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Weekend reflections

January 23rd, 2009

It’s time once again for weekend reflections, which makes space for longer than usual comments on any topic. As always, civilised discussion and no coarse language.

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  1. johng
    January 23rd, 2009 at 18:07 | #1

    What’s the difference between public servants celebrating Christmas or a departmental milestone at taxpayer expense and workers at a publicly listed company having a party for the same reasons at shareholder expense?

  2. johng
    January 23rd, 2009 at 18:11 | #2

    Does anyone else think the recent comments by the QLd branch of the Aust Medical Union (aka the AMA) about the need for the QLD Govt to match the rewards offered by other states or risk losing its members (medical practitioners) as they take up these offers, sound suspiciously like pattern bargaining? I thought this was supposed to be outlawed.

  3. Michael Norrish
    January 23rd, 2009 at 18:30 | #3

    If various forms of fiscal stimulus are supposed to be so good for us, why is the Australian government simultaneously hell-bent on “squeezing the lemon”, extracting money from the Public Service, for example, in turn leading to job losses and the very opposite of stimulus?

  4. TerjeP (say tay-a)
    January 23rd, 2009 at 21:01 | #4

    JQ – I heard you on Radio National this afternoon discussing water policy. It was a replay from the Melbourne Writers festival in 2008. It was quite amusing to listen to you defend markets against those that would see them abolished entirely. Although I wonder what it says when John Quiggin is the most pro market guy in the conversation.

    I thought your point about water being probably the only product that you can have home delivered by the tonne for around $1 was an interesting way to frame the discussion. Clearly transport of water between different parts of the national economy can be done cheaply when gravity permits and not so cheaply otherwise.

  5. Alanna
    January 24th, 2009 at 10:24 | #5

    I came across this link on causes and solutions for the global financial crisis. I was pleased to see a particular economists name placed first on the list.

    http://www.globalresearch.ca/index.php?context=va&aid=10792

  6. MH
    January 24th, 2009 at 12:57 | #6

    I guess the next REFUTED ECONOMIC DOCTRINE will have to be the money supply multiplier. The first wave of the unfolding GFC brought quickly the major merchant banks and many majors into insolvency as CDO failed, the next tranch underlying the acceptance of CDO’s was CDS’s, as the unwinding of the leveraging that was CDO’s collapsed world financial and economic systems I guess the downward spiral of corporate and personal financial distress will translate into the collapse of CDS’s. This will effectively bust everybody except those who never engaged in this exotic form of multiplier fantasy.

    The GFC in the US is starting to resemble the Twin Towers, at the moment the structure is still burning, the top floors have started to collapse and it is only a matter of time before the whole edifice collapses into financial ground zero.

    Stand back and watch events unfold.

  7. Michael of Summer Hill
    January 24th, 2009 at 13:55 | #7

    John, it seems like the Liberal Party are more or less accusing Labor of being two-faced when it comes to refraining from laying off staff for according to Dr Andrew Southcott MP Shadow Minister for Employment Participation, Training and Sport some 3000 plus public servants are expected to lose their jobs.

  8. Michael of Summer Hill
    January 24th, 2009 at 14:49 | #8

    John, the latest info suggests the spat between the Ukrainians & Russkies may not be over for if Ukraine defaults on its next gas bill then my understanding is Ukraine will have to pay in advance for any future gas deliveries. But given Ukraine’s past track record and their current economic disposition I wouldn’t hold my breath that they will make good on their promise.

  9. observa
    January 24th, 2009 at 18:12 | #9

    Turning to the really big picture it’s clear that the two greatest problems on our plate at present and into the forseeable future are the natural and the finacial environment. More narrowly that’s AGW and credit/leverage and the rapid emergence of the latter problem will clearly impact the former in terms of amelioration efforts. Any long term solutions to either will need to bear this in mind. Killing two birds with one policy stone or direction would have very powerful attraction now.

    You don’t have to be a convert to AGW to see the clear emergent danger of emissions C&T and all the financial derivatives that could sail with it, with the GFC now and I pointed out how one of the Godfathers of AGW has seen that light in his letter to Obama. You can add a purportedly recalcitrant Chairman of Exxon to that list now with a preference for straight carbon taxing ‘somewhere north of US$20/tonne’. Furthermore
    “William Nordhaus, a Yale economist, estimated in 2007 that a carbon tax should start at no less than $30 a ton and rise to $85 a ton by 2050 in order to change people’s greenhouse gas emissions. British economist Nicholas Stern estimated in his 2006 report that the price should be about $300 a ton.”
    I have also pointed out previously that there is almost no analysis of what level of current taxes could be substituted for straight carbon taxing at any level, let alone these various picks out of the hat. Without increasing taxation overall, the maximum theoretical carbon tax is one that replaces all other taxes but as Hansen notes it’s advisable to increase tax on those things you want less of (CO2) whilst decreasing taxes on those things you want more of (income and jobs). If you can achieve that with even more positive spinoffs then so much the better.

    Scrapping payroll tax is the immediate no-brainer but the GFC immediately offers a telling spinoff with the substitution of carbon taxing for income tax. It drastically reduces the incentive for leverage, particularly negative gearing and with it that housing affordability problem. Long term we need to quickly defuse the widespread incentive for capital gain and negative gearing with its interest deductibility and incentive to borrow. That is an absolute imperative now for any long term tax reform to address AGW and the GFC contemporaneously. Ultimately we may need to overlay C&T on any new constitutional marketplace we envisage but it should be put away in the drawer for safekeeping until we’ve exhausted the obvious choice now due to the critical lessons of the GFC.

    When you come to that sensible conclusion(bearing in mind no actual numbers have been crunched) you ask yourself is that all? Is that enough? There is still the whole gamut of taxation from GST, land tax, capital council and water rates charges to stamp duties to consider(bearing in mind company tax would naturally disappear with income tax) If you follow the logic so far the path is well defined and self selecting, assuming no major objections. For me the next step was to consider that hypothetical maximum again. Wipe them all out for straight carbon taxing perhaps? Intuitively whilst it had those two powerful aforementioned attractions without any major obstacles it seems too drastic (note devout AGW fans may disagree) No there was that typical problem of water at around a dollar a tonne that Terje mentioned bothered JQ. Carbon was an important and fundamental resource, but not the absolute imperative for me. There were many other resources to consider so raising their price seemed the next logical step and in that there was the total remainder of current taxation up for grabs to do that. Water was clearly one of them but so were many others including the overarching use of land as a resource.

    Yes taxing resources generally to raise their private cost more in line with social cost a la carbon use made much immediate sense, bearing that important new GFC lesson in mind, but taxing natural environment would immediately create economic incentives to knock it over for profit as is the case now. Private ownership is worthy to prevent the tragedy of the common but the last thing private natural environment needs is the tragedy of the common incentive to develop it. It had to have relief from that if held in trust now and for future generations, so no tax whatsoever on natural environment to a maximum for concrete, bitumen and building cover became the obvious next step.

    So far so good with more wombats and less of those hairy nosed taxes but the wombats might need some true countervailing market power, rather than just some reaguard action. You could still have a lot of very wealthy humans and stuff those wombats because they could afford to pay to knock off the habitat anyway and continue with some very conspicuous consumption. A top end annual nett wealth tax perhaps for the really high fliers? Hmmm.. OK but what if they held it as natural environment anyway? Why would you want to penalise that altruism and create the need for income from that environment and back to an implicit land tax again? Give them an exemption for holding it in that form seemed obvious but then a further idea occurred. Give anyone an ANWT franking credit for any expenditure for the preservation or creation of natural environment a la Walmsley’s Eart Sanctuaries. Therein was the clincher incentive to provide true countervailing market power for the wombats now and for all time. The only true inexorable power that works every hour of every day of…

    Tacking carbon C&T onto the current mish mash could never achieve that integrated third way, although it could be reserved for the very end of the journey if required. That would be a long, long way off for consideration IMO.

  10. Janette
    January 24th, 2009 at 18:20 | #10

    Dear John and other economists,

    I just read this article online and i’d really appreciate your thoughts -

    George Monbiot The Guardian, Tuesday 20 January 2009

    In Russell Hoban’s novel Riddley Walker, the descendants of nuclear holocaust survivors seek amid the rubble the key to recovering their lost civilisation. They end up believing that the answer is to re-invent the atom bomb. I was reminded of this when I read the government’s new plans to save us from the credit crunch. It intends – at gobsmacking public expense – to persuade the banks to start lending again, at levels similar to those of 2007. Isn’t this what caused the problem in the first place? Are insane levels of lending really the solution to a crisis caused by insane levels of lending?

    Yes, I know that without money there’s no business, and without business there are no jobs. I also know that most of the money in circulation is issued, through fractional reserve banking, in the form of debt. This means that you can’t solve one problem (a lack of money) without causing another (a mountain of debt). There must be a better way than this.

    This isn’t my subject and I am venturing way beyond my pay grade. But I want to introduce you to another way of negotiating a credit crunch, which requires no moral hazard, no hair of the dog and no public spending. I’m relying, in explaining it, on the former currency trader and central banker Bernard Lietaer.

    In his book The Future of Money, Lietaer points out – as the government did yesterday – that in situations like ours everything grinds to a halt for want of money. But he also explains that there is no reason why this money should take the form of sterling or be issued by the banks. Money consists only of “an agreement within a community to use something as a medium of exchange”. The medium of exchange could be anything, as long as everyone who uses it trusts that everyone else will recognise its value.

    During the Great Depression, businesses in the United States issued rabbit tails, seashells and wooden discs as currency, as well as all manner of papers and metal tokens. In 1971, Jaime Lerner, the mayor of Curitiba in Brazil, kick-started the economy of the city and solved two major social problems by issuing currency in the form of bus tokens. People earned them by picking and sorting litter: thus cleaning the streets and acquiring the means to commute to work. Schemes like this helped Curitiba become one of the most prosperous cities in Brazil.

    But the projects that have proved most effective were those inspired by the German economist Silvio Gessell, who became finance minister in Gustav Landauer’s doomed Bavarian republic. He proposed that communities seeking to rescue themselves from economic collapse should issue their own currency. To discourage people from hoarding it, they should impose a fee (called demurrage), which has the same effect as negative interest. The back of each banknote would contain 12 boxes. For the note to remain valid, the owner had to buy a stamp every month and stick it in one of the boxes. It would be withdrawn from circulation after a year. Money of this kind is called stamp scrip: a privately issued currency that becomes less valuable the longer you hold on to it.

    One of the first places to experiment with this scheme was the small German town of Schwanenkirchen. In 1923, hyperinflation had caused a credit crunch of a different kind. A Dr Hebecker, owner of a coalmine in Schwanenkirchen, told his workers that if they wouldn’t accept the coal-backed stamp scrip he had invented – the Wara – he would have to close the mine. He promised to exchange it, in the first instance, for food. The scheme immediately took off. It saved both the mine and the town. It was soon adopted by 2,000 corporations across Germany. But in 1931, under pressure from the central bank, the ministry of finance closed the project down, with catastrophic consequences for the communities that had come to depend on it. Lietaer points out that the only remaining option for the German economy was ruthless centralised economic planning. Would Hitler have come to power if the Wara and similar schemes had been allowed to survive?

    The Austrian town of Wörgl also tried out Gessell’s idea, in 1932. Like most communities in Europe at the time, it suffered from mass unemployment and a shortage of money for public works. Instead of spending the town’s meagre funds on new works, the mayor put them on deposit as a guarantee for the stamp scrip he issued. By paying workers in the new currency, he paved the streets, restored the water system and built a bridge, new houses and a ski jump. Because they would soon lose their value, Wörgl’s own schillings circulated much faster than the official money, with the result that each unit of currency generated 12 to 14 times more employment. Scores of other towns sought to copy the scheme, at which point – in 1933 – the central bank stamped it out. Wörgl’s workers were thrown out of work again.

    Similar projects took off at the same time in dozens of countries. Almost all of them were closed down (just one, Switzerland’s WIR system, still exists) as the central banks panicked about losing their monopoly over the control of money. Roosevelt prohibited complementary currencies by executive decree, though they might have offered a faster, cheaper and more effective means of pulling the US out of the Depression than his New Deal.

    No one is suggesting that we replace official currencies with local scrip: this is a complementary system, not an alternative. Nor does Lietaer propose this as a solution to all economic ills. But even before you consider how it could be improved through modern information technology, several features of Gessell’s system grab your attention. We need not wait for the government or the central bank to save us: we can set this system up ourselves. It costs taxpayers nothing. It bypasses the greedy banks. It recharges local economies and gives local businesses an advantage over multinationals. It can be tailored to the needs of the community. It does not require – as Eddie George, the former governor of the Bank of England, insisted – that one part of the country be squeezed so that another can prosper.

    Perhaps most importantly, a demurrage system reverses the ecological problem of discount rates. If you have to pay to keep your money, the later you receive your income, the more valuable it will be. So it makes economic sense, under this system, to invest long term. As resources in the ground are a better store of value than money in the bank, the system encourages their conservation.

    I make no claim to expertise. I’m not qualified to identify the flaws in this scheme, nor am I confident that I have made the best case for it. All I ask is that, if you haven’t come across it before, you don’t dismiss it before learning more. As we confront the failure of the [UK]government’s first bailout and the astonishing costs of the second, isn’t it time we considered the alternatives?

  11. observa
    January 24th, 2009 at 23:46 | #11

    Now I’ve outlined how I got there let me summarise that new taxation system-

    1. We tax carbon at the mine or well head (really CO2E taxing but no exemption for use in plastics manufacture, etc)
    2. We tax other resources from mining, quarrying, forestry, fishing and water use.
    3. The private use of land is a resource and is taxed based upon land use from zero for natural state to a maximum for full artificial cover (ie buidings, bitumen and even dam cover or mine and quarrying disturbance.)
    4. We rely on an ANWT(life cycle adjusted)for top end redistribution with a specific exemption and franking credit. That exemption would be all wealth held as natural environment and a franking credit given for any expenditure on remediation(ie mines quarries or opening dams, etc) or for creation of natural environment( ie Walmsley’s Earth Sanctuaries and the like)

    So essentially we have a new constitutional marketplace based on ‘more wombats and less hairy nosed taxes’ but how would that work in practice? Nothing like an example and so let me apply it to JQ’s concern about that MDB water at $1/tonne(kilolitre), assuming you can buy it once the current taxation system and concomitant constitutional marketplace has finished with it all.

    Firstly recall an estimate that it took around 2kl of water to produce a dollars worth of rice and perhaps cotton and flood irrigated pasture might have similar returns. A resource tax of say 10c/kl would probably wipe out that useage and allow more productive uses and environmental flows. Certainly it would save cities like Adelaide from the need for high energy desal plants. The tax might need to be higher to offset payroll, income and company tax, etc under a changed regime but even 25 or 30c per kl is dwarfed by desal at $2.50-$3.00/kl so there’s plenty of room to manouvre there. With carbon taxing, certainly pumping costs would be much higher for all with gravity the cheapest.

    Now we turn to the collection of such water and the owners of dams. Cubby station or those Snowy dams, the owners would have to pay the maxm land use tax similar to CBD land coverage with buildings, concrete and bitumen. After all that natural environment under the maxm dam carrying area is now no longer so. Not a big problem if the tax is amortised across many Snowy Hydro power consumers (esp compared to carbon taxed Hunter Coal generated power) but probably an insurmountable hurdle for the lesser shareholders of that Cubby dam. That’s the way it should be for the pricing of natural environment private property rights, lest the few destroy much. It may be that we resource tax the estimated water evaporation from such artificial damming as well in order to tax true water resource use. That means large shallow dams in hot areas are paying for the higher water lost cf deep cool area dams. This would not be too difficult a sophistication and certainly the Snowy dams should pay their share of water loss, even if it’s only stored for hydro power release downstream.

    Notice that under this pricing regime or resultant ‘constitutional marketplace’, there is strong countervailing market power to resist large natural environment destruction and use for the benefit of the few, as it should be. That is not the case at present and even more so with C&T grafted on (ie land use for ethanol production). So as the owners of Cubby station are caught in the twin pincers of rising water taxes and maxm land resource use taxing, what are their options? Well they revert to much lower land resource use taxing of dryland farming or perhaps sell out to one of our plethora of budding Walmesleys and their Earth Sanctuaries who want to breach the dams and reinstate and revegetate them and the drainage channels for some new environment investment and franking credits for those high wealth investors looking for relief from that ANWT. They of course may be looking for some long term relief or just some temporary relief for some spare cash from an asset sale. Whatever, they gain the relief as long as they hold those shares, as well as enjoying the franking credits(which could be stored like capital gains and losses perhaps)

    Now how does that compare long term with the current CM and proposals to tack C&T on to it? Well for some more empirical feel we need open minds and some analysis of the sorts of figures we could be talking about ie what level of carbon tax would we get on current consumption figures by switching to it from payroll and income tax for instance? At present all we are being offered is the simplistic monoline of C&T from the Australian cringe who typically think if it’s from OS then it must be good so metoo. At the very moment C&Ters reach their goal of political efficacy (that 5% target with all its free handouts) they are blinded to the imminent and obvious threat of the GFC to its core tenets. In that they should be acutely aware of an analogous situation that there is little to sensibly choose between a morally bad but practical war and a morally good but impractical one. Free markets can be the environment’s best friend as long as the invisible hand is a properly constituted one that guides all individual hands in the right direction.

  12. sean
    January 25th, 2009 at 03:45 | #12

    The most interesting event of the week

    US says China manipulating’ currency

    The most interesting article of the week
    China’s thrift is no saving grace

    And the big question of the week
    Tennis hooliganism will it spread?

  13. Kevin Cox
    January 25th, 2009 at 06:37 | #13

    Emissions Permits Trading will not work as expected because the market place in Emissions Permits will exhibit chaotic behaviour. To overcome the chaotic behaviour the government will have to introduce restrictions that will stabilise the prices. This means we may as well use a tax because the market place will not work as it is supposed to work.

    Market places work when price signals tell the market place to increase supply. This presupposes the market place can increase supply. For emissions permits the price signals are meant to encourage the production of renewable energy. Unfortunately this will not happen quickly enough because when the price of permits start to rise then the rise in price will cause demand for permits to increase which will cause the price to continue to rise. The market place has an internal positive feedback component and it will not be controlled by the increase in supply of renewable energy because renewable energy cannot increase in supply quickly enough to effect the price of permits. After some time the price of permits will start to drop. Once the price of permits start to drop they will keep dropping by some unknown amount. We do not know. The price of Emissions Permits will be unpredictable (chaotic). Control theory 101 tells us that a control mechanism that exhibits chaotic behaviour cannot be used to control anything.

    Why are we wasting time with building a system of Emissions Permits Trading that is not going to work?

  14. Kevin Cox
    January 25th, 2009 at 07:00 | #14

    Financial rescue packages will not work while the market in money remains chaotic. The problem with money is that it is created as debt and debt markets exhibit chaotic behaviour. That is we have made money = debt.

    As the price of debt starts to rise so it feeds on itself and encourages more debt. The control mechanisms of central banks increasing the price of debt have not stopped the increase in debt because the reaction time is too slow and because the central banks do not control the supply of money because they have allowed commercial banks to lend money they do not have.

    We are now seeing the other side of chaotic behaviour with the supply of credit drying up.

    A solution is to get rid of fractional reserve banking and only allow financial institutions to lend money they have. To create new money let the government issue zero interest loans to be distributed to the population but require recipients to invest in renewable energy or other ways of reducing greenhouse gas emissions. This will create all the new money we need and it will be backed by an asset. It will divorce money from debt markets and bring stability to the value of money as it will related to assets not debt.

    By the way the investments will reduce greenhouse gas emissions without increasing the price of energy so removing the need for emissions permits.

  15. Martin
    January 25th, 2009 at 14:39 | #15

    Interesting article by Buiter in the Financial Times: http://blogs.ft.com/maverecon/2009/01/can-the-uk-government-stop-the-uk-banking-system-going-down-the-snyrting-without-risking-a-sovereign-debt-crisis/ What are the odds that British bank guarantees will result in a sovereign debt crisis? As I recollect the last time England defaulted on its debt was under Charles II. Buiter recommends that to avoid this the ‘sovereign’ should not guarantee the debts of any bank, but allow them to fail and set up new banks instead.

  16. carbonsink
    January 25th, 2009 at 15:57 | #16

    observa: Love your work, I’m with you all the way on the tax-CO2-at-the-mine/well-head idea, but what’s this “ANWT” you speak of?

    Putting on my green hat, I’d love to see income, consumption and payroll taxes replaced with a simple carbon tax, but putting on my red hat, I see it as regressive and unfair. The poor spend a much larger share of their income on energy, than the rich.

    How do you make your tax system equitable?

  17. observa
    January 25th, 2009 at 17:06 | #17

    Carbonsink,
    ANWT is ‘annual nett wealth tax’ which provides the equity at the very top end you seek, with the proviso of relief for holding it in ‘approved’ environmental form and/or franking credit for expenditure on maintaining or creating same. IMO this would be an acceptable quid pro quo for abandoning income tax.

    While it’s true low income earners would ‘spend’ a much larger proportion of their income on a carbon tax, you need to bear in mind the wealthy consume much more carbon anyway ie from jet travel, aircond, dishwashers, pool pumps, etc. Also given the tendency for access to superior tax planning, negative gearing and capital gains income tax deferral, etc at present, there is much doubt that the current income tax regime offers as much equity as envisaged in its raw scales anyway. Then there’s the problem of the cash economy and general evasion to consider. Whilst carbon/resource taxing at the mine well head and Google Earth would be next to foolproof, wealth declaration could be just as problematic. The easy answer to that is that any undeclared ‘wealth’lying about instantly becomes half the property of the finder and half the property of the ATO(after which they also pursue the unpaid ANWT). Finders keepers losers weepers eh?

  18. observa
    January 25th, 2009 at 17:20 | #18

    Notice also that it doesn’t matter who owns the rights to the resources, be it a Lang Hancock, Bill Gates, the Catholic Church, the ACTU, Chairman Mao’s Sovereign Wealth Fund or common shareholders, they all pay the same resource tax. No opportunity for offshore transfer pricing and a further attraction to any multinational wanting to headquarter in a judicially safe haven close to the Asia Pacific market. No company tax for them, just pay their resource and carbon footprint which they’re free to minimise to their hearts content.

  19. Tony G
    January 25th, 2009 at 18:45 | #19

    carbonsink @ 16 said

    “putting on my red hat, I see it as regressive and unfair. The poor spend a much larger share of their income on energy, than the rich.”

    Yes, but the poor and the rich both spend a much larger share of their incomes on tax than energy.

  20. El Mono
    January 25th, 2009 at 20:42 | #20

    I would also assume that the more well off will be taxed more heavily from the use of land tax

  21. Socrates
    January 26th, 2009 at 07:27 | #21

    I found this piece on the Gaza War interesting:
    http://www.lrb.co.uk/v31/n02/sieg01_.html

    It argues that, not only was the Israeli response disproportionate and contrary to international law, but the initial justifiaction for it was false in the first place. The reason is that it was Israel not Hamas that broke the cease-fire in November. Most media coverage has focused on the former not the latter.

  22. January 26th, 2009 at 08:09 | #22

    Wanted to post that on the Efficient Market Hypthesis at crooked timber but comments were closed, so here it is, as it can be a subject of general discussion:

    <>

  23. January 26th, 2009 at 08:10 | #23

    The comment:

    Tim Worstall, government owned corporatioon can be totally transparent in the internet age (down to each payment), whereas private corporation will never release any interesting information to its shareholders.

    If you think about it, with a transparent government corporation has more “shareholders” than any private corporation, and with better information.

    And politicians are more likely to be removed from their job in disgrace than top executives in the private sector.

    I belive the potential impact of the internet and transparency policies on what form of organisation is more efficient to handle such and such job is currently underestimated.

    Unsurprisingly, Statoil is run in Norway, a country with an advanced transparency system for its state.

  24. carbonsink
    January 26th, 2009 at 08:10 | #24

    Tony G @ 16 wrote:

    Yes, but the poor and the rich both spend a much larger share of their incomes on tax than energy

    But surely that is point. We should all be spending a much larger share of our incomes on (fossil) energy. Currently we tax something good that should be encouraged (honest labour) rather than something bad that should be discouraged (consumption of fossil fuel energy).

  25. January 26th, 2009 at 08:11 | #25

    About unemployment vs people without jobs, here are long term graph for male aged 25-54 in the USA

    http://guerby.org/blog/index.php/2009/01/24/193-l-inexorable-ascension-de-la-population-sans-emploi-aux-usa

    1948-2008: without jobs but not unemployed went from 3% to 9% nearly linearly.

  26. Tony G
    January 26th, 2009 at 10:09 | #26

    carbonsink Said @ 24;

    “But surely that is point. We should all be spending a much larger share of our incomes on (fossil) energy”

    Maybe we agree;

    We currently tax the community at 33% of GDP. If we then tax essential(fossil) energy at an additional 10%, bringing the total tax take to 43% of GDP, I doubt it will kerb (fossil) energy use much as it is essential to our standard of living. What will probably happen is that by increasing the tax take we will have a corresponding lowering of our standard of living.

    The only way to decrease the use of fossil energy is to find an alternative that is competitive. That shouldn’t be difficult if (fossil) energy was the only thing taxed at a rate of 33% of GDP. Finding an alternative energy source would be the only tax avoidance scheme going.

  27. observa
    January 26th, 2009 at 11:08 | #27

    That’s essentially my point TonyG that if we straight tax fossil energy there is that maximum upper bound unless we raise the overall level of taxation. OTOH C&T in trying to fix quantity must let go of price and that could easily be blue sky and a virtual tax in the hands of private emission permit holders once auctioned. That’s a clear competitor to communal taxing and something must give under that scenario. Big Govt greens(I’m a market green) may well be shooting themselves in the foot there and curiously enough it looks like Turnbull is on their side with his latest stance, although they probably wouldn’t see it that way. Peas in a pod really except that Turnbull is smart enough to recognise big finance will drive a bus through international ETS.

    When you see clearly the only logical alternative in the face of the GF meltdown of derivatives trading that leaves you to ask should we go for that maximum hypethetical straight fossil taxing. My answer is essentially no and I outline why so and how and why we should be prepared for some sensible tradeoffs. Feel free to pick the bones of it and suggest better flesh.

  28. Michael of Summer Hill
    January 27th, 2009 at 15:04 | #28

    John, it seems like the Canadians just cannot win for on top of the current financial crisis they now have the H5 avian influenza virus. According to the latest info 60,000 birds at a commercial poultry in southern B.C. had to be put down.

  29. Monkey’s Uncle
    January 27th, 2009 at 15:24 | #29

    Observa @ 17, I agree that it would be a good idea to use some sort of wealth tax to replace income tax.

    There is an obvious reason why taxing people on the value of what they own is far more economically sound than taxing people on how much they earn. That is because people have more incentive to put capital to its most productive use.

    If I own a block of land, and the government taxes me on the value of the land but not on the income I generate from the land, then I have far more incentive to put the land to its most productive use.

    While taxes on income and business profits almost always act as a disincentive to work, investment and productivity, taxes on passive wealth often enhance economic efficiency.

    Yet in much of the community there is a general view that income taxes are somehow ‘fairer’ than property taxes.

    This just proves the truism that people have a natural bias towards bad economic policy.

    [Monkey's Uncle is the new username of Nick K]

  30. Tony G
    January 27th, 2009 at 16:00 | #30

    observa, what you said here about tax swaps is IMHO the way to go.

    ” Essentially they believe in taxing things you want less of (CO2) and tax relief for those things you want more of (income and jobs).[and maybe renewable s]

    Notice that this compromise position negates any need to argue for or against the AGW theory and given the natural disappointment with the Rudd Govt’s opening stance on C&T and its propensity to hand out so many free permits, could well be more satisfactory for both viewpoints, as well as a more level playing field if implemented domestically and internationally.”

    All they need to do is find the correct taxation price point to achieve the desired outcome.

    Monkey’s Uncle said;

    “If I own a block of land, and the government taxes me on the value of the land but not on the income I generate from the land, then I have far more incentive to put the land to its most productive use.”

    We have land at the most productive use in NSW and the land taxes takes 25% of the rental income every year. Land taxes are rent taxes and generally hit low income housing tenants and small tenants in shopping centres the hardest.

  31. Monkey’s Uncle
    January 27th, 2009 at 16:47 | #31

    Tony, all taxes have some negative impact on the economy or invariably inconvenience some people.

    The problem with state land taxes is that there is no compensating reduction in income tax (as that’s a federal tax). So you can’t really measure the tradeoff of higher property taxes/lower income taxes.

  32. Tony G
    January 27th, 2009 at 19:55 | #32

    Monkey’s Uncle;

    The cheapest rent for a house around my way is about $500 per week. The land tax component is about $125 per week. If the tenant pays his rent inclusive of its land tax component with after tax income, and he is on the 45% top marginal tax rate, then he would be paying another $56 per week tax on top of the $125 land tax he is already paying.

    That is how I measure “the tradeoff of higher property taxes/lower income taxes.”

  33. observa
    January 28th, 2009 at 00:22 | #33

    “Notice that this compromise position negates any need to argue for or against the AGW theory”

    Exactly and I have been a fan of fossil fuel taxing for a long time before it became fashionable with AGW C&T. It is the very means by which we convert the natural environment to our desires at such a phenomenal rate and further there is the peak oil factor and the need to adapt quickly to that.

    It is essential that overarching ‘price’ comes to all of us via a higher private cost of all resource usage, for truer social costing, rather than any other more obscure mechanism. When it does that we will concentrate on quality and longevity over quantity and disposability as well as increasing the incentive to recycle due to the higher cost of new resource useage. The tax system is fundamental to setting the constitution of our marketplace in that regard. Indeed it is the very means by which we impose social costing and the way in which we do that, has never been more critical now.

    You can immediately see how fossil/resource taxing is administratively simple, unavoidable and indifferent to private, business, religious, etc use as it should be. (ie it is the ultimate level playing field) Furthermore with stamp duties and capital gains tax removed, land and capital are as free to be traded as labour is, which is critical if we are to be fleet of foot in adapting to a greener society. Taxation should be absolutely frictionless in that regard and resource taxing allows for that imperative.

    It’s hard to see any negatives in what I outline and yet we persist with a clearly failing system of pricing, tacking on more and more convoluted and administratively costly quantity controls in the vain hope we can jumpstart its rotten ticker. Feelgood plastic shopping bag economics in a plethora of shopping trolleys full of cheap packaging, Gladwrap, sandwich bags, bin liners, you name it and our tips and landscape are full of it. Would you like a free doggy doo bag with that sir? Err.. bear in mind you can’t put groceries in it on the premises lest the Govt inspector is on the prowl sir. Kindergarten stuff. The price of freedom is not vigilance, it’s just properly constituted price.

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