Expert says plan to use carbon tax proceeds to drive tax reform would help SMEs

Tax experts have welcomed a proposal by the Government’s key climate change adviser Ross Garnaut to use the proceeds of its planned carbon tax to drive cuts to personal income and SME business tax cuts.

Garnaut, who has backed the Government’s plan to put a price on carbon through a carbon tax before moving to a market-based emissions trading scheme in 2015, said yesterday that he would recommend a carbon price of $20-30 for a tonne of carbon emissions under its initial scheme.

He says that if a price of $26-a-tonne was used, the carbon tax would raise $11.5 billion, half of which could be used for tax cuts suggested in the Henry Review released in May last year, aimed mostly at low and middle income workers.

He argues these tax cuts would allow the carbon pricing regime to be part of a much wider raft of reforms to improve Australia’s productivity growth.

”We can get a long way towards a large productivity raising reform of tax and social security in the bottom half of the income distribution,” he said yesterday in a speech to the National Press Club.

“Such an adjustment would increase incentives to participate in the labour force at a time when Australia faces shortages of labour and inflationary pressures.”

The proposal has won immediate backing from the CPA Australia, with its head of business and investment policy Paul Drum saying Garnaut’s proposals are “hand in glove where we think the debate should go.”

He also points out that cuts to personal income tax could benefit the hundreds of thousands of small businesses that are not incorporated and therefore fall under the income tax regime.

“Tax reform is enabler to address compensation for households and it’s also an enabler to address compensation for businesses that are unincorporated, which is the majority of businesses in Australia,” Drum says.

“It would garner more support from voters than something that’s just about welfare checks.”

While Drum agrees with Garnaut that there will need to be appropriate compensation for trade-exposed businesses under the scheme, and incentives to promote clean energy at a business level (perhaps with R&D tax concessions) and household level, tying the carbon price to tax reform creates the opportunity for “enduring change” rather than short-term compensation.

It may also be a more effective way to change the behaviour of households and businesses.

“People will start to say ‘what’s in it for me’ rather than ‘how is this going to hit me,’” Drum, adding that modelling will now need to be conducted to determine how various groups will be impacted and what sort of tax relief they might receive.

Drum now wants to see the Government pursue the carbon pricing debate in its tax reform summit, to be held later this year.

“We would like to see this included in the tax forum, along with the GST.”