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.

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