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 
@Fran Barlow
Nauru did very well out of their minerals and their descendants would have done fine as well. Nauru got plenty for the resources and what they got ensured they would all live well into the future except… Except a smooth talking swindler came along and talked them out of their money with a few harebrained schemes, which is why they are where they are today.
Alice, I cannot believe that the leader of the Coalition would make up such tall stories as Fran says to ‘to kill the mining boom stone dead’. The man has no credibility and is doing a great deal of damage to Australia’s reputation on the international scene. Bloody drongo.
@Michael of Summer Hill
There are more idiots out there than many recognise and many of them have the vote. Abbott rarely says anything that anyone out there should take seriously, and clearly he and the current rabble who brought him to power would be very dangerous in government, especially at a time where stupidity could be very costly. Despite that, many are taking him seriously and even though he hasn’t even attempted to offer an alternative, he has just criticised everything as being too big and too small, too fat and too thin, too tall and too short, all at the same time, a large section of the public is buying it. People don’t seem to work out that an alternative has to present itself as potentially better before it should be taken seriously, not simply as someone capable of pointing out that the incumbent isn’t impossibly perfect. People have also ignored our lucky escape, and brought the story that the GFC just passed us by and nothing the government did has anything to do with why we have not suffered as the rest of the developed countries have and still are.
Freelander, the argument (sorry, I forgot it’s not an argument) about whether a tax is countercyclical is based on a basic fallacy. Essentially a tax is a transfer of resources from the private sector to the public sector. It is not money being taken out of the economy. It is money being transferred from one sector of the economy to the other.
Transferring more resources from the private sector to the public sector can only be countercyclical if you assume that the public sector has a greater tendency to save rather than spend than the private sector. I would say that assumption is false.
Even a tax which yields much greater revenues during boom times than in other times is not necessarily countercyclical. It all depends on whether the private sector would be more likely to spend or save the extra money if it was left in private hands.
To argue that higher tax revenues are inherently countercyclical because, at the point of collection, they are being collected rather than spent is nonsense on stilts. If the government collects less tax, the money is not being automatically spent at the point it ends in private pockets either. The only question is whether the government or private sector is more likely to spend or save any extra money they receive.
Higher taxes are only countercyclical if you assume that higher tax revenues are more likely to be saved than spent, while tax cuts are more likely to be spent than saved.
To put it another way. Higher tax revenues during boom times are only countercyclical if those revenues go towards improving the budget bottom line rather than being spent.
But this is in itself based on the assumption that governments are more likely to spend than save additional revenues (an assumption that is clearly false).
Or to look at it another way. If higher tax revenues are inherently countercyclical, then a country with relatively high levels of taxation and public spending could be said to have a permanent countercyclical fiscal policy (even if its budget bottom line wasn’t that good). That is the reductio ad absurdum of that argument.
@Freelander
LOL Freelander …or “work till you pop”? Or how about “from bingo to work” by Tony Abbott?
@Michael of Summer Hill
I happen to think he is a bloody drongo too Moshie. Lets watch him make a hash of his budget reply speech? My guess is he will blame all on fed labour and will have no real policies to offer and it will be delivered in the expected “chihuahua turns nasty” approach.
thats labor above
Update, Update, Update, the latest rag reports suggest Tony Abbott’s false claims about the Resources Rent Tax is all bull. According to today’s Brisbane Times, ‘the idea that companies with existing projects will pack their bags and leave our shores, or that no one will invest in Australian mining when very handy profits are still there to made, is a nonsense’.
@Alice
“work till you pop” that would be keeping pregnant woman at work…
@Monkey’s Uncle
The tax is countercyclical which is why JQ said it is countercyclical and why economists call such a tax countercyclical. You can call it anything you like. Don’t imagine though, that economists will start calling such a tax anything other than countercyclical just to suit you though. Even if word gets about that “Monkey’s Uncle” has decided to call such a tax something else based on why he conjectures government might do as a reaction to having the revenue raised by such a tax.
By the way, economists would call the pattern of spending you suggest the government would engage in as procyclical.
Alert – thousands swamp a class action against bank fees from 12 banks including the big four
Bring it on. I hope the IMF (no not that IMF) rolls out their finest and meanest silks…
http://www.heraldsun.com.au/money/banking/imf-to-bankroll-bank-fee-class-action/story-e6frfh5o-1225865541240
Freelander, I don’t imagine economists will consider the matter resolved simply because “Freelander” decrees it so, even though he cannot actually produce any reasoned case for why it must be so.
The notion that increased tax collections are inherently countercyclical is based on the flawed simplistic notion that taxes represent money being taken out of the economy, thus reducing demand. Taxes are not money being taken out of the economy. They are money being transferred from the private sector to the public sector. This, in itself, is not inherently procyclical or countercyclical. All that is either procyclical or countercyclical is the decisions made by the public and private sectors to either save or spend what money ends up in their hands.
A transfer cannot be assumed by definition to be procyclical or countercyclical. Because it is just a transfer. It is not a decision to either spend, save or invest resources. A tax is a transfer. It is not a savings or investment.
If I rob Peter and pay Paul, is this countercyclical because Peter no longer has as much money to spend like a drunken sailor? But hang on, now Paul has got the extra money in his pocket that may enable him to spend like a drunken sailor? Freelander, is robbing Peter inherently countercyclical?
Actually, all other things being equal, a tax which yields high revenues during boom times and low revenues during economic downturns could ordinarily be said to be procyclical. If government revenues increase strongly during an economic boom, this means the public sector has more resources at its disposal. If tax revenues decline strongly during an economic downturn, this means the public sector has less resources to expand its operations.
So all things being equal, this would mean that the public sector is growing at the same time the private sector is growing, and the public sector is declining at the same time the private sector is declining. This is, by definition, procyclical.
Of course, governments can offset this by running bigger surpluses and cutting spending in strong times while running large deficits and spending more in weaker economic times. But in this case it is the government’s decision to spend, save or borrow that is countercyclical. Not the mere existence of a particular tax.
That’s an interesting point, Fran, but it’s not “the issue” – it hasn’t even been raised on this thread until now, and I certainly haven’t heard/read any commentary along those lines in the MSM.
It’s worth thinking about, of course. The welfare of our descendants has some importance, and consideration should be taken when deciding what to do now. It’s a tricky calculation, though. For example, with the resources themselves, we don’t know which ones will be important far into the future. And which discount rate should we use? Etc.
Interestingly, the super tax – according to the Budget – is intended to pay for a lot of things for ourselves now, with not very much put aside for the benefit of future generations.
@Monkey’s Uncle
surely the govt spending would lag the revenue generation and therefore act act to smooth cycles ie be a low pass or moving average filter
@Jarrah
The welfare of our descendants has some importance, and consideration should be taken when deciding what to do now. It’s a tricky calculation, though. For example, with the resources themselves, we don’t know which ones will be important far into the future. And which discount rate should we use?
Some of them we can pretty sure about — copper, iron ore, zinc, bauxite, gold, coal, natural gas, rare earths in general …
You are right if your point is that we will find it difficult to model the comparative utility to the intended beneficiaries of digging up and selling now as opposed to digging up and selling 20 years from now — and of course we aren’t merely modelling price but making a claim about the legacy we leave. Yet even if it did turn out that on one metric there were a 10% real advantage in selling now than in 30 years time, what would that mean?
We generally try to avoid binding our successors too far into the future but exhausting aresource at what we think is a good price now and spending the proceeeds on what seems reasonable now does imply binding our successors with fait accompli. People who are now up to 14-years-old and form the core constituency and the personnel of the government of say, 2050, aren’t going to get a say in what happens to all that mineral wealth.
Even worse, when one considers the Dutch Disease questions, windfall profits from mining may not produce as much benefit to the current community as one might imagine. If it forces policy responses that reduce the overall productivity of the economy or in investment patterns, or increases underemployment in some sectors then the net effect could be very negative over timelines of 20 years or so.
Now as it happens, I don’t believe RSPT will have a negative impact on mining output or employment in Australia, so the point is probably moot, but if even it did, even the negative might be a positive — not a bug but a feature. Leaving valuable commodities in the ground (and thus underpinning the value of existing resources in the market and underpinning a sustainable and more diverse economy) might actually be the best way to maximise the value of the mining industry to the Australian community over the next 50 years.
oops … forgot blockquote first para … 😦
Greg, that may be correct in the very short-term. But before too long higher revenues would be factored in, and generally governments show at least as much propensity to spend rather than save than private individuals. Given that resource booms and busts tend to last a long time, this would be of limited benefit.
I’m not suggesting that such a tax may never prove to be countercyclical. I think in a relatively limited set of circumstances it might. But in most circumstances it would not.
What I am arguing against is the notion put by Freelander that the mere existence of such a tax is almost by definition countercyclical. This simply doesn’t add up.
@Monkey’s Uncle
If you think JQ and I are wrong and that economists don’t call such taxes countercyclical and that economists instead use the haphazard approach you use then demonstrate it. Another thing we don’t do is say when we see someone has, say $2000 deposited in a bank account, no wait they don’t have $2000 in that account because they owe $1500 to Bob. What they owe to Bob is just not relevant. As is your conjecture about what a government does when it gets revenue from a countercyclical tax. Whatever the government does with the revenue it gets, the tax, itself, remains countercyclical.
I doubt you have got it yet. But I am convinced everyone else has, if not long ago, so I leave it at that. For further explication ask your nephew, clearly the cleverest of your species.
Freelander, I never suggested that John Quiggin is as wrong as you are. I think his assessment of the macroeconomics is probably half-right, give or take the original quibble I had. You, on the other hand, are clearly way out of your depth on these economic issues. It seems as though you are trying to get a free ride on John Quiggin’s coattails here, given that he can no doubt argue a case much better than you can.
Your point about someone owing someone else money is a pointless red herring that has nothing to do with any case I made. Although I am curious about why you seem to believe that economists don’t care about liabilities, only assets.
You can continue calling it countercyclical if you want. Just as you can call it Gertrude or Mavis or whatever you please. That won’t change the fact that your reasoning for it being so is daft.
BTW, if any other economist wants to argue that it is countercyclical they are welcome to come here, explain their reasoning and argue the case. Don’t try to hide behind other economists because you cannot argue your own case.
And I never suggested such a tax is always procyclical. I have said that it may be procyclical or countercyclical, depending on economic factors such as the marginal propensity of the private sector and public sector to either spend or save. But I think it would be procyclical more often than it is countercyclical.
So any economist who wants to argue that it is countercyclical is not automatically wrong. They may have come to such a conclusion through sounder reasoning than you have. But none of this changes the fact that your reasoning for it being countercyclical is bunk.
@Monkey’s Uncle
Young simian. The tax is countercyclical. Now please. Let me rest in peace.
The basic fallacy in your argument is that you seem to believe that the mere act of a government collecting higher taxes almost by definition reduces demand in the economy. It does no such thing. All it does is simply transfer a larger portion of wealth from the private sector to the public sector. The public sector then decides whether to spend or save the extra money under its control. It is the net decisions of the public sector and private sector to either spend or save that are either procyclical or countercyclical.
If I take $20,000 out of Peter’s bank account and put it in Paul’s bank account, will this reduce demand? Only if Paul is less likely to spend than Peter. Imagine you have two giant funds. One is called Private Sector. The other is called Public Sector. A tax increase is little more than the decision to take money out of the Private Sector account and put it in the Public Sector account. Will this reduce demand? Only if the Public Sector money is less likely to be spent than if it remained in the Private Sector account.
@Monkey’s Uncle
Nice try MU but your argument holds only if ceteris paribus applies. Time is a variable. Will the money be spent more slowly as slowly or more quickly when it moves from one sector to another? Will it be spent in the same economy or in some place where the impact of the spending is less pertinent to the economy?
Suppose the money goes into a sovereign wealth fund that buys assets off-shore and secures a dividend. Local money supply falls.
MU. Please. For heaven’s sake. Let the dead rest.
@Fran Barlow
Actually Fran, local money supply doesn’t fall because the sovereign wealth fund needs to use Australian dollars it has to buy the foreign dollars it doesn’t have to buy the wealth offshore. However, because the offshore wealth is not domestic, these purchases do not contribute to domestic demand.
@Freelander
Oh but Freelander…you forget ..in the world of some…it doesnt matter where the poverty is reduced and it doesnt matter where the wealth is spent because we are all one big happy global deregulated family now…and in the long run it doesnt matter because everything is “supposed” to be free to travel where ever it wants to go …you know …the four pillars of global freedom..
except…except for one little glaring hypocrytical ommision…no-one wants to make labor free to go where it wants to.
The freedom is only for capital…and what a mess that has created. Freedom for those who own capital….the banks…the entrepreneurs…the CEOs…freedom for profits to go to tax havens to be sequestered for bonus payments.
Not the wage earners. Not the workers. Not Labour. They are not free at all.
The whole thing is a monumental edifice purporting to push for a “free world of individual choices” but the reality is, people cant choose where (which country) to go in search of work. So labour is hogtied and jailed for leaving a place where there are no jobs and paying people smugglers to get them somewhere they might have a chance to earn a decent living.
Fran wouldnt know the difference between domestic demand and the “almost nirvana” (if only we would listen to what she says) she lives in. Based on a prior post she doesnt even know what ceteris paribus means.
@Alice
We might be one big happy family but we don’t share the same currency so to buy goods overseas you typically need to buy foreign currency. Even if you buy them with local currency, foreigners may find they need to exchange ‘our’ dollars for their ‘own’ dollars to buy the things they want.
I am glad that MU has given up. I wasn’t looking forward to another appearance from David Ricardo. I find ghosts kind of frightening.
I can only assume that the ghost of David Ricardo is a sock puppet.
Freelander, if you can indeed prove that was the real spirit of David Ricardo, and he has indeed changed his tune since crossing over and gaining access to all the wisdom on the other side, I will have to consider it.
Who knows? I don’t want to be condemned in the next life for being a hardhearted economic rationalist.
John, I accidently posted the following under Nuclear power: the last post instead of here. The latest report indicate Tony Abbott’s credibility is at stake for it involves Treasury secretary Ken Henry saying a drop off in mining as a result of the new tax “is not all bad.” Given Abbott’s continuous and habitual false claims, the Australian public needs to be reassured that Ken Henry did not make any such statement.
Oh No. Back to raising the dead. Or is that undead.
Freelander, I consulted my spirit guides and they assure me the tax is only countercyclical during the very peak of the economic cycle and under the reign of a fiscally conservative treasurer.
Have mineral prices increased in real terms over recent decades? And can we project demand and scarcity will see this occurring into the future?
Looking at the Treasury Review shows that in the last decade mining profits increased more than 6 fold while govt royalties only doubled. Hence the public could receive higher revenues from mining by quadrupling its % take of profits even if mining activity (measured in profits) shrinks to a quarter of its current level?
Will a large profits tax may have the effect of raising the commodity price now and into the future? If so this will have two benefits?
1)This has the potential of slowing the rate of depletion of our mineral assets (whilst maintaining or increasing total profits- as real prices rise with increasing scarcity);
2) Our national economic structure (and terms of trade) has greater potential to be more diversified/ less weighted towards and inevitably shrinking mineral base.
@Monkey’s Uncle
Dead monkeys are best ignored.
I would have thought that a hefty carbon tax at the minehead – specifically aimed at fossil fuels – would have more widely appreciated and accepted than across the whole mining sector; it would at least show Labor is serious about global emissions reductions. But then the intent of a carbon tax should be to put the brakes on fossil fuel extraction and ultimately encourage it’s collapse (and be tied to incentives to invest in low emissions/low tax technologies) whereas a RRT is not intended to slow down anything, just maximise the public revenue collected.
The fossil fuel miners ought to be on notice that by regulation, by punitive taxation, by threat of class actions and soaring public liability insurance costs, their business is slated for mass closure but instead they will be overseen by gov’ts that are increasingly dependent on the revenues they feed to gov’t coffers.
I can’t help but be cynical and think the RRT will entrench further dependence on mining revenues and make state and federal gov’ts even more determined to maintain growth in the extraction of fossil fuels. And ultimately this will make it harder to undertake the essential shift to a low emissions local and global economy.
I am glad that MU has given up. I wasn’t looking forward to another appearance from David Ricardo. I find ghosts kind of frightening.
You too?
David Ricardo is here as a spook puppet.
As for the RRT – the miners are rolling out the HARM today (heavy artillery in the media). I saw Twiggy forrest on TV this morning crying poor. Apart from a spectacular bubble like share rise which made Twiggy very very VERY rich…has Fortescue actually shipped much minerals yet?
The WA newspapers are also giving it a thrashing (RRT) and the big wheels from Rio have been despatched to threaten, intimidate, bully and club some sense into Treasury officials today. I hope Treasury officials stand firm on this or its Greece …here we come.
Alice,
I take it you are keen to pay the miners shed loads of money if their projects go bad or the commodity prices tank. Interesting.
@Andrew Reynolds
I won’t speak for Alice but I certainly wouldn’t be covering their downside risk in the commodity market. If the price of a commodity falls enough to make the commodity not worth harvesting, that would be their business. Stop harvesting obviously.
Indeed, if the commodity price fell just enough for the royalty rebate to match the super profits tax I’d abandon rebating and the tax.
@Andrew Reynolds
Someone bizarre comment. Why should anyone be ‘keen’ to cover their downside risk? Clearly, you intend to follow up with something else equally bizarre to ‘clarify’ the comment.
Freelander,
That is the effect of the Brown tax that is being advocated here. Alice seems very keen on the tax, therefore I assumed (I thought logically) that she is keen to have the downside risk of the mining companies at least partially subject to government guarantee.
@Andrew Reynolds
One suspects in any event that the potential losses to the taxpayer in downside risk — what Swan calls “non-taxing of risk premiums”, aren’t a big factor. If they were, the mining bosses would be a lot less worried. Plainly, they believe this risk is largely notional and they raise it merely to confuse the wet behind the ears. Put another way, if you like the odds, you don’t want to share them with others, or, from the government’s POV, they want a share of them.
Fran,
Clearly, from many comments on this issue, I do not place a high risk on this either. It is just interesting that Alice is campaigning for a tax that would result in the government subsidising poor decisions on the part of companies.
This is a silly tax (under current circumstances) for many reasons. I would really just like to see why Alice is supporting it so wholeheartedly when it could easily result in the government subsidising any poor decisions of the mining industry.
I should add that, given many of Alice’s comments on risk management both here and elsewhere, I would think that her evaluation of the risk of a big drop in commodity prices would be higher than mine, meaning that she must believe that the risk of the government paying out on this Brown tax would be higher than my thoughts on the risk of them doing so.
@Freelander
What on earth is Andy talking about Freelander?
I have just heard some bizarre rumour (from my partner sho cannot be trusted at all – including on the reasons for a certain very recent resignation of a State Labor minister – for partying too hard with Kristina Keneally according to said less than honest partner who likes a joke)….
that Garnaut has come out in support of the mining companies against the tax
…..is this some sort or bizarre urban myth (the Garnaut bit)? Or is partner having a lend of me?
@Andrew Reynolds
School must be out for the day? Or maybe some pupils have gone free range?
Young Dandy. You have already shown that you know nothing about both ‘risk management’ and logic, as well as economics and the operation of the Australian system of government (and many, most, other things). This risk you speak of is completely illusory. It is simply a delusion in the minds of the ignoratti.
Australia happens to have something called ‘vertical fiscal imbalance’.
[—Painfully obvious step-by-step explanation, provided for the hard of thinking, may be inserted here.–]
Hence, it is really of no great concern whether or not the federal government rebates the royalty payments companies happen to pay to the states. Now that is what I call a bit of logic, but I would be surprised if you manage to understand it.
@Andrew Reynolds
Listen Andrew…everything is tanking and unless ypou want to go “greek” someone has to pay the taxes. Better it be miners, who make a lot, than small business who account for more of the GDP combined. Lets get it straight who needs a break here…only 50 odd thou work in mining. The vast majority of the employed are employed by small business.
Just because the miners have deep pockets and make big donations wont save the govt or the economy.
What sort of failed libertarian atre you Andy that you come in here and support the miners ahead of your small community, decentralised small businesses (that you are supposed to love).
Shame on you Andy.