Julia Gillard offers tax cuts for some to offset price on carbon

The Prime Minister will give battlers the tax break to offset the $600 a year hit family budgets will take when the Government imposes a tax on carbon emissions  part of its plan to fight climate change.

"Cutting taxes is a live option,'' Ms Gillard told The Sunday Telegraph yesterday.

She said it was "one of several options'' the Federal day tours Government was examining to compensate families facing higher power bills as a result of the deeply unpopular decision to put a price on carbon.

Under the taxbreak proposal being thrashed out by the Gillard Government, however, higherincome earners would miss out.


"Assistance will be targeted at those who need it most,'' Ms Gillard said. "Pensioners and lowincome families would come first, and I'd expect a lot of middleincome families would get assistance as well.'

Start of sidebar. Skip to end of sidebar.

The most likely option is believed to be an increase to the Low Income Tax Offset.

It's the first time the Gillard Government has confirmed it is prepared to seize on the advice of climate change adviser Ross Garnaut to wedge Tony Abbott's great big carbon tax attack by using the proceeds to deliver tax reform.

The Government would have to offer low income households about $500 to $600 a year in tax cuts or welfare increases to cover the cost of a carbon tax on current estimates.

But until it unveils a specific carbon price the hit on householders remains unknown.

While the Prime Minister would not canvass specific tax relief options, The Sunday one day tours Telegraph understands the Government is modelling an adjustment to The Low Income Tax Offset.

This offset creates an effective taxfree threshold of $16,000 for lowincome earners and already delivers workers earning $30,000 or less a tax rebate of $1500.

But it cuts out for people earning more than $63,750 a year. By boosting that rebate to cover the estimated $600 a year cost to householders of the carbon tax, it would be a targeted way of delivering the estimated $5.7 billion to be devoted to householder relief.

The official tax free threshold for all taxpayers is $6,000 meaning workers don't pay any tax on the first $6,000 earned.

But the low income tax offset allows for targeted tax cuts for low and middle income earners without delivering tax relief to higher income earners. While the government could adjust the income thresholds for the 15 cent and 30 cent tax rate, that would also deliver relief to workers higher up the income scale.

Pensioners are likely to secure assistance through cash rebates to pay for power bills or a higher indexation of the welfare payments.

Ms Gillard said she understood families are doing it tough, but said the time to act on climate change was now.

"By charging polluters for polluting  because we want to see less pollution  we can use that money for things we want to see more of, like helping households out with tight family budgets by cutting taxes or increasing payments,'' she said.

"I know many people are concerned about prices, but we will be using the money we take from polluters to help families out with tight budgets through generous assistance, as well as protect jobs and invest in climate change programs.

Professor Garnaut, the Government's chief climate change adviser, last week flagged a carbon price of between $20$30 a tonne, a tax that would raise $11.5 billion.

He has advised the government to spend half the cash  $5.7 billion in the first year  on household assistance for pensioners and the unemployed and tax reform.

Professor Garnaut suggested the government could follow the ambitious tax reform agenda proposed by former Treasury secretary Ken Henry.

That would deliver a tax free threshold of $25,000 and a flat tax rate of 35 cents in the dollar for earnings up to $180,000.

Presently, workers pay no tax on the first $6000 they earn and 15c in the dollar for earnings between $6000 and $37,000.

But there's little chance of the carbon tax revenue being able to deliver big bang reform in the short term.

While the Henry review costed the tax free threshold changes at $4 billion in the first year, economic modelling prepared for the Sunday Telegraph for NATSEM shows Ms Gillard could spend the entire $5.7 billion raised simply by lifting the tax free threshold from $6,000 to $10,000.