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Mining super-tax

May 30, 2010

There has been a lot of ink spilt about Labor’s proposed mining super-tax. Much of the debate has been the typical name calling, emotional appeals to the vibe, or citing of authority… which means many people are none the wiser. I suggest there are four issues at play here, and it is necessary to consider them independently.

1. How should resources be paid for?

The government claims ownership of Australia’s underground resources. This is sometimes incorrectly reported as “the people” owning the resources, but of course you and I have no right to sell or control those assets, so that is a meaningless semantic trick. Unless you’re an unreconstructed communist, “the government” is not the same thing as “the people”. But putting that word game aside, the government claims ownership, and therefore they want compensation for the use of those resources.

One of the questions raised by the Henry review is about how the government should be compensated for the use of those resources — a fixed sum (royalty), percentage of revenue (revenue tax), or percentage of profits (profits tax). I have no strong view on this, but there seems to be a general preference for us to switch to a profits tax. This was the main point of the “economists letter”. (Though some details clearly need to be worked out, such as the cut-off points for a “super” profit, the exclusion of interest repayments as a cost, and the taxpayer exposure to business losses.)

2. The level of the tax

The second issue is the one that has received the most attention. The government isn’t simply switching the system, but they are significantly increasing the size of the tax. The government expects to get about $9 billion per year from their super-tax, which will be offset by a company tax cut of only $2 billion per year (and other tax cuts of about $2 billion per year).

This tax is being justified on the grounds of “fairness” where mining companies are not paying their “fair share”. But if this were merely a discussion of shifting the tax burden, then where are the rest of our tax cuts? The government has done well to shift the grounds of this debate, but the real question here is whether Australia should be increasing the size of government or not. Personally, I don’t think the government is spending our money well enough to justify a bigger budget.

Different taxes will hurt people in different ways, but no tax is “cost-free”. With the mining super-tax, the main costs will be lower wages and employment in the mining sector, as well as lower returns for investors (including everybody with a superannuation account). More broadly, the tax increase risks shifting resources into less efficient areas of the economy, leading to lower productivity.

3. Retrospective legislation

The government will change policy from time to time, but the rule of law requires that people are able to act with a reasonable degree of certainty, knowing how the government will respond. The proposed mining super-tax is not just for future projects, but will also apply to existing projects.

The consequences go beyond the impact on current projects… but also increase the “political risk premium” where businesses must be worried about the potential for government changing the rules mid-game. While the change in the political risk premium will be quite small, even small changes can have a very signficant impact on investment and future economic growth. (Malcolm Turnbull made the same point in his analysis.)

4. Undermining federalism

This issue has received far less coverage, but for me it is one of the most important issues with the proposed mining super-tax. Resources have traditionally been claimed by State governments, who have consequently arranged for payment at the State level. With the current policy, the central government is effectively going to centralise control of resources policy, further undermining the Australian federation. This is will be particularly unfair for the mining states, such as Queensland and Western Australia, which will see more of their wealth transferred to the bureaucracy in Canberra. If there is need for reform of resources tax, then this advice should be passed on to State governments, and they should be allowed to set a policy that best matches their particular preferences.

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  1. senexx
    May 30, 2010 at 7:12 am

    The Government is not a private company and should not be treated as such. Semantics are very much at play as a pre-emptive ad hominems about unreconstructed communists.

    Even in a representative democratic Government like ours, it is a government for the people by the people. Any thing you consider to be Government-owned is owned by the public.

    That aside the rest of your first point is valid. My understanding is that it even broadly follows geolibertarian principles.

    As for point two, if we accept that the mining tax will cause lower worker wages, we can infer that the CEOs are refusing to enhance the welfare of their workers and maximising their own. This could be remedied by a slight pay decrease that the multimillion dollar CEOs seem to receive.

    Point three, agreed, retrospective tax is not really “fair”.

    Point four, it depends on whether you prefer competitive federalism (your traditional view) or cooperative federalism and no political blogger in Australia or Australian politician has made a comprehensive “for or against case” for either type of federalism, well at least none that I’ve heard or read.

  2. TerjeP (say Taya)
    May 30, 2010 at 10:26 am

    The problem with taxing profits is that it creates a bias towards operations that are good at borrowing rather than those that are good at making a profit. Both because there is less left in profits to reinvest and because creditors get paid via interest which is a profit reducing expense and hence useful in reducing tax.

    The problem with a progressive profits tax is that it creates incentives to shift profits between years rather than operating in a pattern best suited to demand and the operational needs of the mine.

    I think the government should auction off mining rights to the highest bidder and then stay out of the way. And it should be a state government auction.

  3. May 30, 2010 at 3:34 pm

    Terje — I have some sympathy with your points. One potential response is that the government could legitimately chose to contribute “their” resources to a project in exchange for an equity stake. A profits tax could be seen as a proxy for that. Though perhaps they should just make the equity stake explicit, and offer access to minerals in exchange for a 20% equity stake in the relevant mining companies?

    Senexx — I agree the government isn’t a private company. It’s a government. You can say pretty words about “for the people” all you like, but the word “own” has a meaning, and it’s simply not true that you or I own the assets of the government. The government owns them.

    I don’t understand your point about wages. There has never been an assumption that businesses are charities, trying to maximise wages for the fun of it. They pay market wages. If you increase the costs of business, but the businesses cannot increase the price (because Australia is generally a price-taker in minerals markets) then that will lead to lower production, meaning lower demand for labour, meaning lower wages.

  4. May 30, 2010 at 3:41 pm

    As for “competitive” and “cooperative” federalism… I’m all for both. So long as it’s voluntary. But the central government over-riding the States (yet again) is neither competitive nor cooperative. It’s just another nail in the coffin of our federation. As for articles on the virtues of jurisdictional competition, this is my contribution:

    https://johnhumphreys.wordpress.com/2010/03/02/competition-v-monopoly/

  5. TerjeP (say Taya)
    May 31, 2010 at 3:26 am

    John – I accept that a tax on profits could act as a proxy for profits. However if the entity fails do the creditors get ownership of the mining rights or do they revert to government ownership. It would be better that the government sold the mining rights to the mining company. The question then is whether it should sell for cash or for equity. I’d say it should sell for cash and then if it want’s to play investor it does so via a diversified arms length portfolio such as the future fund.

  6. senexx
    June 9, 2010 at 12:36 pm

    If the government is not a private company (and I do get that it is a government) then it cannot own anything. The “pretty words” were just demonstrating it was a democratically elected government, nothing more.

    The point about wages is multimillion dollar paydays which I cannot see being justifiable could top up wages so there is no need to worry about lower wages. Thus CEOs of the companies that receive multimillion dollar paydays could enhance the welfare of his or her employees with minimal harm to their own.

  7. June 10, 2010 at 3:23 am

    Of course the government can own things. What a strange comment. But I agree our government is democratically elected.

    Your point about wages is wrong. If a business is less profitable, then it will attract less investment, and therefore demand fewer workers. I agree it’s possible for rich people to give money to less rich people, but that’s not how business decisions are made. And it’s worth noting that many owners of mining stocks aren’t the mega-rich, but are normal people who have invested via their super fund.

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