Why, why, why?

The problem with analysing the Carbon Tax damage 

The impacts of the Gillard Government’s so-called Carbon Tax are so far-reaching that calculating the economic effects is impossible. 

I’m reminded of the story of a young boy who had lost his toy car while playing after school. The mother found him crying after he had been through every room in the house, turning things over, searching for his favourite car. The mother asked, “Where were you when you lost the car?” to which the boy replied, “Outside.” When the mother asked why he was looking inside when the car was lost outside, the boy replied, “Because it’s warmer in here.” 

The proposed carbon tax changes the fundamental structure and mechanisms of the economy. There is no way that its effects on a household budget could possibly be predicted by a simple empirical measure of an individual’s current income and consumption patterns, and applying only the obvious direct effects of the tax. 

Economists all know such empirical analysis is worthless in this situation. Why do it then? Alarmingly, the answer is akin to the little boy’s “because it is warmer in here.” No methodology could possibly yield the right answer, but any method that might come close to being correct would be so difficult to develop, explain, and defend, that it is placed in the too difficult file. It is much easier to use the worthless method and tick the box “economic analysis complete.” 

The recent ban on live cattle exports to Indonesia provides a timely and illustrative example of this fallacy. In calculating the impact of the ban, some considered only direct sales of cattle to Indonesia last year, while others considered a wider range of effects such as those on transport and service industries in port towns. 

Almost none have considered the biggest and most dramatic impact of the Government’s knee-jerk ban: the chilling effect on new investment in all sectors. Yet when I spoke to participants in mining, oil and gas, and other Australian export industries, this incident was first and foremost on their minds. 

The fact that a thriving export industry was completely stopped by one politician’s edict with only three days notice, on the back of a single documentary with no independent investigation, has sent chills down the spine of everyone considering investment in productive infrastructure in Australia for any purpose. Stopping building and investment certainly does affect every household in some way. 

Regardless of how one may feel about the underlying issues, the fact remains: there are negative financial impacts of this decision on every Australian (carnivore and vegetarian alike) that are very difficult to quantify. 

In the case of the ill-named Carbon Tax, the usual problems associated with modelling the financial effects of government policy on the average household are compounded exponentially. The Government claims this tax will only affect 500 companies. Unlike the GST which taxes end products only, the new tax will keep taxing all the way through the supply chain. Therefore, it will have an exponential effect. 

In addition, the stated goal of this tax is to discourage productivity. The economic and inflationary effects of decreased activity and availability of goods and services in all sectors must be considered. This tax might only directly apply to 500 companies, but the average household would do well to consider what those 500 companies do. 

Furniture, household appliances, toothpaste, toilet paper, etc. etc., must all get more expensive. In this case, the damage to household net income will be much worse than the GST because there is no end to the compounding. Not only would the maker of your toothpaste be potentially liable to pay this tax, but they must use inputs in their process produced by other companies that have already been taxed for producing the input. 

Some inputs are exempt, others aren’t, and bureaucrats are given the power to constantly change the effective rate of the tax and to define the activities that require reporting which trigger the tax. 

No correct accounting of what this tax will cost the average household is possible. The only answer to the question of how the so-called Carbon Tax will impact on the average family budget is: the damage will be infinite. 

Matt Thompson’s website is Coalition for Agricultural Productivity