A Battle is Building in Australia over their Carbon Tax

Posted by PITHOCRATES - October 27th, 2012

Week in Review

Nations with high tax rates tend to have less foreign investment than nations with low tax rates.  Because lower tax rates allow companies to earn more profits.  More profitable companies have higher stock prices.  And higher earnings per share of stock.  Which means higher returns on foreign investments.  The whole argument about raising taxes on the big corporations is that they’re rich enough and can afford to pay more of their earnings in taxes.  So we know that higher taxes mean lower earnings.  Unless, apparently, it’s a carbon tax (see Abbott won’t axe carbon tax, Combet says posted 10/24/2012 on Sky News).

Climate Change Minister Greg Combet has attacked Tony Abbott’s plan to repeal Labor’s carbon tax as a sovereign risk…

Mr Combet believes abolishing the carbon price – which Mr Abbott says would be the coalition’s first order of government – would diminish Australia’s standing with the international investment community…

“Repealing the carbon price would be damaging to investment confidence and undermine the business decisions which have already been taken.

“This would see financial markets increasing the risk premiums for investments in Australia.”

Mr Combet said people would still pay more for power but without any environmental benefit.

So carbon taxes make consumers pay more for power.  According to the people that gave Australia the carbon tax.  This is the price of fighting global warming.  Higher consumer costs.  And a lower quality of life.  As people have less money to spend on themselves because the government is taking more of their money.

And yet repealing the carbon tax won’t lower the cost of power.  Interesting.  If you increased the cost of power with a carbon tax you’d think you’d reduce the cost of power by eliminating the carbon tax.  So why won’t the price of power come down?  The power companies would have a vested interest to show the people how bad a carbon tax is.  So they will never vote another carbon tax in.  And if the people are going to pay the same for power whether they have a carbon tax or not they’ll probably say,  “Well, if it doesn’t cost any more we might as well as save the planet.”  And vote to restore that carbon tax.  So the power companies would be wise to lower their rates once they repeal the carbon tax.  And most likely will.  As it is in their best long-term interests.

When a country starts using words like ‘nationalizing’ and ‘socialism’ investors will require a higher risk premium.  There’s nothing that will wipe out an investment like a 100% tax on their investments after the state takes it over.  When a country adopts a highly inflationary monetary policy investors will require a higher risk premium.  But one thing investors don’t ask for a higher risk premium is for low taxes.  As low taxes typically stimulate economic activity.  Which creates higher corporate profits.  And higher returns on investment.

Of course, a carbon tax provides a windfall of revenue for governments.  Especially those governments that like to spend the money.  So if this will have an effect on their sovereign debt this means the carbon tax has more to do with funding government spending that saving the planet.  And the risk premium is the higher interest rates they will have to pay on their government bonds if they repeal the carbon tax.  As they will have to borrow even more money to fund their out of control spending.

Remember this lesson well.  This is what a carbon tax is for.  Government spending.  Not to fight global warming.

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