The reason ‘compensation’ will fail

Households have a conservative propensity to save more and spend less when taxes are rising. Even if the carbon tax were (as the Government sometimes, but inconsistently, says) “100%” offset by compensation payments to households, it will still shrink the whole economy.

“Precautionary saving stems from uncertainty about the future and is undoubtedly related to the ever-present prospect of new taxes to cover budget deficits at federal and state levels, and the effect these taxes will have on future wealth. Such behaviour is quite rational in light of the rhetoric about the need to return the federal budget to surplus and the numerous new taxes that have popped up quite unexpectedly in the past two years, such as the mining tax, the flood levy and now the carbon tax.” Extract from Tony Makin inThe Australian

If, on the other hand, the “compensation” were paid to e.g. electricity generators, as they stridently insist, rather than to households, it would probably make the shrinkage worse.

No Comments

Leave a Reply

Your email is never shared.Required fields are marked *