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Sunday, 10 July 2011

Carbon Tax Increases Income Tax Rates?


Something doesn't add up with the carbon tax compensation scheme. Take this except from the West Australian article titled Tax cuts to compensate for higher living costs:

To deliver the tax cuts, the tax-free threshold will triple from $6000 to $18,200 when the carbon tax begins on July 1 next year.

A second round of tax cuts will occur in 2015, when the carbon tax switches to an emissions trading scheme, with the threshold lifted to $19,400.

Most taxpayers will enjoy a tax cut of at least $300.
The first an second points are easy to understand. But the third point about most taxpayers will get a tax cut of at least $300 doesn't make sense. The way the income tax system works currently is that you pay nothing for any income you earn up to $6000. Then from $6000 to $37000 you pay 15 per cent. If the tax-free threshold were to increase from $6000 to $18200 then this means that if you earn at least $18200 per year you will save (18200-6000)*0.15 = $1830, and everyone earning over $18200 per year will get this.

But news article talk about most people getting tax cuts of only $300 and that people earning below $80,000 will not benefit!

This makes no sense. Perhaps the government is trying to obfuscate what looks like a tax rise for people in higher tax brackets. My guess is that although the tax-free threshold will increase, to compensate for this the government will increase income taxes in other areas. For example, for every dollar you earn between $18200 to $37000 you may be required to pay 30 per cent rather than 15 per cent.

I wish the government were clearer on this. It does not look good when the government tries to hide detail. If anything it makes me suspicious.

Update 16 July 2011: I have finally worked it out! It's disappointing that the increase in income tax rates was not clearly highlighted in the mainstream media, but the changes are as follows:
  • Tax-free threshold will increase from $6000 to $18200
  • The 15% income tax rate will be lifted to 19%
  • The 30% income tax rate will be lifted to 32.5% in 2012 and then 33% at 2015.
The low income tax threshold will decrease, which, now that I think about it, makes sense because a change in the income tax rates is much more transparent. All in all, I think these tax rate changes comfort with the general principle of carbon tax compensation, which is to target poor people and not rich people. The increases in the income tax rates at the higher end will help make sure that the benefits of the carbon tax compensation only go to those who need it.

I have complained about the carbon tax because there are many problems with it. It doesn't address the problem of jobs moving overseas and it exempts petrol. Furthermore, carbon tax compensation doesn't all go to poor people. Much of it goes to industries. Nevertheless, I completely understand that the job of politician entails compromise. It is no point letting best get in the way of better, as the Greens would have found out when they opposed the CPRS. With a Parliament made up of independents and the Labor party being heavily influenced by trade unions and voters who struggle with rising petrol costs, it makes sense that Gillard make these compromises to ensure that at least something gets through Parliament. All in all, this is a step in the right direction. Taxing big business for their carbon emissions is a much better idea than paying big business to reduce emissions, which is what Tony Abbott plans to do. If Abbott had his way, the money necessary to pay off big business to reduce emissions would need to come from somewhere, and chances are he would introduce some form of carbon tax e.g. by increasing income taxes. Simply increasing income taxes would not punish people who use more electricity, it only punishes people who earn more. By increasing carbon tax you are punishing those people who commit the sin of emitting more carbon and with the proceeds of the carbon tax you can reduce income tax, which encourages single mothers and students to work.

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