How does the Carbon Tax Affect You?

Archived News, Posted on 11 Jul 2011

ONE million lower-income and part-time workers earning up to $18,200 a year will get to keep every dollar they earn without paying tax, while up to one million higher-income earners on more than $80,000 a year will bear the brunt of Julia Gillard's price on carbon.

By adding genuine tax reform to her clean energy package, the Prime Minister has corrected a major flaw in Kevin Rudd's previous scheme, which sought to compensate households through direct handouts alone.

The tax reform was the best-kept secret of Labor's gruelling negotiations with the independents and the Greens. It picks up on a key recommendation of the Henry tax review to encourage the poor to move from welfare to work and mothers to move back into work. The tax-free threshold will be trebled from $6000 to $18,200 on July 1 next year, freeing one million Australians from the need to lodge annual tax returns at a total cost of $8 billion over the next three financial years. Wayne Swan drove the change after he accepted Treasury advice that Labor's previous handout mechanism -- the Low Income Tax Offset -- warped the tax scales and discouraged some workers for taking on more hours. With LITO being phased out, marginal tax rates will increase to claw back some of the benefit to higher-income earners. No worker will see their total income tax burden rise as a result of the simplification of the tax scales.

A further $6.9bn in assistance will be provided to families, pensioners and self-funded retirees.

The carbon tax, or permit as the government prefers to call its impost, will collect $7.7bn in 2012-13 and $24.5bn over three years.

This is about one-third less than the ambition of Labor's original carbon pollution reduction scheme, which was to raise $11.5bn in 2010-11 alone.

The lower price on emissions still involves a shock at the kitchen table.

The Gillard model is forecast to increase electricity prices by 10 per cent, and gas prices by 9 per cent, but a general increase in inflation of just 0.7 per cent.

The Rudd model forecast energy price rises of 18 per cent and 12 per cent respectively, and an inflation effect of 1.1 per cent.

By contrast, the Howard government's GST added an initial 3.1 per cent to the consumer price index in 2000-01 and another 1.9 per cent in 2001-02.

With a lower compensation hurdle to clear, yesterday's package managed to be more generous to those on the bottom four rungs of the income ladder, and a little less onerous for those on the top four rungs.

Labor's dividing line between winners and losers will make more than four million of the nation's almost nine million households better off, almost two million no worse off, and the remaining three million having to pay some of the direct cost themselves, if they don't change their energy consumption.

Of this last group, one million higher-income earners will get nothing and effectively cross-subsidise the rest of the community.

They include all single people, and single-income families on more than $80,000, and dual-income families on $110,000 and up a year, depending on the number of children.

The checklist of people who are winners includes all singles up to $45,000, sole parents up to $85,000, single-income families up to $60,000, dual-income couples up to $100,000 and retirees with up to $50,000 in private income. The sharp end of the tax reform can be seen in the different treatment of single- and dual-income families.

Take the example of a couple with one child under five.

The majority of mothers in couple families are back at work by the time their child has turned one.

For those still at home, the Gillard model treats all those where the breadwinner earns up to $60,000 as better off.

At $65,000 the household is $1 a week behind after subtracting the kitchen table cost from the tax cut and increase in family benefits.

By the time the breadwinner is on $180,000, all compensation phases out, leaving the family to bear the full, but still modest, price of carbon of $16 a week.

The tax itself is collected by polluters, but is felt by households through higher cost of living.

The tax reform comes into its own when the mother in a single-income household considers returning to work.

While the household starts to go backwards when the father is on $65,000 if she doesn't work, their fortunes improve if the mother takes a part-time position.

If the father remains on $65,000 and the mother earns $25,000, for a combined income of $90,000, the household is treated as a winner under the Gillard model, with a $4 a week more after accounting for the price on carbon.

This is the true value of the trebling of the tax-free threshold -- it makes the transition to work less painful.

A price on carbon provided the revenue to tackle this reform at a time when the budget was struggling to return to surplus.

theaustralian.com.au
11.07.2011