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How to pay for the floods

January 27th, 2011

The floods in Queensland and other states have destroyed a lot of public infrastructure that will need to be rebuilt, as well as damaging crops and reducing output in other industries. In most cases, if the infrastructure made sense in the first place, it makes sense to replace it, which raises the question of how to pay for it. The proposals Gillard seems likely to announce, centred on a one-off levy sound about right to me. As I argued a while back, the rebuilding is likely to raise the level of economic activity, as measured by GDP, which is the relevant measure for macroeconomic and fiscal policy. So, if the settings were about right before, it makes sense to pay for the rebuilding now, through a once-off levy, so that the net macroeconomic impact is approximately neutral.

On the other hand, the government should not seek to offset the loss in revenue associated with lost output and profits during the flood, or from flood relief expenditure. This should be concentrated in 2010-2011, and therefore should not affect the timetable for return to surplus very much. I assume (but am not absolutely certain) that the government has accepted this.

Another bonus is that the appalling “cash for clunkers” scheme is dead for good. I won’t count this as an actual saving, since it seemed unlikely ever to happen, but it’s good to have this confirmed.

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  1. Chris Warren
    January 29th, 2011 at 15:11 | #1

    @Senexx

    Would a deficit harm lower income earners more than a levy, given that low incomes pay no, or low, levy?

    Presumably a levy does not increase borrowings. It does not seem reasonable for governments to increase deficit to rectify natural disasters.

    A levy is a discrete, transparent – one-off cost and can be quantified. Deficits hang round seemingly forever and are hard to quantify in the long run.

  2. January 29th, 2011 at 15:27 | #2

    @Chris Warren

    A levy is an imposition on the taxpayer, a deficit is not (despite neoclassical theory). Deficits are not inherently bad.

    Senexx

  3. may
    January 29th, 2011 at 16:00 | #3

    well,the storm in a teacup summary seems to be people with not much money don’t mind paying around $1 a week

    and people with quite a bit more are really pissed off about paying aroung $7(?) a week.

    all sorts of carry on from the pissed off about why,but nothing really coherent except they don’t like the current government.

    JQ?
    in this weeks new scientist there is and article you possibly might be interested in to do with the way money flows through an economy compared to the way energy flows through
    biosystems.

  4. may
    January 29th, 2011 at 16:02 | #4

    aroung(??)

    around.

    there is an article.

  5. Chris Warren
    January 29th, 2011 at 16:44 | #5

    @Senexx

    How is a levy an imposition on low income people if they are exempt from it?

    A levy is mainly an imposition on people who pay it, although there may be vague second effects.

    No one has said deficits are inherently bad – where did this come from?

  6. Donald Oats
    January 29th, 2011 at 16:50 | #6

    All I get out of this is “Tax Cuts For The Rich!” is OK and levies are not. Go figure. Perhaps rich people give at the office.

  7. Jill Rush
    January 29th, 2011 at 17:17 | #7

    Ah Donald you may be on to something here. Donations as tax deductions or salary sacrifice – levy an additional payment without the same tax benefits. Personally I can afford to give up the cup of coffee per week that it will cost – probably help my health too.

  8. Alice
    January 29th, 2011 at 17:22 | #8

    @Donald Oats
    Yeah right Don…its all party of the current neoliberal pervasive and destructive policies…tax cuts are good for the rich becuase it will trickle down (and thats proved an abject failure as their tax cuts got gambled away and diverted to tax havens and the only way to control the rich from ripping the rest of us off with tax avoidance is to control their capital flows country to country and tax them more…BUT we are now dealing with the errors of past policies…sigh).

    Levies?? Levy the hell out of the rich. They have had their day in the sun at everyone else’s expense. Inequality of income is all that has resulted. from this. Its inequality causing the mess we are in now (people with inadequate super, the young not getting a fair go of start in life, inadequate infrastructure from which business can actually grow and get enough profits, governments on the take instead of on the make…need I go on???

    I dont know where we vote to get the change which is needed urgently (must I give up on the idea of a civil society that works well?). What I do know is the media wont support change and if it comes down to politics which of course it does, both major parties are in the back deep pockets of even more inequality.

    I dont see a decent person amongst the candidates – I see trained seals. Sad but true, from my view.

  9. Alice
    January 29th, 2011 at 18:31 | #9

    @Senexx
    Senexx has a damn good point – why are we supporting a levy instead of a deficit?

  10. Alice
    January 29th, 2011 at 18:34 | #10

    And how to pay for it? Isnt it called the third of my income that goes each week paying tax? (oh and the much less that goes each week if I was richer?)

  11. Chris Warren
    January 29th, 2011 at 21:41 | #11

    @Alice

    Anyone paying a third of their income in tax can afford to pay a third of their income as tax.

    According to the current tax scales:

    http://www.ato.gov.au/scripts/taxcalc/calc_standard_hire.asp

    this 33% tax rate cuts-in at a income of $3,900 per week, or $200,000 per year. Tax payable is: $1,306.00 pw.

    People on 33% tax rate really should not worry about becoming richer.

    We live under welfare state capitalism, subsidised by third world countries until they catch up that is.

    The amount of tax is trivial, compared to what it will have to be in the future.

    A levy is a tax and can be designed so that it only impacts on incomes at different rates.

  12. Alice
    January 30th, 2011 at 07:07 | #12

    @Chris Warren
    Then Chris – Ive made an error of understatement clearly and wish I was paying only a third of my income in tax.

  13. Chris Warren
    January 30th, 2011 at 07:35 | #13

    @Alice

    If you add PAYE, GST, excise, rates, stamp duty and motor taxes, the general “tax” revenue is a higher percentage of earnings.

  14. Donald Oats
    January 30th, 2011 at 09:16 | #14

    I wish to point out that there is a GetUp! campaign under way to push for a separate, permanent climate disaster fund (I hope the link works – they haven’t added this to the GetUp! site’s “Current Campaigns” tab yet), as described in their public letter, the first part of which is:

    48 hours ago, the Government announced they want to pay for the climate disasters of today by killing the renewable energy projects of tomorrow.
    Climate change means more extreme weather events1, so it makes sense to establish a permanent Climate Disaster Fund — not just to respond to one off events like the recent floods.
    There’s a simple solution to fund reconstruction after extreme weather events, while also reducing pollution and supporting renewable energy. The Government must establish a permanent Climate Disaster Fund, paid for by ending the billions of dollars they’re handing out to subsidise the use of fossil fuels2, most of which ends up in the pockets of Australia’s biggest polluters.

    Annabel Crabb reminds readers of the cost of this substantial rollback of climate policy:

    News of a freakish reversal of direction in Australian climate policy is not, in itself, particularly stunning any more; this policy area is prone to more rethinks than Lady Gaga’s day wardrobe.
    But what Julia Gillard did at yesterday’s National Press Club address is nonetheless pretty staggering.
    Her cool public slaughter of about $1.3 billion in clean energy incentives could be described in several different ways.
    Rudd-era greenies might call it “rat-f***ing.”
    Ms Gillard herself would call it “Seeing what needs to be done, and doing it.”
    I’d call it: “Putting It All On Black”.

    I think Ms Crabb’s characterisation, and her Rudd-era one as well, are on the money. Unfortunately. Humans just don’t seem ready to help themselves at the global level, instead preferring to let the likes of Bolt and co to wreck the public dialogue on the AGW issue, and letting a significant but not major sector of our economy dictate the terms of the debate.

    Can anyone offer some clarity on what is the new current position of Labor on the AGW / “Climate Change” environmental problem? Is it that doing nothing (and failing) is a safer policy than doing something (and probably failing)? Is that what this is all about?

  15. January 30th, 2011 at 11:28 | #15

    @Chris Warren

    I didn’t say it was an imposition on the low income people. A levy which is just another name for a type of tax is an imposition on the taxpayer regardless of which taxpayers pay it.

  16. January 30th, 2011 at 11:28 | #16

    @Alice

    Thank you Alice.

    To both, My point earlier and still is that I understand the political necessities of the levy and the politics that go with it. On those grounds the levy is quite reasonable.

    However on economic grounds with most economic schools of thought, if not all, it is unjustified. Like I said though I recognise the political realities.

    Kind Regards to you both,

    Senexx

  17. Chris Warren
    January 30th, 2011 at 13:47 | #17

    @Senexx

    I’m a bit confused.

    If you say: “A levy is an imposition on the taxpayer” surely this includes all taxpayers?????

    So it would seem that, unavoidably, you have covered whether or not a levy is an imposition on low income taxpayers.

    If not – can you please indicate how you exempted these people?

    Anyway, if the levy is paid only by the rich, then presumably they may manipulate political-economic levers so that even this type of tax becomes an imposition on all taxpayers (even those exempted from payment).

    However any claim that a means-based levy will necessarily do this, is speculative and needs to be explained. But such an explanation also needs to compare whatever burden falls on tax-exempt people through taxing the rich, compared to the burden that falls on low income through and alternative policy – increased deficit which must be funded and introduces additional impetus for inflation. Though there may be this second effect – a means based levy may still be preferable.

    Taxing the rich has minimal detriment on the poor. Collecting the same revenue through deficits increases the gap between rich and poor and between labour and capital – particularly if Tory regimes like Howard’s restrict wage movements (but let profits fly as high as they can). Deficits (think ‘debts’) disrupt demand conditions. A levy only changes the distribution of demand.

    Our economy is so junked-up with per-capita debt that no economic argument exists that we need more.

  18. Alice
    January 30th, 2011 at 15:26 | #18

    @Chris Warren
    says “particularly if Tory regimes like Howard’s restrict wage movements (but let profits fly as high as they can). ”

    One legacy of this is that firms like “Toys R Us” and other mainly large conglomerate chains have been getting away with ripping casual kid labour off for years here in Australia but no-one talks about the burden of their lost income to the profit centres of employers like Toys R Us.

    So glad the newspaper informs us in a tiny little article today that Toys R Us was forced by Fair Work Australia to repay and send a letter of apology to all current and past employees it had been ripping off and repay them the one million dollars it misappropriated as well as cough up 300K for staff training.

    Good one. Tip of the iceberg though. Im not in the mood to be generous with the levy and should it be progressive? Yes. And should the miners pay a bigger flood levy? Yes – after hearing they now think the NSW miners have cracked the catchment bedrock to Wonora and its leaking water.

    Just another reason that the despicable Kenneally (yes it was her as planning minister that gave them permission to long wall mine there) NSW State Labor should be thrown out at the election. Evil creatures who would do anything grubby for a donation.

    Yet why would the young of this country vote back in the architects of workchoices and the architects of now much higher education costs?

    Lets hope its a young green swing. It really should be.

  19. Tim Macknay
    January 31st, 2011 at 12:34 | #19

    I think that you are missing the connection between an industry that burns millions of tonnes of coal, releasing millions more tonnes of CO2, Global Warming inducing CO2, record breaking state devastating flood causing Global Warming.

    Nope. Not missing the connection at all. Just questioning your claim that there is some money the electricity industry is holding that the government can retrieve with nothing more than a strongly worded email. I take it you now acknowledge that is not the case.

  20. BilB
    January 31st, 2011 at 15:51 | #20

    If you have read the history of the price increases then you will know that yes there is money there. The electricity distributors are in the process of buying up 5 billion dollars of NSW electricity industry assets with their windfall profit, for example.

    The other method is to levy the electricity industry to clean up the mess that CO2 emissions are causing. Environmental restitution. Several serves of cleanups and they might get the message that it is no longer OK to flood the atmosphere with CO2, relatively speaking.

  21. February 3rd, 2011 at 20:37 | #21

    @Chris Warren

    You’re attempting to read too much into it. It is not about the levy and the levy’s affect on people. It is the wrong economic tool/instrument to use.

    If you click my name at the bottom of each of my previous posts, you may begin to understand.

    It is for these reasons that I cannot understand the support Prof. Quiggin, Christopher Joye and others give the levy. It is economically inappropriate.

  22. Chris Warren
    February 3rd, 2011 at 21:52 | #22

    @Senexx

    I can only repeat what I have said. A levy will not hurt low income people as much as a deficit. As I have noted – it will necessarily be an imposition on all taxpayers.

    For me, the affect on people is a key determinant of public policy within a representative democracy.

    Once society accepts a need to fund reconstruction of Queensland (which is debatable) a levy is a better economic tool to use than increasing the deficit.

    It is economically appropriate and socially preferable.

  23. Chris Warren
    February 3rd, 2011 at 21:55 | #23

    Just a slight typo …

    Should be …

    “As I have noted – it will not be an imposition on all taxpayers.”

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