My take on the carbon tax
Back in 2007 I wrote a policy monograph that was published by the Centre for Independent Studies talking about a carbon tax for Australia. The point of my paper was two-fold… first I argued that a carbon tax is a more efficient and simple option than an emissions trading system (which I think would be a horrible policy), and secondly I argued that if a carbon tax was introduced then it should be linked to matching tax cuts to ensure that there would be minimal efficiency cost to the economy.
I coped quite a bit of flack from the right for even considering the option of a carbon tax, but I think both of my points hold up to fair scrutiny.
Two years later (2009) I wrote several op-eds on the same topic, and gave a speech (along with Richard Denniss and Warwick McKibbon) about why a tax is relatively better than a trading system. In the same year, I also co-wrote a New Zealand version of the monograph, which was held up by Roger Douglass as a better alternative to the ETS that New Zealand is stuck with. My main points were repeated by many free-market economists (such as Sinclair Davidson and Jason Soon) as well as by Tony Abbott.
Fast-forward another two years to today, and I am now involved in a campaign to stop Gillard’s carbon tax. So why the change?
The simple fact is that I haven’t changed my position. While a carbon tax is an improvement over a trading system, I have always been crystal clear from the beginning that a carbon tax would still cause economic damage, and so it would need to be linked to other tax cuts to help mitigate that damage. Since the expected benefit of a carbon tax (or ETS, or any other carbon policy) is close to zero, if there is any substantive economic cost then the policy should be rejected. Unfortunately it is necessary to keep repeating the simple maxim that the government should only introduce a policy if the benefits of that policy exceeds the costs. This seems painfully self-evident, but it is so often forgotten.
While we still don’t have the details of Gillard’s carbon tax, she has been clear that it will include a range of spending commitments. That means this is going to be a “tax and spend” reform, not the “tax and tax cut” reform that I have written about. I have always said that a carbon tax could only make sense with matching tax cuts… and so if there are no matching tax cuts then obviously I will oppose the new tax.
Amazingly, some prominent left-wing writers have been quite confused about this point. Professor John Quiggin suggested that government spending and tax cuts “amounts to much the same thing” while Tim Lambert accuses me of a backflip, of being deceitful and then says that the “difference between revenue neutral [ie tax & spend] and budget neutral [ie tax & tax cut] doesn’t seem to be that large”. This confusion is quite baffling. I think the difference between government spending and tax cuts is pretty obvious and very important.