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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