Friday, May 28, 2010

Who wins? Who loses? This is worth reading

Paul Frijters, the impressive economist, concludes...

Who are the winners of this tax? They include:

. Mine workers and mining communities. The long-run level of activity should go up, and the pressure on their wages and employment relations should go down.

. The general business community. Non-mining activities are taxed less because mining profits are taxed more, meaning that in general, businesses win out

. The general public, simply because they can expect to benefit from reduced taxation and receive parts of the services bought by this tax.

. The economic system, because this kind of tax is very dependable (minerals can’t run away to foreign countries and hence the tax can’t be avoided), making the public finances sounder and more reliable.

Who are the expected losers of this tax? They include:

. Shareholders in mining activities in Australia. When they bought their mining shares, the shareholders expected to receive a certain flow of profits, and that profit stream is now taxed more, making shares in mining less valuable. These losers include domestic shareholders and foreign shareholders, such as major Chinese interests in Australian firms and foreign shareholders in mining companies operating in Australia. To a certain extent, the RPT means Australia is grabbing in the coffers of foreigners to the benefit of its own population.

. Shareholders in mining activities outside Australia. Many countries are facing the problem of how to tax economic activities without reducing the level of economic activity, and Rent taxes are recognised as being pretty close to the economic textbook ideal as to how to do it. Hence other countries will no doubt follow suit if Australia pulls it off. This makes international mining companies understandably nervous.

. Other holders of fixed assets within Australia. This tax of course establishes the principle that assets that cannot run away might witness an increase in the taxation of the income generated by those assets. There are quite a few other sources of rent that could in principle be treated similarly, making owners of fixed assets justifiably nervous. Land, in particular, would be a prime long-term target for tax increases.

Frijters continues:

The specter that land-owners might be taxed on the basis of the value of that land (as an imputation of its profitability) will undoubtedly make owners of prime real estate nervous, and no amount of protestations on the part of the current government that it will not introduce such a tax will entirely allay the fears of those who see an analogy between taxing what is beneath the surface (minerals) and taxing the surface itself. And it would be quite possible that the Liberals introduce such a land-tax in their next government. Hence all those super-rich that make their money off fixed assets rather than their skills can all justifiably feel they have something to lose from the introduction of this tax.

In short, many of the expected losers of this tax are foreign or super-rich, whilst the expected beneficiaries include the vast majority of the Australian population and the business community.

If the tax indeed goes ahead as hypothesised above, the political question will be whether the few losers will manage to fool the many winners into believing that it is in the interest of the many (including workers in the mining industry!) to protect the few.

I consider Rudd exceptionally lucky with the current avalanche of misinformation and self-interested commentary coming from the rich mining companies. It is not often in economics that a proposed new tax is so obviously a fight between the interests of the few and the interests of the whole, making it easy for economists to be fairly united on where they stand. The more fuss is made about it, the more it can become a defining issue for current politicians and the more satisfaction they can take from the experience.

I fervently hope this debate drags on for a long time and becomes a debate about what kind of society Australia wishes to be: one that is run in the interest of the whole, where small groups of super-rich cannot sway public opinion, or one where any change that has a couple of well-funded losers can be stopped by disinformation and fear mongering.

The full post is at Core Economics.

Related Posts

. A taste of Henry

. Three of the best things written about the Resource Super Profits Tax

. Five easy pieces - the Mining Super Profits Tax

. Wednesday column: We'll still be mining


Rationalist said...

Why is it good for mine workers if it reduces wage pressures for them?

Roger Wegener said...

Great post Peter. Keep it up - facts and alternative views are very important and might make a big difference.

@Rat - What Paul Frijters is saying is that pressure to reduce wages and conditions will be reduced - and workers and their conditions will be more secure - a good thing. Details are in his paper.

Rationalist said...

That sounds rather irrational. How does increasing taxation burden reduce the downward pressure on mining wages? I was also under the impression that wage pressures in the mining sector was very much in the positive direction, rather than in the negative direction.

Taylor said...

The proposition didn't make sense to me either, but on re-reading I gather Frijters is referring to the long run, over which term the new arrangements are assumed by economists to stimulate mining.

Rationalist said...

Assumptions are never a good thing to make in the context of the ever so unpredictability of the Rudd government.

Taylor said...


Anonymous said...

I write this after trawling through the disheartening shrillness over at George Megalogenis's latest entry... dear Taylor and Rationalist, to paraphrase K Henry from the other day, make a choice between intuition and analysis of data and models. If you'd rather view everything through a partisan lens and so cannot read an article accurately, think through it's implications and apprecitate that such statements are made by an economist linked to a blog about ... economics then please don't comment here. There's plenty of space over at The Australian to get your echo chamber on. Leave this blog to the others. Peter - feel free to delete this comment. I know I shouldn't be making personal comments about other contributors here, but ... bugger it, I'll go for a run instead.

Rationalist said...

Hi Anon,

I do not feel your post is worth deleting and I hope Peter chooses not to do so.

I am simply just a bit curious about a statement that seems unintuitive re: increasing tax burden decreasing downward pressure on mining wages.

Also, on partisanship, I am not one to hide that I supported Labor in 2007, as did Australia as a whole. I suppose it is people like me who will ultimately judge the next government. I also have not read the article by Megalogenis that you mention, nor do I comment on News Ltd/Fairfax sites in any meaningful way.

Dave55 said...

You are right that decreased profits will reduce wage pressures however if the modelling on the RSPT is right, the reduced risk profile for smaller mines will increase the amount of mining activity as a whole which increases demand for labour which will put upwards pressure on wages. The most profitable mines are the ones with less employees (ie, open cut) so increasing the number of marginal mines is likely to have a disproportionate increase in labour in the sector.

Rationalist said...

Dave has provided a clear and concise explanation to my query.

Thank you.

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