There is a very simple supply and demand diagram in any introductory economics course which explains the incidence of tax levied on the supply of a product. It shows that the degree to which the tax is borne by the supplier or the supplier’s customers depends on how sensitive the customers are to rising prices. If their demand is price-inelastic (i.e., falls only slightly or not all as price rises) then they, not the supplier, will bear most or all of the tax.
Commercial life is more complex than simple diagrams allow but, in this case, the simple diagrammatic representation has profound implications which go well beyond its apparent limitations.
The diagram leads us into the world of consequences. Consequences are often those pesky, unintended effects that many impatient people and children think it best to ignore because consideration of them before acting might slow things down. A shorthand way to describe the phenomenon would be acting without thinking.
The last six years of government in Australia provides a number of world-class examples of acting without thinking. Pink batts would probably be very highly rated in any international compendium of unthinking acts. It wasn’t so much the tragic deaths and accidents that were not foreseen but the long-term, crippling effect it was bound to have on the well-established and stable insulation industry.
Stopping live-cattle exports in their tracks, without a moment’s thought, as a result of a TV program, would be a close second. Never mind the consequences for the cattle industry and our relationship with Indonesia. The first mining tax was a unique example of modelling the impact of a tax without the accompaniment of even a microscopic amount of common sense or reference to the industry on which it was to be levied.
The incidence and consequences of the carbon dioxide tax are far reaching and hard to calculate, particularly without knowledge of what the rest of the world intends doing. “The big polluters will pay”, we were told. Well, no, they probably won’t. They’ll pass on the extra costs to their business customers, who will, in turn, pass the costs on, until the elderly lady at the bottom of the street has to pay more for her usage of power or dies of hypothermia trying to save on electricity. And maybe along the way some people will lose their jobs as their employers become uncompetitive. Whoops! That was not intended.
But is this now all in the unthinking past since the reprise of Rudd, replete with a kinder more consultative persona? Apparently it is not. In short order we’ve had changes to FBT and to tobacco taxes and the PNG "solution". It is fair to say that the Government has not the least idea of the consequences of any of these measures. It can’t have because they’ve all been rushed into effect.
How will sales of domestically manufactured cars be affected by the FBT changes? What impact will this have downstream? Who will actually pay the higher taxes? Where will the incidence of the tobacco taxes fall. How regressive will that be? Can PNG cope, logistically, socially, and politically, with housing and resettling thousands of asylum seekers?
Please don’t ask us any of these uncomfortable questions. We’re just Labor politicians, akin to children if you like, and therefore unable to compute unintended consequences that might interfere with our grand plans and moral imperatives.
Those on the right of the political spectrum often discuss how they would want be described – a conservative; a classical liberal; a libertarian; "an Austrian", in the mould of Hayek and Mises. There are differences of substance among those on the right – it is broad church. However, all put an emphasis on limited government and individual freedom. And there is, as well, another common thread: adulthood. It could also be described as a commitment to search for the whole truth in evaluating public policy. It finds expression in explicitly investigating and taking account of pesky consequences before contemplating action.
Childish behaviour often results in messes that have to be cleaned up by adults. Australian public policy is in a mess. We now need the adults to clean it up; starting from September 7. Another three years of more of the same and something akin to Hercules’ clean up of the Augean Stables might be required.
Peter Smith, a frequent Quadrant Online contributor, is the author of Bad Economics