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Julia Gillard, Nye Bevan, and the Carbon Tax

Posted by Tax Advisor on 15 July, 2011

Julia Gillard makes a political calculation that she hopes will pay off by the next election

There she was at the Laverton mill two weeks ago, the bright flame of her bob of copper hair only slightly muted by the blazing orange of hard hat and vest. As Julia Gillard listened to the puzzled miners of OneSteel in the Hunter valley, the furious backlash against her just unveiled carbon tax already swollen in the land, we fancied her mind wandering back to her patron saint and fellow Welsh-born Aneurin Bevan.

Back in the middle of the last century, Labor Health Minister Nye Bevan, himself a miner’s son, pushed through the legislation that made possible the UK’s National Health System. Despite the successes and failures of the NHS, this required the kind of deft negotiating skills not unlike those Gillard herself employed to make the controversial price on carbon a reality.

We imagine Prime Minister Gillard feels the full weight of Bevan’s regret at the moment. She has good cause to. The announcement of the carbon tax scheme has seen her popularity, and that of the Labor Party, tumble. The forces amassed against the tax have daily grown in strength and Gillard has been compelled to swap horse trade for sales pitch. She’s hit the road in quasi electoral mode, traveling from mill to mall in an attempt to build renewed support for the plan and win over the skeptics.

Gillard has the advantage of time: the next elections are fully two years away and opposition to the carbon tax may lessen by then. In the long haul though, she may well fail to win sufficient approval to ensure her reelection. But, for now, the Prime Minister is willing to risk all political capital, regardless of the will of the people. It is doubtful that the Greens and independents would default before the coming of the vote later this year to make the tax law. It seems that the surest way to see the tax derailed would be to have Julia Gillard deposed by members of her own party and that is unlikely to happen.

So, whether fortunate or unfortunate, the carbon tax is a reality we may soon all contend with. The question is how and how differently. Previously, we’ve spoken of how revenue from the tax would be used. We’ve also stressed repeatedly how, under the Labor plan, the wealthy would bear the brunt of the tax’s impact on households. Those with income in excess of $150,000 would receive little or no assistance from the government towards their increased energy costs. Their earnings would, in effect, go to subsidize the transition to cleaner energy fostered by the price on carbon. They are clearly, at least in the short term, the losers of the carbon tax. The long term effects of the carbon tax are not easily predicted, but many believe that the growing Australian economy, a current beacon in the world, may regress.

The winners are not so easily ascertained. To do so, we must look more closely at the details of the Government’s Clean Energy Plan released on July 10th, specifically at the personal tax reforms that would follow upon the implementation of the carbon tax. The reforms are targeted at low and middle-income earners and basically follow a three pronged approach. In the first place, the statutory tax-free threshold will be raised next June to $18,200, with a further increase to $19,400 in 2015. It is currently at $6000. This threefold increase will effectively replace most of the low-income tax offset (LITO), bringing it down from $1500 to $445 in 2012 and further to $300 on transition to a floating carbon price. These changes will be joined by a shift upwards of the marginal tax rates, from 15% to 19% for those who fall below the new $18,200 threshold and from 30% to 32.5% for those who earn less than the $37,000 point at which LITO starts to phase-out. The rates for those who make $80K and above will remain the same.

All this may seem rather arcane, especially as a partial aim of the changes is to increase transparency in the tax system, but combined with increases in the Family Tax Benefit, and in pensions and allowances, these adjustments have interesting, at times odd consequences regarding who gets what and how much. It ultimately adds up to a tale of multiple thresholds, with some households to benefit more, irrespective of whether they fall well ahead of others in income levels but in line with other factors such as their marital status, age, and number of dependents.

If the carbon tax is enacted, the much power you consume will make a difference to how much you net from the changes in taxation. This of course is the larger point of the carbon tax, and that is to try to seduce the consumer to shift to less energy intensive habits in the medium term and, finally, to cleaner but more costly sources of energy. We may soon realise the success or failure of this undertaking.

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