Friday
Aug062010

Countering Some Poor Arguments for a Mining Tax

I was recently asked by Xavier Shay (blog, twitter) to comment on an article in The Age by Michael Gilding, entitled “More tax dollars and less mining? That’s a win-win situation”. Here is my response: 

Short version: Gilding identifies several problems for which a reduction in mining – though it might help – is the wrong solution.

Longer, point by point version:

Gilding’s first argument, that “mining sucks oxygen (capital investment) from the rest of the economy”, is one I can’t support. The reason is that a basic tenet of economics is that people (the market) make their own best decisions – in this case, investing in mining rather than, say, toll roads. The first rule of taxation is therefore that it distorts private decision-making as little as possible, which makes justifying a mining tax on the grounds that it distorts decisions problematic. (The RSPT, I note, was lauded precisely for NOT distorting investment decisions.)

There is a notable exception to this non-distorting policy: when the social costs/benefits are not adequately reflected by the monetary costs/benefits. That’s why we have extra taxes on cigarettes – the “costs” they impose are less than the untaxed price a market sets on them. Similarly, education provides (societal) benefits far in excess of what it costs to deliver, and is therefore subsidised.

Now, Gilding argues that capital that goes to mining could instead go to “innovative technologies or creative industries”, like solar power. Well, yes, but it could also go to building apartment buildings, shopping centres, car manufacturing plants, coal power stations, wharves, or toll roads. I am open to the idea of stimulating innovative and creative industries (and solar power), but reducing capital investment in mining is a silly way of doing it.

 

Gilding’s second argument is about the effects that mining exports have on the Australian dollar. It is true that a higher Australian dollar reduces our (quantity of) exports. Gilding expresses the commonly held view that exports are better than imports, and we should increase our net exports. In the first point, I am agnostic: exports are like saving, imports are like borrowing. As long as I’m in balance over time, there is no intrinsic “better” or “worse”. I have more sympathy for the second point – that we should increase our net exports at this point in time –, as we have reasonably high levels of private foreign debt that really should be addressed. However, the proposed mechanism is, again, rubbish: if we wanted to increase our exports by devaluing the Australian dollar (by reducing mining production), why not just do as the Chinese do and go back to a pegged currency? Oh, that’s right – decades of economic and political doctrine advocating the contrary.

In short: making one industry less competitive (mining) does not make other industries (cars) more competitive.

 

Gilding’s third argument is about the difficulty in managing a two-speed economy. That difficulty absolutely exists, and skimming profits off high-performing industries to help (through reform, not subsidies!) low-performing industries is good economic management. But why is mining unique is this regard? There are other industries in Australia whose return on investment is just as high (in percentile terms), and taking “super profits” from one high-performing industry while ignoring others is inequitable, unfair, and distortionary policy. (An economy wide super-profits tax – essentially progressive company taxes, as we have on income – is certainly an interesting idea, but not one that’s within a coo-ee of public debate. I don’t even know how theoretically valid it is.)

No, the rationale for the extra tax on mining was: 1) natural resources are non-renewable; and 2) natural resources are pubic assets. That the revenue then be used to reform the rest of the economy – yes, absolutely! Using that RSPT/MRRT/$ACRONYM revenue for anything other than infrastructure and/or business investment would be awful, short-sighted policy.

 

There is a fourth argument in Gilding’s piece, though he barely touches on it: “[M]inerals are not going to go anywhere. In fact, it might be prudent to leave some of those minerals in the ground for future generations of Australians.” This is a rather tricky issue of inter-temporal profit maximisation – is it better to sell something now or later? Just imagine you have a bar of gold sitting at home – when you do you sell it? All now, all later, bits and pieces over time (let’s assume you can separate it into discrete portions easily)? The answer depends on when you think you’ll need money over your lifetime, your expectations of the development of the value of gold, and your expectations of the development of the value of alternative investments. Maybe, in 50 years, gold can be cheaply synthesised and will become very cheap. Maybe it will be discovered to be a key ingredient in life-prolonging elixirs and will sky-rocket in value. Maybe you have a high preference for getting a return on your gold in the next 10 years and don’t care about anything else. (How long does a CEO typically stay at a company?) But, certainly, it’s a very complex topic.

Actually, I lie – Gilding does touch on the topic again, in his summary: “Mining is robbing future generations of natural resources.” Where is our future generations’ “right” to natural resources? Would they be just as happy with the proceeds of alternative investments funded by selling those resources? Huge, thorny topic; barely scratched in the article.

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