Wednesday, January 30, 2008

How much should we spend to reward pollution?

New Treasury figures estimate that by next year we'll be spending over $2 billion per year subsidising the use of company cars – nearly twice as much as was previously predicted.

I've talked before about this environmentally destructive tax rort that encourages drivers to drive and drive and drive - the more you drive, the less tax you pay.

Now if car travel is a legitimate business expense, then it's reasonable for allowance to be made for the cost of car travel when assessing tax. But you need to question whether tax breaks are justified for businesses providing personal (private) cars to employees as part of their salary package – cars that they may or may not use for business trips.

The big problem is that it’s hard to work out when a car is needed for business (in which case maybe it’s reasonable for an employee to provide one and for it not to be taxed) and when it’s really just being used for private purposes (in which case it shouldn’t be tax deductible). The Tax Office’s arbitrary solution is to assume that if you drive it far enough, you must have needed it for business – so the further you drive, the less tax you pay. The rate of tax you pay on your car loan repayments ranges from 26% if you drive less than 15,000 km in a year to just 7% if you drive more than 40,000km. This of course encourages driving more, not just for legitimate business, but also to reduce the amount of tax you have to pay, particular if you find yourself near the cusp of one of the tax brackets towards the end of the year.

The Australian Conservation Foundation puts it this way:
These tax breaks are economically senseless, reward environmentally destructive behaviour and increase taxes that the rest of us have to pay. There are much better uses for $2 billion than to hand it out to affluent corporate executives as an incentive to buy cars and drive them as much as possible to get the maximum tax benefit.

I can't say I disagree. The government has pledged to introduce a carbon trading scheme by 2010, at some cost to businesses and consumers. A sensible precursor is to remove the distortions like this one and the tax break for 4-wheel-drives / SUVs - which impose environmental and economic costs.

Maybe one for the Productivity Commission?


Beju said...

I agree 100%! Its amazing to think that countries such as Australia are trying to be stop global warming and signing Kyoto on one hand, and on the other hand are subsidising car travel so the more a person drives, the less tax he pays which in the end, only leads to more C02 in the atmosphere.

This is why I am also against the government trying to bring down petrol prices. The money spent by the government in regulating and cutting taxes on petrol will only lead to people driving more and once again, more C02 in the atmosphere.

More money should be spent on finding alternative energy sources that can successfully be used in cars.

The US looks like it is starting to go down this path. Not for the good of mankind and trying to prevent global warming however, but because they can't control the oil supplies in some countries who are not allies with the US and this is causing a democratic nightmare for politicians in Washington.

Anonymous said...

There must exist a point where the cost of driving the extra km's will increase your cost (i.e. petrol+depreciation+time > reduced tax) so I dont think there is a huge incentive here to drive for the sake of reducing cost. I'm not in a position to work this point out but I think it cant be much over 3000km's.

If a carbon trading scheme is introduced the incentive to drive will again be reduced as the justification will now be

petrol+depreciation+carbon cost>reduced tax

Im my opinion the elimination of the tax rort probably wont cause a significant reduction in greenhouse emissions.