Peter Gallagher

Henry Ergas answers the ques­tions that the Gillard gov­ern­ment has for­got­ten even to ask:

“…in terms of Australia’s national inter­est, it is dif­fi­cult to think of a pol­icy more harm­ful than such a uni­lat­eral tax” Extract from Uni­lat­eral action cre­ates costs with­out ben­e­fits, in The Aus­tralian

But I think Henry might be too opti­mistic about the ben­e­fits of a bor­der adjust­ment approach to exempt­ing exports from the tax.

Finally, would these prob­lems be ame­lio­rated were the tax only on domes­tic con­sump­tion, exempt­ing exports but tax­ing imports, as Geoff Car­mody has pro­posed? Of course they would. But that is only because we are act­ing uni­lat­er­ally, dam­ag­ing our exports. Shift­ing the bur­den on to domes­tic con­sump­tion reduces the harm. But the harm does not go away: it is just diminished.

I will need to review this more closely, but I think the out­come might be much worse than Henry believes. I sus­pect that exempt­ing exports from the tax would force us to choose between large losses for Aus­tralian indus­try and con­sumers, or con­tra­ven­tion of the World Trade Orga­ni­za­tion (WTO) rules.

If the Aus­tralian gov­ern­ment exempts goods from a tax on con­di­tion that they are exported, the tax-benefit amounts to a pro­hib­ited export sub­sidy under the WTO rules. But a spe­cial WTO rule applies to economy-wide value-added taxes (like the GST). These taxes may be adjusted at the bor­der to exempt exports even while the tax is levied on imported goods. The levy on imports must be in pre­cisely the amounts that would have applied to the pro­duc­tion of such goods had they been man­u­fac­tured in Aus­tralia—even if we do not man­u­fac­ture those goods in Aus­tralia. This is exactly what hap­pens now in Aus­tralia with the GST: exports are exempt and imports (of $1000 value or more) are levied at the statu­tory rate.

It is likely that WTO mem­bers will treat any car­bon taxes they impose in their own ter­ri­tory as a “GST-like” value-added tax under this spe­cial WTO rule. Now, the impo­si­tion of the equiv­a­lent tax on imports is not com­pul­sory under WTO rules: it seems to me it would be con­sis­tent with WTO rules to waive the import taxes com­pletely (although, not selec­tively). But what gov­ern­ment would give imports a free ride under a regime where they taxed the local man­u­fac­tur­ers of the same or directly com­pet­i­tive goods? None, ever has, as far as I know.

So, if the Aus­tralian gov­ern­ment exempts exports from the car­bon tax it is very likely to have to tax imports of goods imported from the rest of the world where they would not oth­er­wise have been taxed.This would be a sig­nif­i­cant increase in import costs, not to men­tion a book-keeping night­mare. It will be very dif­fi­cult to deter­mine the required rate of tax on each prod­uct and each deter­mi­na­tion will be open to chal­lenge by importers and by our WTO part­ners. Although the tax rev­enue com­prises a trans­fer to gov­ern­ment that could be returned to firms and house­holds by other means, the bor­der duty would lead to large inef­fi­cien­cies in our econ­omy (and prob­a­bly a reduc­tion in growth and demand).