Naked truth is better for selling tax

Politicians can be economical with the truth when discussing the effects of policies they're selling. They'll rarely admit new policies can cost ordinary Australians. They'll argue such effects are zero or minimal. They'll say somebody else - preferably non-voters - will cop any adverse impact.

Nowhere is this truer than in the case of new taxes. Politicians often argue consumers won't pay, sheltering behind their legal incidence (that is, the other parties legally obliged to pay the tax). Legal tax obligations don't stop the tax burden being shifted to somebody else. It usually is.

Politicians can tie themselves in knots tiptoeing around this cost-shifting common sense. This undermines their credibility.

Here are some examples.

Comprehensive climate policies require a broad-based price on emissions. This increases production costs. These will be passed on down the supply chain to consumers. That's as it should be. A price on carbon is the supply chain signal needed to encourage a shift from high-emission products to low-emission products.

Some politicians (the Greens are among the worst) pretend big polluters, not consumers, pay carbon prices. Mainstream parties also favour emissions trading schemes because big polluters legally must pay for emissions permits. They also like the charade that the market sets the carbon price, not governments.

These claims are dishonest. Big polluters pass costs on where they can (to Australian consumers) or shift production overseas (where they can't and profits fall below overseas opportunities). Under an ETS, governments set carbon prices by limiting total emissions permits. The ETS has no effect on emissions. It just shuffles them, once governments set the cap via total permits issued.

The Australian opposition has a direct-action alternative climate policy. It's opposed to a “great big new tax on everything”. It supports subsidies for emissions reduction initiatives. These subsidies could grow without limit. But somebody must pay for them. Voters will pay for direct action, including through higher taxes.

Broad-based climate policy would be easier to sell if politicians were honest about what was needed. A comprehensive carbon price raises consumer prices, concentrated on high-emissions products. That's a fact.

Governments get lots of revenue, from ETS permit sales or a carbon tax. Most of that extra revenue can be used to cut income (and other) taxes, and increase social welfare payments.

Let's be clear. Climate policy is intended to raise prices of emissions-intensive products compared with greener products. It's not intended to cut real incomes. Using most of the revenue from a carbon price to cut other distorting taxes and increase welfare payments can achieve the first effect and avoid the second.

Why can't politicians just say this rather than hiding the cost-shifting reality? It would make their job easier.

The holy grail of tax theory is a tax that raises revenue without changing taxpayer behaviour and without shifting the tax away from those legally required to pay it.

The government is selling the resource super-profits tax as a practical example.

It claims rich foreign miners will pay the RSPT and the revenue can be used to fund benefits for (voting) Australians.

For a capital-importing country such as Australia, the explicit xenophobia used as part of the rhetoric pushing this tax is appalling and irresponsible. The class war overtone also used is wedge politics, ignoring past reforms, including those of the Hawke-Keating governments, that brought people together (for example through superannuation investments).

Worse, the RSPT is a wolf in sheep's clothing. For new mines, it looks like another distorting tax. The government's future cost refund promises on which its non-distorting credentials rest aren't believed by the market. They're worthless. Most Australians will pay through lower investment, jobs and asset prices.

For existing mines, it may be closer to the ideal non-distorting tax. But it gains that accolade by being applied to existing mines as a complete surprise after all the hard work has been done, costs are depreciated away and only the rewards from success are there to be taxed.

As with most real-world “ideal” taxes, the trick is to ambush successful investments after success has been delivered and hope future investors will be too dumb to worry that the same trick may be pulled on them.

This is dishonest and likely to be a one-trick strategy, the costs of which will be a permanent souring of the investment climate and less growth down the track.

So, far from looking after future generations, as its proponents claim, the real risk is that the short-term political opportunism driving the RSPT will detract from their living standards.

So-called developer levies are also dressed up as an ideal tax. Governments pretend the landowner or the developer pays such levies. If they don't, the tax must be shifted to home buyers and other property investors. If landowners and investors won't pay, and developers can't make a profit by passing the levy on, the land doesn't get developed.

In time, the resulting land banking (including by governments) pushes land and property prices higher as demand grows, until the developer or government owner can pass the levy on to the next buyer in the chain.

Australia's housing affordability problem in some states partly reflects this problem. In the end, consumers - especially first-home buyers - usually end up paying so-called developer levies.

Of course governments don't advertise this. They prefer the illusion that rich developers pay the levy. The reality is that housing affordability is undermined and community infrastructure costs are financed by a few.

Tobacco taxes are an example where politicians go closer to telling the truth. Here, they do argue increased tobacco excises won't be paid by the tobacco companies but will be shifted to smokers.

This is correct. In this case, however, politicians pretend the tax increase is to cut smoking rather than to raise tax revenue. Chances are tobacco tax increases will cut smoking a little bit but raise tax revenue a lot. Naturally, governments pocket the proceeds if people keep smoking.

More honesty would make politicians' jobs easier. Honesty acknowledges the inherent common sense of the electorate.

It may even increase respect for what politicians are on about.

It couldn't make things worse.