Published in Menzies House blog on 31 May 2010 under the title “Mining Super-Tax“
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”.)
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.
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.
John Humphreys 