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.

232 thoughts on “Some thoughts on Resource Rent Tax (updated)

  1. Andrew Reynolds :

    IMHO it makes him look like an idiot. in this case appearances may not be deceiving.

    Given that you are losing to “an idiot”, what does that make you?

  2. Imagine two hobos who have no real expectation except for continuing their hobo life living in a park, begging, and gather used newspapers to keep warm at night. Let’s call them, wolog, Dandy one and Dandy two.

    Let’s say someone comes along and offers to give Dandy two a ticket that has a 50 per cent chance of wining and providing the owner with $1 million and nothing otherwise. Would Dandy two say “Well, I am tempted to take the ticket. But my financial advisor tells me that to put this ticket in my portfolio would substantial increase my risk (compared with Dandy one), so I will have to refuse.”

    Let’s say the generous person says “But after I give it to you, you could throw it away if you choose (and you would still be the same as Dandy one). So where’s the additional risk?” Dandy two says “My financial advisor says that’s no good. The moment the ticket hits my hand I am involved in substantially more risk and there is no way around it.”

    Hobo two then retreats back to the park. Happy that having had ‘excellent’ financial advice, they have avoided what would have been the mistake of their life.

  3. Losing to someone that claims that a volatile cashflow represents less risk and then, when it is pointed out that this is wrong responds “blah blah blah” as an argument does not constitute losing, Freelander.
    As for your last attempt at an argument, Freelander, I have been absolutely clear that security two is the more valuable, despite the risk. I have pointed that out many times. So far, you have failed to understand (AFAICS) what that means.
    Maybe one day you will be capable of being an adult. Until then, short pants only.
    .
    Alice,
    I am not so much worried about the super returns – you well know my position on compulsory super. Deliberately reducing them, though, is very different to reducing them by error.
    The point I was making, however, was that to over tax the industry and have most, if not all, exploration conducted overseas means that there will be many less mines in the future – meaning less of your beloved tax revenue to fund all that infrastructure and those “real jobs” in the future.
    Mining is not tricky, Alice – you find stuff and dig it out of the ground. If you do not look, you will not find. No finding, no mining. This tax will simply penalise the finding.

  4. @Andrew Reynolds

    What do you predict Australia will be like at the end of the mining bubble?
    The mining industry has crowded out other forms of investment in this country and placed higher wage and inflationary pressures on every other form of investment to the point where this country knows nothing else.
    It seems obvious to me that the Government’s actions of investing in the NBN, infastructure, promoting personal savings, boosting super, education, renewable energy and a reallocation of the tax burden is more than the usual one term policies we’ve become used to, for once an Australian government is looking 10 years into the future and is actually making an effort to address the issues.
    For Australia to remain prosperous post mining boom we are going to need other export industries and this budget’s measures is a good start towards that objective.
    To those in the media do us all a favour and stop airing one liners from vested interests, does anyone seriously take public comments from guys like Twiggy or Tony Abbot as anything other than spin based on self interest?

  5. We will have a lot of people with strong employment experience, accustomed to working flexibly in many sites and capable of taking on a number of roles in any organisation. The government will be well cashed up, provided the money is not wasted in the interim.
    Our industry and services will be accustomed to operating in tough environments and be capable of taking on the best of the world as a result.
    Being experienced and flexible, Australians will be capable of either working here, if the pay is enough to keep them, or overseas, where they will be more than capable of taking on many roles anywhere.
    There is more, do you want me to go on?

  6. No, Hobo two. I think we want you to go overseas if you imagine they are crying out for you. Please. Silence their calls. Maybe they are calling at a high frequency? We don’t hear them.

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