The Garnaut black hole

Ross Garnaut suggests that the tax free threshold be increased to $25,000. That is a good policy anyway – controversial I know. A few years ago when I looked at that idea, the cost to revenue was $1.5 billion for every $1,000 increase in the threshold. So a $19,000 increase would cost $28.5 billion in the first instance. Money well spent – I reckon the work incentives and reduced churning would be beneficial to the economy overall. But Garnaut’s carbon tax will only raise $11.5 billion and of that 55 percent will be paid to low and middle income households. So he’s a bit short. As a welfare policy it sucks too. That’s about $6 billion to supplement a welfare budget of over $121 billion already.

Update: Now that the details of the carbon tax are available it turns out it is not budget neutral as the government kept promising.

Mr Swan has defended the cost of implementing the government’s carbon price policy, saying there are always upfront costs when there is such a large reform.

“It is broadly budget neutral over the forward estimates … but over the forward estimates the costs are relatively modest,” Mr Swan told ABC radio on Monday.

But Mr Hockey points out that the cost of the scheme on the budget is $4.3 billion over the forward estimates.

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16 Responses to The Garnaut black hole

  1. Skuter

    Wow- Ross Garnaut has just admitted on 7.30 that households will pay as the ‘big polluters’ will just pass on the cost of the tax, hence the need for compensation to households. He also admitted that the household compensation will end up subsidising some groups. Hasn’t he just contradicted everything Gillard, Combet, et al. have been saying about pricing ‘carbon’. Unbelievable.

  2. Peter Whiteford

    Sinclair

    I would assume that Garnaut is using the Henry review recommendations, for which the net cost is about $3 billion – mainly because the tax scale is adjusted further up (rates go up to 30% over a wider income range). The proposal is not without distributional problems, but it is affordable.

  3. Peter Whiteford

    The government released further details of Henry tax calculations last October. It’s at:
    http://www.treasury.gov.au/contentitem.asp?NavId=035&ContentID=1895

  4. TerjeP

    LITO already gives low income households an effective tax free threshold much higher than the official one. I think it’s about $15000 from memory. Not that I’ll be opposing an increase in the tax free threshold. I think 100% of the carbon tax revenue should go towards increasing the tax free threshold.

  5. Sinclair Davidson

    Peter – I don’t recall that being a specific proposal, rather an under-developed idea. From memory they drew back from making that a formal recommendation because of the potential costs to revenue. If it is affordable it should be introduce anyway.

    (I can’t find the modelling in your 8.15 pm post).

  6. Sinclair Davidson

    terje – raising the threshold reduces the tax burden on everyone, the LITO doesn’t have that effect.

  7. Jim

    Is it wise to have any group or level of earners pay no tax at all?
    Don’t we need everyone to have “skin in the game” to ensure that the concept that taxpayers fund services and tax increases affect everyone is constantly reinforced?
    No flat tax – paying more proportionately the more you make is reasonable – but paying nothing at all ( except for pensioners, the disabled and the unemployed ) for the government services you receive may noy create the healthiest appreciation of reality.

  8. Judith Sloan

    One of the problems with the Henry proposal was when the modelling was done was that a whole lot of families (middle income ones) would be worse off. That is not going to happen in the context of a carbon tax being introduced.

    The LITO is bad policy because it introduces an unnecessary poverty trap.

  9. Sinclair Davidson

    Jim – probably not. I have changed my view from something similar to yours to that more similar to Peter Saunders who argued for a high tax free threshold to remove unnecessary churn. But the arguments you propose are good ones.

  10. Mike a.

    On the whole I think the fewer the steps and flared the tax scales the better. The main reason being that it makes it more difficult to raise taxes through stealth; ie bracket creep. So the best system has tax on every dollar you earn and a flatter scale overall. Then if the government wants to raise taxes they have to debate and legislate it.

  11. The cost offsets Garnaut proposed were I think abolition of the LITO and STO, plus increasing taxes on those earning over $80,000 to remove the benefit for those taxpayers of increasing the tax free threshold.

  12. TerjeP

    terje – raising the threshold reduces the tax burden on everyone, the LITO doesn’t have that effect.

    Yes. However the carbon tax is a burden on everyone so it’s not inappropriate.

    LITO is bad policy because it reduces transparency and increases complexity.

  13. .

    Mike – so obviously if we were funded purely by a consumption tax, that would happen, and it would be 100% transparent.

  14. Peter Whiteford

    Sinclair

    The Henry costings of personal income tax cuts are at:

    http://www.treasury.gov.au/documents/1895/PDF/09_12_03_PIT_and_FBT_package_final_write_up.pdf

    On page 9, they give an estimate of the tax scale changes costing $3 billion. The cost is much less than your estimate, first because the LITO and the SATO and a couple of other TOs mean that many people don’t actually benefit from an increase in the tax threshold, but more importantly the increase in the rate to 35% above the threshold offsets the cost of the higher threshold. As Judith points out, this actually means that people up to about $80,000 experience small tax increases under the “pure” Henry proposals. Higher income taxpayers benefit the most through the proposed abolition of the Medicare levy under Henry, but from the Government’s reaction, this is unlikely to happen.

    Given that the tax increases up to $80,000 are small under the Henry proposal, the Garnaut proposal seems to me to generate more than enough revenue to solve this problem.

    As John Passant points out Garnaut recommends some other offsetting proposals. So there is no black hole.

  15. .

    So do higher income earners pay more or less income tax?

    If they pay more, this is a travesty.

    Maybe it’s assumed they’ll get a handout anyway under the ETS.

  16. Catching up

    If PM Gillard not agree that major polluters would pass on their costs, why would the PM be saying that compensation would be paid.

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