Taxing the Golden Goose

When I did my economics unit at University I learnt that if you tax goods at a rate higher than other goods, you will discourage consumption of that good. This is the basis of all “Sin” taxes on alcohol and cigarettes. A corollary is that investment in producing that good will similarly be discouraged.

This elementary fact is lost on the Federal Government’s treasury chief, Ken Henry:

The review reportedly tabled by Australia’s Treasury chief, Ken Henry, and leaked to media last week, recommends scrapping individual Australian state royalty taxes on mining projects in favour of a 40% uniform national resource tax.

For the record, the corporate tax rate is 30% of profits. Thus Ken Henry is proposing a 33% tax rate hike (from 30% to 40%)  just “because you are a miner.” Apparently this is to help fund the aging population.

Here are just a few unintended consequences:

1. Small to medium sized businesses in the mining sector now find it harder to attract capital, as investors will now be attracted to other companies with a lower tax rate. In other words, the return on investment for miners is now 33% lower.
2. Shareholders in mining companies now get 33% less in dividends, meaning less money to re-invest, save or spend, leading to reduced economic output.
3. Replacing the state royalty taxes, now means that states will find it harder to compete for mining businesses to set up in their states. Competition between states reduces royalty tax rates in the long term.
4. Mining exploration is discouraged, thus leading to lower rates of mining activity, thus leading to lower economic output (including lower exports).
5. Superannuation returns from funds invested in mining companies will be lower, thus actually adding to the problem of funding the aging population that it is purportedly trying to solve!
6. Mining companies will have greater incentive to explore overseas and not in Australia.
7. Discouraging mining activity may actually reduce tax receipts due to the Laffer curve effect.
8. (UPDATE) Companies delay investment decisions due to proposed resource tax, thus dampening economic activity.

UPDATE: Looks like it’s going to happen.

UPDATE: More from Michael Stutchbury from The Australian.

No related posts.