When is “reform” not a reform?

Illustration by Michael Mucci

No doubt Ms Gillard will assure us, next Sunday when she announces the coal tax she has agreed with the Greens and two “independents”, that this is a “reform” that will secure a better economic future for Australia.

But a “reform” is no reform when…

  1. It is not adapted to its purpose:
    • The Gillard-Brown coal tax will not make any difference to the continuing rise of global CO2 emissions as China, India, Indonesia and the rest of the world grows rapidly using carbon-intensive technologies.
    • The tax will have no impact on the changing climate because the IPCC claims that the climate is extremely sensitive to CO2 and that CO2 is “mainly” responsible for late 20th century warming have not been supported by further investigation or by the experience of the last decade (when warming stopped while CO2 emissions continued to climb).
    • Even if the IPCC’s estimate of climate senstivity were confirmed, the potential impact of the Gillard-Brown tax on global warming is, in any case, immeasurably small.
  2. It reduces the flexibility of our economy:
    • Unlike the Keating/Hawke economic reforms in the 1980s that removed regulations that distorted investment, demand and prices the Gillard/Brown coal tax will reintroduce distortions by
      1. taxing the same activity differently in major economic sectors (stationary power and transport)
      2. raising the price of a major economic activity (carbon production) that has lower opportunity costs in Australia than elsewhere in the world and so cutting our gains from trade (and our trading partners’ gains, too)
    • The coal tax will force us to spend heavily and prematurely in an immature market (“renweable energy” technologies) to replace base-load power generation that has been shut down at a direct charge to the public purse
    • In the absence of border-adjustments (that would be provocative and impractical) the coal tax will raise the price of carbon-intensive local products, artificially diverting demand to imports, cutting domestic output while increasing output in economies that are still more carbon-intensive than our own.
    • By taxing production in an industry where we enjoy a comparative advantage, the coal tax will deny us some of the productivity boost we could expect (in future) from the massive capital and skill-deepening taking place right now in that industry and in associated service industries (deepening that is temporarily depressing current productivity)
    • It will undermine the value of an Australian wage by hiking our real exchange rate (the cost of a unit of Australian output measured in, say, Renminbi), when this is the last thing our economy needs.
  3. It reallocates your income for no socially important purpose:
    • Opinion polls running strongly against the tax tell us that the government has not (so far) identified a socially important purpose. There is, if anything, the opposite of an electoral mandate for the Gillard-Brown tax. References to “authoritative” advocates such as the IPCC or Ross Garnaut do not demonstrate a socially important purpose.
    • A partly “compensated” tax makes a salami of your money. It comprises transfers between households (those “fully” compensated and those not) minus the billions of dollars that new “clean energy” bureaucracies will siphon-off, minus whatever funds the government holds onto to e.g. meet its promised tithes to the U.N. bureaucracy, minus the funds used to “compensate” producers, including farmers, who lobby successfully for special treatment…
    • Consumers will be soaked by both the government and big business. Generators will pass their tax liability onto consumers (households) in the form of price increases. Experience tells us that where there is room for influence (wasteful lobbying), government will also “compensate” some producers including power generators and coal miners either directly or indirectly, sometimes openly, sometimes not. In Europe, producers in key industries treated such compensation as rents and also passed-on the price increases to consumers
  4. It creates a mess that future governments will have to clean up:
    • Every adult—and even every MHR—understands that disruptive changes are durable only when they come after a deliberate and inclusive consultation leading to strong consensus on a choice between alternatives and with declared room for revision when/if the facts change. Productivity Commission Chair Gary Banks recalls in detail how this practice made it possible for Australia to pull itself out of economic decline in the 1970’s in his book “An Economy-Wide View” (available for download, here). The Gillard-Brown coal tax “reform” fails every part of that test.

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