Beware of Gillards bearing gifts
Julia Gillard has floated the idea of using some of the carbon tax revenue to increase pensions and cut taxes to offset the impact of the tax. Beware.
For a start there aren’t just age pensioners on government supported fixed incomes. There are students, the disabled, the unemployed. Will they all get increased payments too to fully compensate for the increased living costs of the carbon tax?
The Labor Party fears budget deficits. A $12 a week increase for all pensioners would cost around $2.5 billion.
If adequate compensation does go ahead for all those on fixed Government payments it is probable it would be paid for in part out of cuts to public services instead of taxing the rich and big business.
And what sort of tax cuts does Gillard have in mind?
Ross Garnaut, the Government’s climate change adviser, sparked the debate when he called for some of the carbon tax revenue to be used to begin the tax reform process recommended by the Henry Tax Review.
That Review argued for three tax rates for personal income - no tax on incomes up to $25000, a flat 35% on incomes above that up to $180000 and 45% for those lucky 3 percent who earn more than $180000.
There’s just one problem with this proposal. Workers earning between about $37000 and $94000 would pay more tax than they currently do.
Pay a carbon tax and pay more income tax! That is likely to be very popular with voters. Tony Abbott would become PM.
So the Government won’t touch these flatter tax recommendations with a barge poll.
They may play around with the low income tax offset (‘LITO’).
The first $6000 of income is tax free. However LITO gives a non-refundable full offset of $1500 against the tax paid on incomes earned up to $30,000. Effectively this means that any Australian resident earning income up to $16000 pays not tax.
Once a taxpayer earns more than $30,000 the offset begin to cut out at the rate of 4 cents in every dollar above that. This means the offset cuts out completely at an income of $67,500, almost exactly the average wage.
The beauty of this tax offset cut out is that it doesn’t benefit the rich. It also doesn’t benefit well paid workers.
Recent estimates are that a carbon tax of $25 per tonne would add about $600 every year to an average family’s bills.
Such a tax would raise around $12 billion in revenue and about $6 billion appears to be earmarked for household compensation. The rest would compensate the polluters, especially in trade exposed industries.
An increase in the tax free threshold from the current $6000 to say $10,000 would cover the cost of the carbon tax’s impact on ordinary wage earners. However it would deliver tax cuts to the rich too.
So the Government will be tempted to fiddle with LITO, and set it at such a level that it seemingly compensates low paid workers. But they might be tempted to adjust the cut out level to pass on the carbon tax costs to workers whose pay is close to or around the average wage.
Even the current LITO framework won’t help compensate many workers.
To offset the possible extra $12 a week resulting from the carbon tax, and taking into account that most families are two income families, LITO would have to be increased from its current $1500 to over $2000.
But remember this. First, LITO is non refundable. For people paying tax who earn below the current $16000 effective non-taxable level, part of the offset is wasted because they can’t claim a tax refund of the difference between the tax they are liable for and the offset itself.
Increasing the offset to say $2000, while it will change that $16000 tax free level to about $19000 effectively tax free, will just mean that all those earning below $16000 get no benefit from the change because the offset isn’t refundable. So without more, Gillard’s compensation through LITO will be meaningless to them.
Second, carbon tax compensation through LITO would start to cut out for people earning greater than $30,000 if current arrangements continue.
For someone on $50000 a year the compensation would be half the amount needed to cover the cost of the carbon tax.
Third, the what happens when, as planned, the Government moves to an Emissions Trading scheme in 2015 and the tax money dries up? Does the compensation flowing from it dry up too? Or do we pay for the tax cuts by cuts to services?
And if that move to an ETS doesn’t happen, because, as appears likely, the rest of the world hasn’t adopted an ETS, and so the carbon tax continues, the design of the tax is to increase the price of carbon each year. There appear to be no plans to compensate for that annual tax increase.
What a great con. Fiddling with LITO gives the impression of compensating many people when in fact most workers will get little from it and certainly not enough to fully cover the increased living costs arising from the carbon tax.
Now of course critics will say this is all conjecture. True.
But this is a government that wants to make workers pay for the cost of capitalism’s environmental crisis. Reducing the burden on the poor through tax offsets and increasing it on average wage earners through that inadequate compensation scheme must be tempting Gillard and co very much.
Beware the sleight of hand.
Maybe I am just too simple a man. Why not tax the polluters and the rich instead, and tax their profits, not our consumption?
The Resource Super Profits Tax would have raised an extra $100 billion over ten years compared to the Minerals Resource Rent Tax. That could fund a lot of compensation to workers and build a lot of renewable energy plants around Australia.
The final thing to say about tax cuts is that they can erode over time. If Gillard doesn’t inflation adjust the limits then the value dissipates as the years go by.
Instead of uncertain and inadequate tax cuts through LITO that won’t fully address cost of living increases for most workers, why don’t we fight for wage increases that do? That shifts the cost of the tax on to the bosses especially if it is combined with strict price controls over carbon tax price increases.
The bosses are the polluters. Cut their profit rates to make them pay for their climate change.