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Australian Carbon Tax Debate

Gerard Jackson has published his third article critiquing the Centre for Independent Studies monograph, Exploring a Carbon Tax for Australia, written by John Humphreys.

Article #1: Why is the Centre for Independent Studies supporting the destructive carbon tax? (25th of February 2008)

Article #2: Why a carbon tax would hit living standards (3rd of March 2008)

Article #3: Carbon taxes versus living standards (10th of March 2008)

As he makes clear across each of his articles, Gerard (“Gerry”) Jackson’s perspective and analytic methodology is explicitly that of the Austrian School of economics. Even more narrowly, it is primarily the application of Austrian Capital Theory.

From Article #1:

What matters is the impact of the tax on capital. (I use the term capital in the Austrian sense of the word … )

From Article #2:

All I have done is to apply “Austrian” capital theory to the proposed carbon tax.

From Article #3:

Austrian analysis focuses on the impact the tax would have on the country’s capital structure.

There are a number of ways in which this very narrow and distinctive approach is useful when applied to understanding the fundamental nature of taxing Carbon and the effects of taxing Carbon – whether through a direct Carbon Tax or through Carbon Trading or by any other variant.

This is especially so in the case of John Humphreys’ paper which argues, among other things …

  • That the negative economic effects of imposing a Carbon Tax can be offset or largely neutralised by using the revenue gathered to reduce income taxes and/or raise the taxable threshold.
  • [This point has been removed as it was shown to be an incorrect understanding of John Humphreys’ position and argument. See comments, below for clarification.]
  • That a Carbon Tax, by being more broad-based, could be used to replace the existing highly biased Fuel Tax regime and thereby deliver a more equitable and less destructive economic outcome.
  • That a Carbon Tax would lead to the development of energy producing and/or energy efficient technologies which do not emit as much Carbon as current fossil-fuel-based methods. And that it would do so without negatively affecting the country’s standard of living.

The value of the Austrian approach is that it is able to identify the fundamental and profound difference between a Carbon Tax and the other types of taxes mentioned, above.

As Gerard Jackson states in Article #3:

… a carbon tax is a direct tax on capital and hence Australia’s capital structure and the process of capital accumulation

If it could be shown that this is in fact the case, then its harmful effects could not be offset by reductions in those other types of taxes.

Those other types of taxes might (at least in the very short term) mean more spending money in the consumer’s pocket. However, the Carbon Tax would mean lower productive capacity.

Using reductio ad absurdum, Gerard Jackson notes:

Imagine a situation in which a government proposed to levy a 100 per cent profits tax on business while ‘offsetting’ it with an equivalent cut in taxes on consumer goods and incomes. Does anyone really think that these tax cuts would prevent an economic collapse?

The aim of John Humphreys’ policy monograph for the CIS is to demonstrate that a Carbon Tax would be less harmful to the country than Emissions Trading. That it would be “more efficient, effective, simple, flexible and transparent”. He does indeed present many good arguments on that front.

However, he goes well beyond merely identifying the “lesser of the evils” in this paper (and in subsequent responses to Gerard Jackson’s critiques) when he concludes that by applying income tax reductions as offsets and/or by using the Carbon Tax to replace current Fuel Taxes that the harm caused by a Carbon Tax can be more or less neutralised.

I believe this is incorrect.

Gerard Jackson’s articles are a highly valuable and important contribution to better understanding the Carbon Tax issue. Furthermore, his analytic methods can be applied to Carbon regulation in general.

Australia owes this man a great deal.

Thank you Gerry.

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Note added on Wed March 12, 2008.

  • All comments are moderated by PRODOS.
  • All swipes, personal attacks, etc. will be snipped out of posts.
  • Anything that is not a positive contribution to the discussion will be removed or edited.

For further clarification please write to PRODOS.

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6 Comments

  1. [snip]

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    Brief comment deleted.

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  2. I never said that being revenue neutral causes a tax to create no economic costs. The welfare effects of a tax swap are ambiguous unless you do much more detailed economic analysis. It is possible that a tax swap can increase or decrease economic welfare, depending on the details of the tax swap.

    If Gerry thinks that the fuel tax and income taxes are more efficient than a low carbon tax, then that is an issue that could be debated. I’m not convinced either way. I certainly think that income and fuel taxes are far too high… and I note that it is generally more efficient to have lower taxes on a broader base.

    [ … snip … ]
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  3. It’s worth responding to the point about destroying capital. Gerry is concentrating on the mechanism whereby tax harms the economy. […snip…]

    Nobody is denying that a carbon tax will harm the economy. But it is simply not true (as Prodos writes above) that the harm is necessarily so large that it must necessarily have a bigger impact that tax cuts.

    Capital is important. Indeed, increasing the quality and quantity of capital is how you get economic growth. A carbon tax will impact on capital in a number of ways. Specifically, it will encourage investment in alternative energy and discourage further investment in “dirty” coal electricity generation. To the degree that these investments differ from the free-market allocation of resources, this will lead to a misallocation of resources and an economic cost.

    In addition, a carbon tax will increase the price of electricity. This will impact consumer decisions away from their free-market decision and consequently lead to a misallocation of their resources … and an economic cost.

    This is all true. But it is also true that all tax leads to economic costs. Taxes cause behaviour to change from the free-market behaviour, and therefore cause costs. Income taxes induce changed behaviour, the deadweight loss from which has been estimated at between 20% and 60% of the tax revenue (ie if you raise $100, you also destroy $20-$60 worth of welfare).

    In addition, income taxes double tax savings. There are two reasons for this, which I won’t go into here. A tax on savings is a tax on investment which is a tax on capital accumulation.

    Income taxes will impact on capital accumulation in other ways. Some of the incidence of income tax will be bourne by the employer, and so the income tax will distort their labour-capital decisions… leading to malinvestment (ie investment in the “wrong” things).

    A fuel tax also impacts on the economy in various ways… leading to economic costs. Fuel is an input into most production, but to varying degrees. So a fuel tax will impact on different industries differently, creating distortions in consumer behaviour and investment decisions (leading to mal-investment).

    The short conclusion is that tax increases hurt the economy and tax decreases help the economy. A tax swap will have ambiguous effects, depending on a number of factors. Some important elements include the elasticity of demand (lower is better) and the level of the tax (lower is better). Fuel and electricity have a similar elasticity of demand, and the tax on fuel is already very high… indicating high potential economic benefits from a fuel tax cut.

    Gerry made claims about “catastrophy”. He was clearly wrong. He accused me of making a “broken-window-lite” argument. Wrong again. He said that “revenue-neutral” was irrelevant. Wrong. […snip…].

    The reality is that the government is going to do something on AGW. Probably carbon trading, with no offsetting tax cuts, and continued subsidies. That is a much worse policy that I’m suggesting.

    It’s great to call for no tax. I believe in no tax. But I also live in a world where my ideal is not politically viable. So I get involved in the real debate and try to push policies in the right direction. I’m calling for a more moderate reaction… and offsetting tax cuts, linked with the removal of billions of subsidies (introduced by the Liberals).

    [ … snip ..]

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    Moderator: Edited sections shown in [square brackets].
    Last paragraph removed – seemed off-topic, possibly a “swipe”.
    Sentence removed and some words removed which might seem to attributed motive and/or morality.
    Some word substitution to neutralize any sense of attributing motive and/or morality.
    Some mild swiping left untouched – seemed to be within bounds of vigorous exchange.
    One sentence making distinct point was removed. Tried to edit in such a way as to preserve the point yet remove swipe, but unable. Therefore chose to remove whole sentence.

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  4. Replying to John Humphreys

    Good afternoon.

    I never said that being revenue neutral causes a tax to create no economic costs. The welfare effects of a tax swap are ambiguous unless you do much more detailed economic analysis. It is possible that a tax swap can increase or decrease economic welfare, depending on the details of the tax swap

    I agree that you have not claimed that being “revenue-neutral” necessarily leads to “no economic costs”.

    You have written (my emphasis):

    … More importantly, a carbon tax has the added benefit of providing revenue which can be used to cut other taxes. Indeed, a revenue-neutral carbon tax may have little or no economic cost.

    … Perhaps the strongest argument for a carbon tax over a carbon trading scheme is that the revenue raised from a carbon tax can be used to reduce or remove other taxes, and therefore to offset the economic costs of the carbon tax. With a modest carbon tax and appropriate offsets it is possible that a carbon tax might have no net negative economic effect.

    Also:

    A $30 per tonne carbon tax could be used to replace the current fuel taxes with little or no economic cost.

    I understand these statements as proposing alternatives that are both “revenue-neutral” and (potentially) result in “no economic cost”.

    Revenue-neutrality (i.e. the government not ending up with more money than it had before) is central to your proposals.

    Robert Carling states in the Foreword of the policy monograph:

    As Humphreys points out, though, the purpose of a carbon tax should not be to raise additional tax revenue, nor even to reduce overall energy usage, but to use price signals to shift the composition of energy consumption in favour of

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  5. […snip…]

    And yes, I did say it was “possible” to return the revenue in such that the reforms could be welfare neutral. The ultimate impact depends on many things, and it was the assumption of an automatic link between revenue-neutrality and welfare neutrality that I objected to.

    Finally, if Gerry hasn’t tried to weigh the taxes against each other (as you say, and I agree), then he hasn’t really assessed my proposal. Consequently, it is inappropriate of him to say my proposal would lead to catastrophy, for him to attack the CIS consistently, to call me a bad economist and question my ethics, to say I have trouble dealing with facts etc etc. […snip…]

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    Moderator: Removed sections are shown as “[…snip….]”

    Friendly comment to moderator snipped.
    Mildly personal section left in, but consider it borderline.
    Removed sentence which seemed to infer other party’s motive and/or morality.

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  6. I’ve removed the following section from the post, as it was shown to be an incorrect characterization of John Humphreys’ position and argument:

    PRODOS had written:

    That because this approach would be revenue-neutral (which I understand to mean: It would not result in the government ending up with overall more revenue), this means it has not, at the end of the day, resulted in a greater burden on the economy than was on it before, and that therefore the economy would not be damaged or diminished or worse off.

    Thanks to John Humphreys for pointing out this incorrect portrayal of his argument.

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