Better planning is necessary for resource taxes

The proposed minerals tax is bad policy. Taxes inevitably dampen private enterprise; this tax will slow the resources sector. That is not the problem with this tax however – its flaws lie with its bluntness. A more subtle, well-designed mechanism to tax windfall profits in the resources sector would be defensible.

Blatant money-grabs by governments, even if through taxes, are an action that can do long-term damage to economies. The damage is done either through making industries unprofitable, or by frightening off current and potential future investors. This tax does not have many issues on the former point, as it focuses on corporations with large windfall profits. It does little, however, to mitigate the issue of investor confidence.

Investor confidence can be fickle, and if the Australian Government cannot provide a sense of continuity for the legal, regulatory, and taxation frameworks under which companies operate, we may see a long-term reduction in foreign investment. The obvious extreme example of such a case is when governments can no longer convince corporations that property rights exist on a solid footing. This has historically been the case in many African (and some South American) nations that have repeatedly seized lucrative private assets. Australia isn’t anywhere close to that situation yet, but this policy could be perceived to be a step in that direction. No doubt some will portray it that way.

The resource & minerals industry is slightly different from other economic sectors however, in that it does not always bring prosperity to countries owning the resources (African nations are also a case in point). If the resources companies are internationally owned and the domestically employed workforce is small, economic benefits of a resources sector can be minimal. The Australian economy still gains significant benefits from its resources sector, but less than was once the case. From this perspective, a well-planned policy to ensure the domestic economy gets full value from windfall profits in the resource sector would be beneficial. This is particularly the case in the current environment, where the boom is not driven by exceptional management or technological improvements, but by external circumstances: the economic boom in China.

A well-planned resource taxation policy would consist of a small royalty imposed on mineral exports for individual minerals when their sale price is much higher than that of market fluctuations, with the royalty ramping upwards as price increased further from the average. Such a policy could be in place over the long-term, reducing investor uncertainty, would ensure a larger share of windfall mining profits remains in the domestic economy, and could help provide a braking mechanism for the boom-bust cycles in Australia’s resources sector.

Even such a mechanism would have some detrimental effects on the resources sector in the long-term, but they could be outweighed by the overall benefits. The tax as currently proposed, however, is using a cleaver when a scalpel is needed.