Some thoughts on Resource Rent Tax (updated)
I’m going to be in the Budget lockup tomorrow, so I probably won’t be posting much after this. So, rather than polish it up, I’m going to bang out some thoughts on the Resource Rent Tax proposal, the main element of the Henry Review adopted by the government. The shorter version: the Tax is a good idea, and the criticisms we have seen are what you would expect from rent-seekers seeking to protect their rents.
The central arguments in favor of the RRT proposal are intertwined, and I’ll try to put them together in coherent way
* The basic efficiency argument: Since mineral deposits yield super-normal profits to those who have the right to exploit them, a tax on those profits will not lead to less investment – the profit will still be enough to induce investment
* The economic equity argument. Compared to almost any other tax we could impose, the burden of the RRT falls least on low-income Australians and most on high-income investors, many of whom are foreigners
* The legal equity argument. In Australia, mineral resources are, and always have been, owned by the state, representing all Australians, and not by individuals. So we should seek to maximize the return on our own assets.
* The political economy argument. Ever since I can remember, and probably before that, mining companies have been threatening to pack their bags and go overseas. They’ve made these threats when they were upset about tax policy, about environmental restrictions, about Aboriginal land rights, about union wage demands and work practices and when they were in a bad mood for no particular reason. But, even though lots of Australian industries have disappeared, or contracted drastically for a range of reasons, the miners are still here. The reason is obvious. They can leave, but they can’t take the minerals with them. It’s precisely this immobility that underlies the case for RRT
In practice, no tax works exactly in the way the textbooks suggest. A tax designed to fall on super-profits is bound to fall, to some extent, on ordinary returns to such activities as exploration and the development of mineral resources. But this does not significantly weaken the case for the RRT, for a number of reasons.
* Timing. In the ideal case, it does not matter when a rent tax is introduced. But given that there will be some tax on ordinary profits, it makes sense to introduce the tax at a time when profits are buoyant. It’s hard to imagine a better time than now.
* Macroeconomic arguments. The standard analysis implicitly assumes stable full employment. But, in reality, the economy fluctuates, and periods of high profitability in mining tend to be associated with booms in the economy as a whole. Under these conditions, an RRT is strongly countercyclical, since it raises a lot of revenue in booms and much less in recessions. And to the extent that it does affect activity in the mining sector, the countercyclical effect is enhanced. If the RRT constrains mining activity in boom times, more minerals will be available when conditions are not so strong, and ther are less super profits to be taxed.
There is, finally, a purely political argument for the government to stick with the RRT as announced. Having caved in on a range of issues, and most notably on the ETS where the mining lobby was prominent among the opponents, the government has to show some spine here.