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.
John Quiggin 
Couldn’t agree more, particularly the counter-cyclical nature of a ‘boom time’ tax. Despite the aversion to taxes, I’m glad budgets can still raise taxes in Australia without tea-party-esque shenanigans.
Passing some benefits of the super-profits tax through to small business and Australian companies will generate some additional support for this move.
Its odd that our economy is so based on China, when China is based so much on sales into Western economies that are heading into austerity.
Maybe this just means Australia lags the rest of OECD economies, and does not necessarily escape?
@John
The tea party simply reminds everyone that the USA was founded on tax evasion, or as they might prefer to say a tax revolt. The Greeks are currently suffering the legacy of tea-party-esque failure to pay tax combined with a huge sense of entitlement. Although, the consequences of that legacy have been diminished by the IMF and more responsibly run European countries bailing them out. German anger is understandable.
I agree with the RRT for all the reasons stated by John Q and others. I would also like to see mining companies provide all rental housing at reasonable cost to emplyees as well as take a more responsible role in training emplyees for their needs rather than poaching them from other sectors and countries.
However, perhaps it would be fairer for mining companies to be able to accumulate all their development costs into a pool of capital which can then be used as a form of depreciation to offset taxation only when they start to make a profit, with flexible depreciation rates which account for the expected life of the venture and changing markets.
Would that be too difficult?
If you check recommendations 51-54 (IIRC) of Henry you’ll find that he recommends various land and natural resource taxes which do precisely this (extend a Resource Rent Tax or something similar). The govt is not following through with it (at this time) because it would mean large political pain for small financial gain.
I think it’s a bit silly to draw comparisons with farming. Farmers grow their crops on private land they had to purchase, and must put work into cultivating their crops.
The closest equivalent would be if conventional agricultural crops simply grew in the wild on public land, and all farmers needed to do was to find and harvest said crops. In that circumstance, it would surely be reasonable to charge farmers for having access to a public resource.
And fishing is already heavily regulated. Anyone cannot just go and take as many fish from the water as they please.
@Monkey’s Uncle
The comparison with farmers seems reasonable. Miners also do not just ‘find and harvest’ ore from wild public land (terra nullius?).
The point is that miners have not paid a fair share to Australia of the product from the lands they purchase access to.
This applies to many other sectors of the economy.
Somewhat off-topic, but would appreciate an analysis of smoking taxes. As smokers are disproportionately poor, this seems to me to be an incredibly regressive tax which could only be justified if the funds raised were specifically allocated to smoking cessation programs, most of which should be targetting the poor.
@Gus
While I don’t support your initial reasoning — of course we want to target those who will suffer most by smoking and who have the worst access to health services by discouraging them from smoking — I agree the focus should be on providing them with programs that assist them to reduce or quit or get treatment for smoking related condition. Spending any of the money on programs unrelated to smoking-related health conditions or smoking reduction (save in areas mainly directly benefiting the less advantaged) would be regressive.
James, as I said before, I support resource rents in principle, but of all the arguments for them, the “legal equity” one (a misnomer, but I’ll leave that for the sake of expedience) is weakest in logic.
Monkey’s Uncle, farming IS a good example. I mentioned soil fertility – ie, a certain combination of pre-existing molecules that they had nothing to do with* – which is essentially the same as what miners get their money from.
The regulation or otherwise is not in dispute, but whether mining constitutes a special case that should be taxed more than other apparently similar pursuits.
* – excepting enriching methods, which ironically usually come from mining and drilling, and the clear exception of sustainable permaculture and the like, where farmers don’t really extract value, but perpetuate it.
Chris Warren, I believe your assertion about a “fair share” is related to JQ’s first point. I’m not sure if either is really true. If they are paying the same rate of tax as other industries, then surely that’s fair? And their profits are good now, thanks to China, but mining is a cyclical industry and so they need good years to make up for bad ones – just like farmers. Although I’m just supposing, it’s not a fully fledged economic model 🙂
Regarding China, reducing mining investment (if that is what happens, which isn’t certain at all) could do them a lot of good – rising materials prices might help cool their overheated and very unbalanced economy. Again, just supposin’.
There is no comparison with (freehold) farmers at all. If you throw farmers into the mix, then you also need to throw in all people who use land in any way, shape or form, including residents and businesses who own land.
Fishers – yes. They do pay licence fees but I don’t know the level. Forestry on crown land and eco-tourism as well are in the same boat. As are the pastoralists who lease crown land – although they also lease the land and are required to make various ‘improvements’. By a not too different principle, people who visit crown land are often charged a fee (eg national and state parks).
But the difference is that in most cases the fees / royalties are paid to the ‘crown’ that owns the land – ie the state governments. Normal taxes are collected through the Federal Government (on behalf of the States).
@Gus
It is an incredibly regressive tax if you are poor and choose to smoke. If you don’t smoke it isn’t regressive at all. The moral is don’t smoke.
I do agree with your point that notice should be taken of where this revenue comes from when making expenditure decisions. However, taxes aren’t hypothecated, and even if they were, I would be surprised if more isn’t already spent on the additional medicare costs of smokers as well as on programs for reducing smoking and so on. This means hypothecation would be pointless as it would be unlikely to increase the amount of money directed toward these areas.
If you want to read some good ‘research’, many apologists for big tobacco have cried rivers of crocodile tears for the inequity of the regressive tax on tobacco. Very interesting as the types of people who produce this made to order ‘research’ are the types that inhabit places like the IPA and CIS and in their other ‘research’ support all types of taxes that are incredibly regressive, like, for example, poll taxes. A poll tax is a lump sum tax, the same value for rich or poor, for simply existing. Making the choice to avoid that tax is somewhat more dramatic than simply giving up smoking.
@Sou
Farmers or others who own freehold land cannot do what they like with that land. Their use of that land is highly regulated. If the government decided to start charging them a rent for that land there would really be no impediment, except public anger stopping them from doing so. I haven’t read the Henry tax review yet, but I wouldn’t be surprised if there wasn’t a proposal along these lines anyway. It would be a great idea. It would be called a tax rather than a rent but would amount to the same thing. Land ownership does not really confer the rights, to do whatever you like, that many seem to think it does. And a good thing that it doesn’t.
I’ve just come across this disturbing, and illuminating, article on the growth of China’s coal production and the implications this has for Australian coal production and the world coal price in the near term.
http://www.theoildrum.com/node/6434#more
“If it’s not there you can’t burn it” is one of the headings. The way China and India are gobbling up coal will soon make a price on carbon unnecessary. Coal will price itself out of the market. Australia will have to ramp up production to the rising coal price. Scary stuff.
I don’t understand the logic of charging someone who already owns land a rent for the land. The closest is rates that are charged by local councils – but this is ostensibly for local government services.
I don’t believe any government in Australia has a legal basis for charging ‘rent’ for land they don’t own, let alone singling out landholders who farm land from other landholders (who almost without exception totally destroy the land by covering it with concrete and buildings).
The government charging rent for land it no longer owns, to me is the weirdest notion – I wonder where it is coming from.
@Fran Barlow
Fran, I have no general problem with taxation of smoking to reduce the level of smoking if it is effective, and if the taxation is primarily there as a health measure. As an aside, do the budget papers specify what reduction in smoking is expected?
Freelander – The argument that people are choosing to smoke is overly simplistic given the evidence that nicotine is addictive. In this context, the funding of smoking cessation programs is essential if there is to be a moral argument for a regressive tax.
In my area of interest, maternal and child health, we have sound randomised trial evidence that interventions to reduce smoking in pregnancy are effective at reducing both smoking and the proportion of infants born <2.5kg. There is no national program to fund smoking-cessation programs for all pregnant women who smoke. Can you imagine that, given the huge amount of money raised from smoking taxes?
I am not an economist, but it looks to me like cigarettes are taxed because the demand of addicts is price-inelastic, rather than as a method of reducing smoking. This is why I would be interested in a post from John which addresses this issue.
On reflection, I suspect what is being discussed is a land/property tax. That is a tax on a specific form of assets and is already levied in many states for land and buildings valued above a threshold. It has nothing to do with resource use. It is a form of wealth tax.
Someone will undoubtedly correct me if I’ve read it wrong.
@Sou
I suggest you check out Prosper Australia for an explanation and advocacy of the concept.
@Sou
The thing is they don’t really own the land in the way you might think they do. Governments can put taxes on anything. When taxes are levied they inevitably change the value of assets. A rational investor though has already factored that into the price they pay for an asset (that is called rational expectations). Hence, they recognise that government may very well put a tax on the asset changing its value so to compensate for that they pay less for the asset to take account of this risk premium. So when they are perfectly rational it is simply a gamble they willingly take with their eyes open. This means they can’t complain if or when the government does it. Rational expectations is a great thing. It is amazing what you can justify with a rational expectations argument.
@Gus
It is the case that addicitive substances tend to be more price eleastic than non-addictive substances, but it’s not unlimited. That’s why one measure of success in the drug wars is the street price of controlled substances.
Both for alcohol and cigarettes price is a factor. Given the externalities associated with smoking, which certainly include damage to fetuses, there is a strong case for resisting calims of this nature. We want people to stop and this might work.
As I said though, I’d be wanting to very much ensure that there was a close match between revenue and relevant quality mass delivered outcomes-audited health programs. I’d quite like some of the funds to go into case management for all newborns — with priority to first time parents or those in the bottom three to four deciles of the population — with a view to establishing good parenting practice and a nurturing environment for children. That would not only address smoking, but other substance abuse, neglect, domestic violence, early education, childhood benchmarks and so forth. We could begin to make a start on breaking generational disadvantage.
As for whether it is a tax or a rent… Which ever it is you get the same back in return. A receipt if you’re lucky!
The point I am getting at is that mining does not really add much value in the same sense that other economic activity does. If I find a large gold deposit I haven’t really created any value. The wealth is put in the ground by nature. It is not as though I invented some new chemical process of turning worthless rock into more valuable material.
For the most part I agree with the contention that miners are largely rent-seekers who are simply exploiting an existing resource they did not create and essentially belongs to all. Of course, the very nature of government control is that it tends to be a haven for rent-seekers who can use their political influence to get access to common resources on unfair terms.
Miners essentially just dig wealth out of the ground. So long as the charges for doing so are not so high that it becomes uneconomic to dig wealth out of the ground and sell it, then there is no problem. And so long as it does not become uneconomic to prospect for new mineral deposits.
As far as cigarettes go, a good policy approach would be to attack tobacco company profits. If the profits were taxed especially heavily in a way that made the companies disentangle the tobacco company from the conglomerate and made selling tobacco not such a good earner, they would cease to work so hard pushing their product and funding their pushers, and mouth pieces. That would be the real way to put the boot in, and slow them down. What is sad is that the measures taken so far have still left their trade highly profitable. I would like to see the industry reduced to the point where their senior executives can only afford to live in parks under discarded newspapers, and are forced to supplement their meager company incomes, meager including bonuses, with eight to ten hours a day of begging. Now that is what I call a policy performance indicator.
@ James – thanks for pointing me to what this notion is all about. I suspect it’s been developed by a wealthy 25-year-old male. Too many flaws to even know where to start. As they say – “it’s not even wrong”.
@Sou
It’s not even wrong because it is entirely correct and the idea has been around for a very long time. A big promoter of the idea was Henry George.
http://en.wikipedia.org/wiki/Henry_George
http://hgfa.org.au/
http://www.henrygeorge.org/
One attractive feature of the approach is that property booms would be a thing of the past. Hence, people wouldn’t get extraordinarily rich simply because they were rich in the first place. Most of the value of land is in its location relative to other things. After land is purchased other things come into existence and they by being located nearby increase the value of a piece of land. This increase is hardly due to anything the land owner does. Much of the value of land can result from government activity and provision of a variety of services. If the government rents the land, at an appropriate price, then as well as being a good source of revenue, the government also has a stake in promoting policies that increase the amenity and hence value of the land. Converting things so that the government is effectively the sole owner of the land and rents it out to everyone is probably far to difficult to do. However, government by charging significant rents (not full rents) would reduce the price of land, making ownership easier, because effectively government would be part owner. This approach has a lot merit and is well understood by economists.
In the case of farming, farmers are only really in the same category if they make their living by excessively exploiting a common resource. For example, if farmers obtain large amounts of water at artificially low prices that do not reflect market value or opportunity cost, then they are indeed rent-seekers who are living at the expense of others.
The only possible quibble I have with John Quiggin over this is on the macroeconomic arguments. Taxes which raise more revenues during economic booms are only really countercyclical if the extra revenue goes towards improving the budget bottom line rather than being spent.
If the extra revenue is spent rather than saved, then an overall increase in tax revenue and expenditure is normally pro-cyclical. That is because it leads to a slight increase in consumption and a slight reduction in net savings across the economy, thereby increasing demand instead of dampening demand.
The best policy would be to put the revenues from resource booms into a special fund, and then spend them during economic downturns.
@Monkey’s Uncle
Regardless of the pattern of spending the tax is countercyclical. Proportionally more tax is taken out during booms than during slowdowns. The government’s decisions about their pattern of spending has nothing to do with whether the tax is countercyclical or not.
@Sou
I am a bit surprised to learn that Adam Smith, Ricardo, Mill, Marx, Keynes and Friedman, all of whom advocated this form of tax – about the only thing they all agreed on – were “not even wrong”.
Any other cornerstones of economic thinking you’d care to overturn while you’re at it?
Hi James. I didn’t mean to offend you. I didn’t realise you were advocating this. And no, that’s enough ‘overturning’ from me for now. I didn’t realise all those old economists advocated this as the sole source of government revenue – maybe I’ll have to go back to school – lol. Of course times were different back then. And given that it’s not been introduced I suspect a lot of other people think the way I do.
BTW – to clarify, I figured the person behind the petition was not necessarily wealthy – but a very young, very high income earner, salaried employee, married or about to be so, and male.
@Jarrah
The point you’re missing is that mining consumes non-renewable resources. Farming* and fishing** doesn’t. Once that ore/coal/etc has been dug up it’s gone forever.
*water is renewable; topsoil was the closest to a non-renewable resource I could think of but even that regenerates (although not very quickly in Australian conditions) plus it’s in the farmers’ interests to conserve their topsoil as much as possible.
** as long a they don’t over-fish their resource.
Freelander, I am well aware of the fact that (taken in isolation from spending) such a tax is countercyclical. Thanks for pointing out such basic things that apparently no-one else is capable of working out.
Such an observation is of limited value though in terms of assessing the practical impact on public policy, because government spending decisions in the real world are not made in a vacuum completely isolated from other considerations like the amount of revenue available.
All I am suggesting is that such a tax is only countercyclical if the government practices fiscal discipline. In the hands of an irresponsible government, it could well produce a net result which is procyclical.
I wouldn’t be sure about that they asserted it as the ‘sole source’ of revenue. Depends on how much revenue is required. But there is little doubt that it is an excellent source of revenue with a lot of attractive features. Times may have been different but the analysis has withstood the test of time. Addition has been around for a long time too, but numbers still seem to add up the same as they did back then, when ‘times were different’.
@Monkey’s Uncle
I wasn’t concerned about anyone else. Simply your not working it out.
The tax is countercyclical. That doesn’t mean that a government is not able to do other things that are procyclical that may overwhelm the impact of the tax.
@Sou
It was mentioned on a Radio National program about urban planning in Sydney recently that 12 people or corporations own more than 50% of the Sydney CBD. Think about how much rental income they would be getting, and how much money they could throw into political donations, then ask yourself again why a tax on land rent might not get introduced very often.
The major political objection is that it would lower house prices, which is good on the whole but hurts people who have taken out large bank loans to buy a house or retirees planning on negative mortgages. The usual proposal is a phased introduction that exempts first owner-occupied houses with an unimproved land value of less than $500,000 or so. Another objection is that it might hurt marginal farmers, but if the farmers are on marginal land they are unlikely to pay any tax to speak of anyway.
It’s very important to understand that an ideal land tax is only on unimproved value. Unlike rates, CGT, etc, it doesn’t tax improvements made to the land (e.g. building a house).
You might be interested to know that the ACT was originally intended to fund itself this way, which is why all land in the ACT is technically rented from the government, but the system was emasculated sometime in the Menzies era IIRC.
Freelander, what you don’t seem to understand is that governments generally raise taxes in order to provide revenue to fund their expenditure. They don’t normally just levy taxes solely to take money out of the economy. So you are confusing ends with means.
Your argument is akin to saying that all wages or profits are countercyclical, as at the point of transfer they represent money being taken out of the economy and into private hands. The fact that this money may end up being spent, and thus stimulate demand, is apparently of no consequence.
I am not making an argument. I am just clarifying that the tax is countercyclical.
Update, Update, Update, Tony Abbott fails to grasp the economics of Resources Rent Tax without producing any evidence to substantiate his claim that the new tax will ‘strangle growth’. Abbott is all bull.
But bull sells. Unfortunately.
Not so fast Freelander for Abbott has made a big false claim which cannot be substantiated.
Well Abbott’s first claim was that the RSPT was Rudd’s plan to kill the mining boom stone dead.
It doesn’t get any sillier than that.
Ok, ‘we’ own all the minerals. I can’t believe that we let miners basically steal our stuff like this! If we really own the minerals collectively, I say 90% tax and why wouldn’t we want the dividends in regular cash payments. I’d like to quit my job and live of the dividends.
@Damian
You might want to, but even in good years there isn’t enough. The super profit last year was $90billion. Even if we grabbed the lot, and we are only taking back a measily 40 per cent in the proposal, it works out about $4,000 per person. The services government supplies cost considerably more than this so there isn’t any left over for you to quit your job and live off the dividends. Even if you did get $4,000, I am not sure $80 a week would help you sleep any sounder in a park somewhere. If you based your early retirement on the 40 per cent being proposed that would only be about $30 per week.
@Damian
If you are wondering where all the money the government collects goes… Well, for starters, it costs a lot of money just to protect the rest of us from those sleeping in parks.
@Michael of Summer Hill
Who really here expects Abbott to come up with a decent policy….when Howard first got in, Abbot was holed up in a room somewhere writing the most neoliberal of neoliberal agendas… the plan for Iraq (mistake), the plan for boat people (lies and a mistake) and the plan to screw our youth (workchoices) and the plan to screw our single mothers and other poor (welfare to work).
So who here thinks Abbott is worth voting for? He is (was and still is) a Howard neoliberal bootlicker and has nothing to offer us now. Would he have thought up the resource rent tax, now?
NO.
@Freelander
You kill me Freelander…every thought of starting your own comedy show??!!
@Sou
“If you throw farmers into the mix, then you also need to throw in all people who use land in any way, shape or form, including residents and businesses who own land.”
Exactly my point in my original comment. I don’t see a problem with that – I’m a vacillating Georgist.
@Monkey’s Uncle
The value comes from the investment and work needed to get the gold out of the ground. It’s worthless while in the ground, and human effort gives it value – same as everything, really. Which begs the question – why is it being singled out?
@Ben
You give one possible answer to that question – a one-time resource has a different character to a renewable one. But does it give us a reason to tax it differently? Do we want to preserve iron ore and whathaveyou for some later use (or non-use), and therefore should discourage its extraction by taxing it heavily?
@Jarrah
I suspect the issue might be Jarrah, that minerals are rather like a treasure chest. They are seen as a one off thing which you sell once and alienate forever. Also, flogging these off can lead to windfall profits that are one time only. If we sell them, opur descendents can’t. It’s like Nauru and super phosphate.
So it is different from, say selling education, which is less profitable but more sustainable and less volatile as an export earner. And we haven’t even mentioned “dutch disease”.
@Alice
I particularly liked the Howard government’s plan to get older poor folk back to work, or ‘work till you drop’ as I liked to call it.