Last Updated Jul 11, 2011 12:35 AM EDT
The new tax structure looks like another missed opportunity for tax reform. Tinkering with tax thresholds and tax rates has done a good job of putting more money into the pockets of low-income earners, without hitting the rich but, as I wrote in Let's Be (More) Progressive on Tax, hitting the top 3 percent of salary earners harder and giving more leeway to middle income earners would help address Australia's increasing rich/poor gap. Now the carbon tax could be broadening that gap by letting the richest people get off too lightly.
Admittedly you could argue that the tax changes announced at the weekend are all about income redistribution. After all, those in the top income brackets will pay indirectly through the increased price of things resulting from the new carbon tax. That money finds its way back to the government, who uses some of it to pay low-income earners. Money from the rich is findings its way to the poor.
Of course, it doesn't quite work like that because low-income earners are also paying more for things, and the increase will be a proportionately higher slice of their salary than it is for those at the top end.
So the rich are doing okay, the rest might be struggling. It seems unlikely that the compensation being offered in middle- and lower-income groups will be enough to accommodate the rising price of goods and services influenced by the carbon tax.
The table below shows tax paid based on the current and new brackets, allowing for the low-income tax offset. The government says the tax-ree threshold is being increased from $6,000 to $18,000, but in reality the tax offset means you can earn up to $17,000 before you pay tax. Under the new scheme you'll start paying tax at $21,000. By my reckoning that means about 600,000 Aussies will no longer pay any tax. Very nice, but they won't exactly be rolling in cash.
Those with an income of between $20,000 and $25,000 will gain the most from the new tax structure, paying around $500 or $600 less in tax. It would have been nice to see that sort of compensation spread further.
Just over half of all taxpayers, earning between $30,000 and $68,000, will gain just $300 from this new tax arrangement. With the carbon price increasing over time, and tax thresholds changing less so, it's unlikely that $300 will be enough compensation and middle-income earners will have to make compromises.
A smarter move, I believe, would have been to extend the $600 compensatory benefit right through the middle income brackets. There's not enough money coming from the carbon tax to cover the $1.6 billion or so needed for such a change --- and we wouldn't want to divert any of the revenue being allocated to renewable energy --- but there's still scope to take it from the top earners. Increasing the effective tax rate of the one percent earning $248,000 or more, from 39 percent to 44 percent, would more than cover it. They wouldn't like it, but they wouldn't particularly feel it either. It might even change their behaviour --- they have the discretionary income to choose to buy from carbon neutral providers, even if it costs more. They could also be given incentives to reduce their tax through investments in renewable energy.
I think the government missed an opportunity here. Carbon consumption habits will be influenced by income and our respective abilities to choose. The household purse just got tighter for middle-income earners, whilst those at the top end will feel it less than anyone.
A more radical thought on all this came from SailDog, who left a comment on my earlier story on progressive tax. He suggests a carbon tax should completely replace our current income tax system. The argument was that people paid for consuming something we wanted to reduce. If you want to pay less tax, change your behaviour. In principle, I love the idea of getting rid of income tax and replacing it holus bolus with a carbon tax, but I suspect many low-income earners could freeze to death in the process. It would also mean that to achieve the same level of income tax (assuming we charged for every tonne of the 580 million or so that our industries put out) we'd have to have a carbon price of $200 per tonne. It might be a great idea, but I don't think we're quite ready for that one yet.