The recently announced Resource Profit Tax is in principle a profit grab, taking from those who owns large mines, and handing this out to those that dont. Obviously this makes mining executives angry and the noise they are creating at the moment is deafening, with all sorts of nonsense bandied about in the media about how this tax will mean the end of the world as we know it. Leaving the noise from a few super-rich to one side, it is useful to think of who belongs to the winners and the losers of the proposed tax.
A difficulty in making that assessment is that no-one yet knows how this tax will be carried out. Part of the difficulty is that the tax is meant to replace the existing royalty system in individual states, but these individual states are unlikely to simply agree to such changes in their tax raising activities. Also, definitions of ‘costs’, ‘rents’, and just exactly what constitutes a ‘mining project’ are yet to be worked out, so we can at the moment do no more than give a best guess. Let’s presume that the tax gets implemented in the way it designed, meaning that the profits of all current and future mining projects will be taxed at 40%, whereby the initial costs and losses count as a kind of tax-offset.
At the moment, the government’s plan includes the possibility that mining firms that made a loss on a project get part of that loss reimbursed, but exactly how that will work out is not clear (what happens in the case of bankruptcy?), so let’s presume that costs and initial losses will be treated as tax off-sets, which is what they will be for most of the big mining companies.
Since a profitable project now remains a profitable project in the future, the long-run effect of this tax is that at least as many projects will go ahead as without this tax. Indeed, more will go ahead because the tax replaces existing royalty taxes which tax all mining activity and do discourage all mining activity. Hence, in the long-run more mining will take place under this new tax, implying higher levels of investments. The beauty of the tax is that the underlying assets (minerals in the ground) cannot run away and hence the tax cannot be avoided by mining somewhere else. It is just not credible for any company to pretend they will refuse to make money and not dig up and sell the minerals that are there. All talk of capital flight, sovereign risk, and other forms of saber rattling are just not credible.
Another clear effect of this tax is that it will give mining companies (like Xstrata and BHP Billiton) an incentive to increase the costs, just like any tax-offset increases people’s incentive to use those offsets. This means that one should see increased job security, higher wages, and increases in other cost factors like transport. Indeed, the tax office will have a tricky time in deciding whether all the costs mining companies will start putting on their books are really costs associated with mining activities. Mining companies can for instance try to hide profits by paying excessive amounts to transport companies for transporting the minerals if these transport companies are owned by the same parent companies. All kinds of tax-avoidance games can be played. However, let’s presume the tax office will do a reasonable job and manage to keep the increase in ‘fake costs’ to acceptable levels. Even then, anything that is essentially a cost to mining (like employment, wages, and inputs) should get an easier time in negotiations with mining bosses because the government now effectively pays some of those costs.
Who, then, are the winners of this tax? They include:
- Mine workers and mining communities. The long-run level of activity should go up, and the pressure on their wages and employment relations should go down.
- The general business community. Non-mining activities are taxed less because mining profits are taxed more, meaning that in general, businesses win out.
- The general public, simply because they can expect to benefit from reduced taxation and receive parts of the services bought by this tax.
- The economic system, because this kind of tax is very dependable (minerals can’t run away to foreign countries and hence the tax can’t be avoided), making the public finances sounder and more reliable.
Who are the expected losers of this tax? They include:
- Shareholders in mining activities in Australia. When they bought their mining shares, the shareholders expected to receive a certain flow of profits, and that profit stream is now taxed more, making shares in mining less valuable. These losers include domestic shareholders and foreign shareholders, such as major Chinese interests in Australian firms and foreign shareholders in mining companies operating in Australia. To a certain extent, the RPT means Australia is grabbing in the coffers of foreigners to the benefit of its own population.
- Shareholders in mining activities outside Australia. Many countries are facing the problem of how to tax economic activities without reducing the level of economic activity, and Rent taxes are recognised as being pretty close to the economic textbook ideal as to how to do it. Hence other countries will no doubt follow suit if Australia pulls it off. This makes international mining companies understandably nervous.
- Other holders of fixed assets within Australia. This tax of course establishes the principle that assets that cannot run away might witness an increase in the taxation of the income generated by those assets. There are quite a few other sources of rent that could in principle be treated similarly, making owners of fixed assets justifiably nervous. Land, in particular, would be a prime long-term target for tax increases.
The specter that land-owners might be taxed on the basis of the value of that land (as an imputation of its profitability) will undoubtedly make owners of prime real estate nervous, and no amount of protestations on the part of the current government that it will not introduce such a tax will entirely allay the fears of those who see an analogy between taxing what is beneath the surface (minerals) and taxing the surface itself. And it would be quite possible that the Liberals introduce such a land-tax in their next government. Hence all those super-rich that make their money off fixed assets rather than their skills can all justifiably feel they have something to lose from the introduction of this tax.
In short, many of the expected losers of this tax are foreign or super-rich, whilst the expected beneficiaries include the vast majority of the Australian population and the business community. If the tax indeed goes ahead as hypothesised above, the political question will be whether the few losers will manage to fool the many winners into believing that it is in the interest of the many (including workers in the mining industry!) to protect the few.
I consider Rudd exceptionally lucky with the current avalanche of misinformation and self-interested commentary coming from the rich mining companies. It is not often in economics that a proposed new tax is so obviously a fight between the interests of the few and the interests of the whole, making it easy for economists to be fairly united on where they stand. The more fuss is made about it, the more it can become a defining issue for current politicians and the more satisfaction they can take from the experience.
I fervently hope this debate drags on for a long time and becomes a debate about what kind of society Australia wishes to be: one that is run in the interest of the whole, where small groups of super-rich cannot sway public opinion, or one where any change that has a couple of well-funded losers can be stopped by disinformation and fear mongering.