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How much should we spend to reward pollution?

By David Jeffery

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?

Full post as published by Oikos on January 29, 2008 (boomark / email).