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Unpacking the carbon compensation package

The federal Labor government has introduced the details of its proposed carbon tax, including a compensation package, which includes around $15 billion in assistance for low- and middle-income households. According to Labor, the package will ensure that 22 per cent of households will be no worse off, and that 44 per cent will be financially better off. In fact, by the Treasury’s modelling, some low income sections of the working class come out up to $800 per year better off.

The avenues through which compensation will be directed are the lowering of income tax payments for most workers, and the increasing of allowances, family payments and pensions. Taken by themselves, these are progressive measures. However, when weighed up against the effects of the new tax, they are not as generous as at first sight. Most of the working class – those who are only marginally ahead, on the “break even” line or who are only partially compensated, will likely see their position (further) eroded over time.

What the government giveth, the government taketh away…

All of the avenues through which compensation is directed provide the government with mechanisms to recoup some of the assistance they have promised. For example, the proposed tax cuts – which amount to a tripling of the tax-free threshold – come after the government had already frozen tax-scale indexation for three years (indexation that occurs to account for inflation).

Analysis last year estimated that this freeze will result in over half a million people currently earning less $37,000 being pushed into a higher tax bracket by the next election; another half a million of those earning less than $80,000 will also be subjected to this “bracket creep”. The result? The promised tax cut compensation is already being “compensated” for.

A number of years ago, the Melbourne Institute calculated that government revenue to the tune of $3.8 billion was generated as a result of bracket creep over the five years to 2005, serving to erode the Liberal government’s compensation package for the GST. Importantly, the Institute noted that “It is clear that the increase in [the average income tax rate] due to not (fully) indexing thresholds…is largest in relative terms among those [with] the lowest income.”

How much is bracket creep taking from the working class now? It’s hard to say exactly, but one estimate puts the total bracket-creep figure over this year and next at over $4 billion – about the same amount it is costing the government to implement the tax over the next three years.

The promise of increased payments also has to be put in the context of government moves to cut spending over time. The Age’s economics editor Tim Colebatch wrote just two months ago of Labor’s budget:

This budget has hundreds of savings measures, mostly transparent, and some of them deliberately opaque. That includes an extra $1 billion saved by increasing the so-called “efficiency dividend”… It’s a tactic that forces bureaucrats to cut programs without the politicians having their fingerprints on it…

On top of that, the budget makes dozens of cuts – mostly small, one very big – for additional “efficiency savings” in specific departments and agencies, and many other silent cuts by requiring departments to fund new programs from existing resources.

Pension and dole payments are to rise by 1.7 per cent as compensation for the carbon tax – but we have already seen Labor cut the total amount payable through the aged pension and dole schemes by increasing the age at which people are eligible to receive either. And Labor is introducing measures to try and push unemployed workers – and working class single mothers – off entitlements.

Almost all of the 150,000 people employed by the federal government will receive compensation – but at the same time as their wages are being held below cost of living increases.

The aim here isn’t to go step by step through the winners and losers, but to illustrate a point. The government claims that the compensation will be permanent. But what Labor “gives” with the adjustment of the tax-free threshold, Labor has already begun taking back through a lack of adjustment to the tax scale index. What they give in the form of increased payments they have begun taking away in the form of cuts in spending.

For many, the “permanent compensation” will likely live on in name only, the largesse eroded over time via expenditure reductions and revenue increases in other areas to balance the books, leaving only cost of living increases. The effect will be to push a greater burden of the tax on to the working class over time. The only difference is that the government will do it surreptitiously, simply by making cuts under a different “non-carbon tax related” banner – and probably in the name of bringing the budget back into (or keeping it in) surplus.

What about the rich?

The actions of the ruling class, with their insatiable demand for profits, led to the environmental problems that exist today. Working people don’t reap the rewards of the billions of dollars that mining and energy companies pocket every year. And we don’t get any say over how electricity production is carried out. The rich and big business should bear all the financial cost of fixing the problems they caused.

So on paper one of the positive outcomes of the package is that the richest people – those individuals without dependents earning over $85,000 per year, or those with dependents earning over $180,000 – will receive no compensation and see costs rise by $800 to $1,000 per year. This is another progressive characteristic of the compensation package: Tony Abbott describes it as “socialism masquerading as environmentalism”. But again it needs to be put in perspective.

The carbon tax itself is regressive: as Ross Garnaut, the leading figure in the pro-carbon tax camp and a supporter of compensation (“assistance”) to low income earners, noted in the final report of the government commissioned 2011 Climate Change Review:

In the long run, households will pay almost the entire carbon price as businesses pass carbon costs through to the users of their products… A household facing a higher electricity bill will have an incentive to reduce its electricity consumption over time. Regardless of the assistance [to households], electricity will still be relatively more expensive, so electricity consumption can be expected to fall over time.

The average cost of living increase for an individual earning $10,000 per year is estimated at $165 – or 1.65 per cent of total income. For an individual earning $200,000 the associated impact is under half of one per cent. So in this instance, the very poor are slugged, proportionally, over three times the rate of the rich.

This is the rub. Even if you take out the effects of the compensation package, the hit on the rich from the carbon tax is disproportionately small. For the compensation package not to have had a progressive character would have been truly scandalous, but the design of the tax lets the rich off the hook regardless.

Further, it hardly makes up for the hundreds of millions the super-wealthy have reaped in tax cuts over the last six years. For example in 2005 the top tax rate was 47 cents for every dollar gained over $95,000; in 2006 the Liberals changed the scales to 45 cents for every dollar over $150,000.

What about the companies? Over three years the government will collect around $25 billion in tax from them. But it will be handing back $9.2 billion through assistance packages at a time when the company tax rate is being lowered to 29 per cent – gifting industry several billion dollars more. This comes on top of $60 billion in foregone revenues over the next ten years due to Labor backing down from the Resources Super Profits Tax.

Neoliberalism masquerading as ecosocialism

Paul Kelly, writing in The Australian on Saturday, spelled out one way the tax fits in to the government’s broader agenda:

[T]he push for carbon pricing originated from the Treasury as a pro-market economy-wide reform whose great advocates were Ken Henry, Martin Parkinson and Ross Garnaut with their ideas holding sway with John Howard, Rudd and Gillard as successive PMs. Indeed, among insiders the power of carbon pricing as the next stage in Australia’s pro-market reform process has been fundamental to its traction.

So it is far from ironic that, at their respective press conferences on Sunday, both Julia Gillard and Greens leader Bob Brown quoted favourably the Tory scum former prime minister of Britain Margaret Thatcher. While the carbon tax is not by any means shock therapy, it does fit with the broader project of neoliberal economics in the sense that the package has been structured to:

1)   Enable a transition to a market in pollution trading.

2)   Allow the cost of the tax scheme to be passed “down the chain” to workers over time.

No wonder the chief economists at BT Financial Group, St George, Westpac, the former chief economist of ANZ, and the chief executive of NAB all back the tax. If an emission trading scheme gets off the ground, the financial sector will reap the rewards of structuring financial instruments that enable speculation on carbon permits, and there will be commissions aplenty to be made from trading pollution.

And that’s the idea. The capitalist market – the great enabler of environmental destruction and the oft cited justification for pushing down working class living standards – is to be put in the service of the planet’s salvation. If the situation weren’t so serious it would be laughable. Unfortunately it is not so laughable that the Greens repudiate it. Having positioned themselves as a left alternative to Labor, the Greens have been at the forefront of pushing this tax. Deputy Leader Christine Milne said on Sunday that “The best response to rising energy prices, whether or not those price rises have anything to do with putting a price on pollution, is to save energy.” Margaret Thatcher would definitely agree – and best way to save energy is to start treating it as a luxury item.

Similarly the ACTU, which has backed the tax from day one, has praised the final package. President Ged Kearney called on opponents of the tax to stop the “scare campaign” and on the bosses to “build new industries for the long-term security of their profits and their employees”. A lesson could have at least been learned from the NBN project, when the government outflanked the entire union movement by nationalising the backbone of the country’s telecommunications infrastructure (albeit temporarily). Electricity generation was an opportunity to press for state-based infrastructure development to provide a public service for the working class. The ACTU decided instead to continue its role as the ALP PR department and lecture business about making profits.

Meanwhile Tony Abbott is posing as a friend of blue collar workers in the manufacturing and mining industries. There is no doubt that a government led by him will be just as anti-union and anti-worker as the last Liberal government. This is the party that brought in WorkChoices and the GST, gave out billions in corporate welfare, ruled for the rich, and proposed similar schemes to that being now rolled out by Labor.

Over the coming weeks and months Gillard, Brown and Abbott will be criss-crossing the country in an attempt to prove that they all have the program to both reduce carbon emissions and to help with the cost of living pressures that workers are currently subject to. None of them do.

This article, by Ben Hillier, first appeared in Socialist Alternative.



Comment from Auntie Rhoberta
Time July 14, 2011 at 3:26 pm

Surely it is now in the interests of workers to look deeply into the question of climate sensitivity, since if it is low then this tax has no ostensible justifcation.