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Sunday, April 3, 2011

Labor and the Greens on the Carbon Tax debate

above: Less tumultuous times for PM Julia Gillard and Greens leader Bob Brown

The following article evaluates the debate on Carbon Tax reform in Australia, but also divisons between the Greens and ALP government on Company Tax and with the Minerals Resource Rent Tax (MRRT).  Starting with a preference for distributive justice and social wage expansion, the author - Tristan Ewins - tries to chart some kind of way forward for the Gillard government and its allies.
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Debate on Company Tax cuts is beginning to gain momentum in Canberra with Gillard Labor, independents and the Greens at odds over what comprises the best policy. That debate is more broadly framed in the context of the Minerals Resource Rent Tax (MRRT), and a declared intent by Labor to direct new revenue into corporate tax cuts and infrastructure (especially in the ‘mining states’ of WA and Queensland), and in the process to provide room for an increase in superannuation contributions by business.

Therefore it’s probably best to explain the background of the MRRT before going into the debates that hinge on the treatment of revenue thus gained - and how all this relates to the other crucial debate on Carbon Tax reform.

During the 2010 debate David Richardson – writing for On Line Opinion – explained that the real effective rate paid by the miners in 2010 was 19 per cent, as opposed to 24 per cent for the corporate sector more broadly. To correct this the originally-proposed tax on ‘super profits’ aimed to affect profits above the government bond rate – then at 5.8 per cent. http://www.onlineopinion.com.au/view.asp?article=10469

The aim was to garner a fair share of profits from the sector for ordinary Australians who collectively own the non-renewable resources which the mining companies profit from.

But elements of the mining industry spent an estimated $22 million on advertisements undermining Rudd Labor in an effort that effectively brought down a Prime Minister. Mining concerns would have remained viable and profitable. But the scare campaign: threatening disinvestment and job losses – found its mark.

While the original tax was to be levied at 40 per cent, the heavily diluted version negotiated by Gillard will apply at 30 per cent on profits over the long-term government bond rate plus 7 per cent. http://www.abc.net.au/news/stories/2011/03/29/3176405.htm

Allowances and concessions will see an “effective statutory tax rate [of] 22.5%.” http://en.wikipedia.org/wiki/Mineral_Resource_Rent_Tax

And the newer version will also only apply to coal and iron ore, excluding other minerals including gold, nickel and uranium.

The original Resource Super Profits Tax would have raised approximately $12 billion over its first two years. http://www.theaustralian.com.au/national-affairs/greens-join-mining-tax-deal-revolt/story-fn59niix-1226027728392

But the revised Minerals Resource Rent Tax will see a significant reduction in revenue compared to the original proposal.

To be more specific: In 2010 Gillard Labor estimated the compromise would cost $1.5 billion less over the first two years than under the original package. http://www.news.com.au/business/the-great-mining-tax-battle-at-a-glance/story-e6frfm1i-1225888848317

But Treasury estimates suppose a gap in the vicinity of $60 billion over ten years; with some others projecting that the shortfall could be closer to $100 billion. http://www.perthnow.com.au/business/minerals-resource-rent-tax-to-regain-spotlight/story-e6frg2r3-1226025450249

It is in this context that Labor has downgraded its original promises to cut Company Tax. Instead of cutting the rate from 30% to 28%, now the government is proposing a cut of only one per cent. (ie: to a rate of 29%)

However Greens leader Bob Brown has argued that even a cut of one per cent would return half of new revenue taken back to the miners. Instead Brown is proposing a ‘two-tiered’ approach to Company Tax which would see only companies enjoying profits of less than $250 million enjoying the tax discount. This would hit ‘the big end of town’: including the major banks and mining giants – while sparing small business. For Brown the money thus saved would be better spent improving wages and conditions for aged care workers, funding national dental health care, or increasing Newstart, the youth allowance, Austudy and Abstudy," http://www.abc.net.au/news/stories/2011/03/29/3176405.htm

As against claims lower Company Tax is needed to allow for greater competitiveness, research commissioned by the Greens shows that the current rate of 30 per cent is still very significantly below the OECD “weighted average” of 36 per cent. The same research estimates a 1 per cent cut would cost $18 billion by 2021. http://au.news.yahoo.com/thewest/business/a/-/national/9091822/greens-want-to-restrict-company-tax-cut-to-small-business/

Such a pool of money could also be critical for infrastructure, education, and mental health and aged care services. http://www.businessday.com.au/business/mining-tax-tax-cuts-are-linked--swan-20110329-1ce3v.html

But there are potential issues for Labor in drifting away further from the platform it took on these issues to the 2010 Federal election.

To begin: it is important for Labor to honour any agreements in order to retain credibility as a partner for negotiation into the future. This means that if Labor has any kind of ‘agreement’ it is a practical necessity at least that the government ought enter into fresh negotiations if seeking to change its position on resource taxation during the current term. Either that or take such action as to make the consequences ‘neutral’ for those concerned. This could boil down to a choice between either increases in corporate superannuation contributions for low income workers, or abandoning the Company Tax cut, diverting the proceeds to other crucial priorities as Brown suggests.

Further: if the government goes down the path of increasing superannuation contributions for low income earners it would be best to also ease Aged Pension means tests for such groups to enhance any real effective gain.

It is equally compelling as a matter of public interest, however, that the electorate be made aware of the scope of any agreement Gillard made with the big miners, including BHP and Rio Tinto, and corporate Australia more broadly, in the run up to the 2010 poll. Negotiations with the most powerful corporate interests ‘behind closed doors’ is anathema to democracy.

Unfortunately, the political power of the miners, and the corporate sector more broadly, is not going to disappear any time soon, no matter how it skews democratic processes, overshadowing the voices of ordinary citizens. So maintaining credibility in negotiations with those interests is crucial no matter how problematic their power may be.

However it is also most definitely legitimate for Labor to seek a fresh mandate at the next Federal election to effectively increase and widen the scope of the Minerals Resource Rent Tax; and to start canvassing support for any such move now. Given the past defeat, though, Labor would need to adopt a cautious approach.

Yet there could be a difficulty with such a move as well if not handled properly. Labor might not want to ‘muddy the waters’ by pursuing too many distinct major debates on tax reform at once for fear of leaving some voters overwhelmed.

Climate Minister Greg Combet is anticipating a “long debate” suggesting any Carbon Tax will not be implemented until July 2012. http://au.news.yahoo.com/a/-/latest/9001318/carbon-tax-will-be-a-long-debate-combet/

In that context a ‘tax summit’ (Wayne Swan prefers the word ‘forum’) is planned for October this year. http://www.theage.com.au/national/key-tax-plans-before-summit-20110320-1c2bm.html

But without putting public fears to rest – as early implementation could achieve – the debate may become a ‘running sore’ distracting from any further reform agenda.

If the Gillard government could resolve the shape of Carbon Tax reform and see the tax implemented late this year (2011), though, fear and scepticism could be put to rest well before the next election. Crucially: this could provide the necessary time and ‘breathing room’ to pursue a debate on further significant progressive tax reform.

Taking that into consideration, the tax ‘summit’ or ‘forum’ could do to be brought forward somewhat – perhaps by a couple of months.

Openness to future reform is also crucial given the scenario of profit levels in the industry waning somewhat - to the point where the government will need to consider additional changes simply to maintain revenue, and fair returns on the natural resources that belong properly to all Australians.

All this considered, what is the best move for Labor in pursuing social justice objectives, while fostering co-operation with its independent and Green partners?

The key could be in the implementation of any Carbon Tax.

In 2010 the Greens were proposing a Carbon Tax of $24/Tonne, including assistance to ‘trade exposed’ industries. http://www.greenleft.org.au/node/43138

Without some form of assistance exports and import-competing jobs might simply be lost overseas without any real reduction in emissions.

Professor Ross Garnaut, meanwhile (responsible for the Rudd Labor ‘Climate Change Review’), has argued for a tax somewhere in the range of $20-$30 a tonne. http://www.smh.com.au/opinion/politics/garnauts-carbon-tax-plan-can-kill-two-big-reforms-in-one-hit-20110317-1by5o.html?comments=148

Garnaut has furthermore estimated that a carbon tax at a rate of $26/tonne would bring in $11.5 billion in the first year alone. http://au.news.yahoo.com/thewest/a/-/breaking/9032850/garnaut-ties-income-tax-cuts-to-carbon-tax/

Assuming these levels of revenue, it is the structure of compensation that is crucial: and which provides opportunities for fairer wealth distribution.

Firstly, compensation should take the form of direct payments for low and middle income groups, and increases in welfare – including the Aged Pension, Disability Support Pension, Austudy and Newstart. Income tax cuts, by comparison, are a clumsy instrument which would compensate high income groups who do not need the assistance.

Secondly: Compensation should exclude the top 30%-35% income demographic to provide sufficient scope to increase welfare and significantly improve the final financial position of low and middle income groups and individuals.

Thirdly: In this context - by returning all such revenue gained via a carbon tax taxpayers in the form of cash payments to low and middle income groups, including welfare recipients, Labor could actually expand and consolidate its electoral support base. This could very effectively undercut Abbott’s appeal to ‘battlers’ on ‘cost-of-living’ issues.

Fourth: A carbon tax rate at what Labor considers ‘the upper end’ of the scale (including the Garnaut proposal) could actually provide greater scope to assist low and middle income groups via compensation and effective redistribution. Hence it makes electoral sense in shoring up Labor’s support base.

Finally:  The only real problem in this scheme of things is that of what happens when the transition to a lower-emissions economy is actually achieved.  The problem being that at this point carbon tax or ETS revenue may 'dry up'.  For the long term, therefore, an alternative funding mechanism will be necessary to compensate low and middle income groups.  Hopefully, though, innovation in the renewable energy sector will also drive down cost structures.  Solar Paint, developed in Australia, looks particularly promising. See: http://www.abc.net.au/tv/newinventors/txt/s3008638.htm   and also: http://www.greenlivingpedia.org/Solar_paint

As for right-wing commentators such as Miranda Devine who seem to think distributive justice measures via tax comprise some malign ‘social engineering’: do they suppose the same is true in the case of most tax 'reforms' – including the gradual ‘flattening’ of income tax – which historically have redistributed wealth from low and middle income groups to the wealthy? The double-standards are palpable.

This leaves us with the concerns of Bob Brown and the Greens more broadly that emphasis on Company Tax cuts will leave crucial areas of the welfare state and social wage under-funded and exposed. While Labor cannot be seen to be simply ‘dancing to the Greens’ tune’, minority government necessarily involves compromise. And indeed, given their significant electoral support base, the positions of the Greens ought be considered seriously regardless.

As already alluded to – early implementation of a carbon tax could provide ‘breathing room’ for further debate and further reform before the next election.

In 2009 ‘Lateral Economics’ informed the Henry Tax review that ‘axing’ dividend imputation could save the Federal government $20 billion a year. http://www.businessday.com.au/business/dividend-imputation-wont-be-cut-says-henry-20090821-etwn.html

Dividend imputation is meant to stop so-called ‘double taxation’ of profits: providing credits to shareholders to compenstate for Company Tax already paid.  This was supposed to provide an incentive for investment. But the reform – first implemented under Keating Labor – provided a windfall for the most wealthy Australians, with a massive cost to the budget bottom line, and less money for crucial social programs and infrastructure.

Without fully removing the measure, shifting to half dividend imputation – as once suggested by progressive economist John Quiggin - would be a substantial equity measure, and provide over $10 billion/year much of which could be directed to crucial social programs in aged care, mental health and education, and for social housing and infrastructure.

Such reform would mainly hit millionaires who own so much invested wealth in this country: but small investors may resent the change as well. The benefit from social investment would need to be clear before the next Federal election. And while a means test could provide fairness to small investors, using some of the money to further improve the Aged Pension could be a smart move in the context of ‘winning over' such people as well.

Furthermore: to maintain investment in the Australian economy in that context, some of the money could be diverted to a public pension fund. (to be invested locally) Not only could this support ongoing job creation: it could also sustain the Aged Pension in the context of an ageing population.

A compromise between the Greens, independents and Labor – with early implementation of a Carbon Tax, and a trade-off for half-dividend imputation in return for agreement on Company Tax – could be in the interests of Labor’s core constituency. Appealing to the material interests of most voters, it would also consolidate Labor’s electoral support base, while being well in keeping with Labor ideals.

Tristan Ewins is a freelance writer and grassroots Labor activist based in Melbourne, Australia. He maintains and publishes the 'Left Focus' blog

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