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Tuesday, June 15, 2010

Dr Ross Garnaut's views on the Resource Rent Tax

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Judging by the paper released by Professor Ross Garnaut the Rudd government did not consult widely before it adopted its proposal for a Resource Rent Tax on all minerals. Garnaut makes the argument that:

"If the Resource Super Profits Tax had been announced on May 2, 1990, the community would have been able to put it in that context". (p.1)
The reality is that the community should not be deciding taxation policy because it established an uncritical basis for policy development. These are intellectual issues and they should be determined by intellectuals. Reason ought to be the standard, as opposed to the government imposing its will upon a minority (i.e. miners), using the carrot of some concession for retirees. The broader interest of the 'common good' does not legitimatise taxes on miners. Taxes ought to be fair.... meaning they ought to apply to users of the services finances by the taxes. The role of the Senate was to protect the interests of minorities. The concept has been quashed by amalgamation of the parliament into a two-party duopoly.

"The Great Crash raises fundamental questions about the capacity of contemporary Governments of democratic capitalist countries to implement policies in the public interest that are contested by powerful private interests". (p.2)
Interesting in raising the issue of the financial crisis in the USA and Europe, he is totally obtuse on the cause of the financial troubles in the USA. Does he (like many) attribute it to bankers, or does he acknowledge the role of governments in enabling the bankers; most particularly the easy monetary policy of the Federal Reserve. Yet he seems to attribute the problem to meddling private interests. Are not politicians supposed to be the agents of morality given that they have a monopoly on the use of force. A capacity that ought to preclude the 'initiation' of force.

"The governments of democratic capitalist economies “face a constant war against almost unlimited financial demands on the state by citizens and lobby groups...”.
This strikes me as a total misdirection on his part since it was the government who initiated the tax on mining without any consultation. Not that consultation would help because ultimately coercion is unethical whether a thief gives you a warning or not.

"The essential reason why Australia is faring better is that we went through a couple of decades in which our policy-making processes were opened up for a while to influence from an informed and independent centre of the polity. This allowed the building of support for reform in the national interest, against the private interests that received benefits from the unreformed system".
Nonsense, we are doing better because the Liberals curtailed government spending. The momentum of the economy was buoyed by the minerals boom from 2001-2008. Gaunaut leaves no ambiguity about where he stands. He is a complete collectivist, as one would expect of a bureaucrat and academic. He states:

"I am saying that the Australian Government has taken a position on the basis of advice of people of knowledge and standing, that asserts some hard propositions about the national interest, at the expense of some private interests that exercise considerable influence in our polity". (p.3)
The problem with this is that the public interest ought to be considered in a framework of rights. If society gains at the expense of minority elements in the community, then we do irreparable harm to the interests of all people, both in terms of their economic interest and their psyche. I would suggest to you that publicly funded bureaucrats have no interest in such issues because a concept of rights is the antithesis of their publicly-funded existence. So for Garnaut any action against minorities is justified, even if it breaches the interests of certain interests. The problem of course is that at some point in our lives we all constitute a minority, whether its in school, the corporate work, as parents, taxpayers or foreigners abroad. Are we not inclined to expect a more intelligible, principled framework, so we know where we stand. I think it matters little whether we have 1 minutes notice or 1 year. The majority or those who represent it, ought to have no pecuniary interest in the property of others, unless there is a question of protection of counter party rights...lest we become a nation of perpetrators and victims, always picking off the weakest minority group who has no natural advantage. I have already mentioned that Google pays just 0.1% income tax in Australia, by shifting its revenues offshore to Ireland. Garnaut states:
"Australia is a country that must make its way on its own, outside the monetary and trade and
economic blocs of the North Atlantic, in a democratic capitalist world in crisis". (p.3)
This is an increasingly unrealistic expectation when you are talking about romantic, commercial and political relationships which are increasingly global. What is required is not political isolation, but engagement on the basis of some intelligible standard, i.e. Where reason is the standard of value....where reasons rather than 'numbers' or kickbacks are the standard of value. The world is in crisis precisely because of Garnaut's style of moral relativism.

"What is important is that this time, on this subject, we demonstrate that we can still discuss policy proposals with clarity and rigour, listening to interested parties, with their words having influence according to their content, and not according to the cruder instruments of political influence that accompany them".
This quote highlights Garnaut's economic ignorance. How can we discuss policies based on coercion without recognising the influence of arbitrary policy on private interests. Investors have already lost money. The present market capitalisation of a mining stock is a function of its future (taxable) earnings. Any question of increasing those taxes is going to lead to a destruction of wealth. Why should any politician or bureaucrat have that power? This is a particular concern when they seemingly are indifferent to its impact. He appears completely oblivious to the sovereign risk issue as well. Clearly he sees any private interest as antagonistic to his 'common good', whilst any pursuit of the common good is noble irrespective of its impact or underlying motivations.
He then makes a comparison between the removal of subsidies from the car industry under the Button Car Plan with the current predicament. Clearly he misses the principle involved; that is that industry in general ought not to support an unsustainable and dependent industry. Now, the mining industry ought not to be supporting retirees. If we want to raise super provisions, we need only to reduce the market distortions by government in Australia (i.e. First home grants scheme) and abroad (US Fed monetary policy) in order to reduce their intervention in the economy. Any investor in the market takes a huge gamble these days trying to read the arbitrary whim of government and central banks. Supply & demand no longer drives the economy. The prospect of the Fed flooding or sterilising money supply is the sole distortive measure.

"An accepted ideal in any system of taxation is that it should as far as possible be “neutral”. The ideal of neutrality is that, without good reason, the tax should not alter decisions on investment, production or trade". (p.4)
This would have been a nice ideal if it was established before any tax was even adopted. We might ask the legitimacy of any tax if this proposition is to hold true. The reality is that - if you accept arbitrary taxation - it is a nonsensical proposition because change intent on achieving a "neutral outcome" could only result in a more complicated tax system. Unsurprisingly, this is exactly what we have. Its great for the bureaucrats. The practical implication however is that taxation is readily loopholed by corporations trying to reduce tax, which precipitates amendments to tax legislation, which is intent upon correcting old mistakes, but it only succeeds in creating more flaws in an already bad system. Of course capitalists are blamed, but no one reflects on the immorality of the system.
He then launches into a defense of his proposition by considering the economic rent. The problem with such economic analysis is that it is divorced from context. Why is economists so bad at predicting market behaviour? Its because economists don't understand human behaviour, so they look at some aspect of markets, and drop certain pertinent considerations. Academia is not served by their isolation from the real world. The idea of collecting a salary from the government irrespective of the 'grounding' of your research is a solid basis for economic rationalism. We see the same in all the humanities. We would not see it in medicine or engineering. So expect academics to develop animal rights which are based on some conception of utilitarianism and 'empathetic (human-like) animals', climate change models based on uncritical 'tragic' computer modelling that fails to consider the impact of the sun. Academics were not passive responders to these issues, they actually drove these issues with the help of politicians and the media.
He argues that economic rent as revenue has a lower economic costs than other forms of taxation. That might be true from a relativist perspective, however its hard to accept if its part of an arbitrary taxation system which is destined to result in greater levels of taxation. A simple low-percentage transaction tax would be far cheaper. It is however not the issue, since public administration hardly provides much incentive to reduce the administrative cost of taxation. It is simply too easy to increase tax rather than change the system.

He adds that "Many Australians would add that the recovery of mineral rent from the companies to which rights to mine have been allocated for the community represents a move to more equitable distribution of income, in a way that has lower economic costs than other measures to promote distributional equity". (p.6)
This is not a reasonable argument. You cannot leave open the moral question of whether 'common good' questions are legitimate without analysing them. I would argue that:
1. The idea of recovering rent from miners is morally benign if it is small and the tax is known before the mining company commits to a project area, i.e. Exploration title. Any time thereafter is too late because the market will have attached a value to those project interests. Thereafter shareholders suffer an unfair loss from the application of the tax.
2. Where is the logic that says that income redistribution is a desirable quality. Studies of psychology will establish that ethical redistribution models based on coercion are destined to fail because they establish a moral legitimacy to parasitism, or a culture of risk aversion, and entitlement. Economists will not consider those factors.

Garnaut on page 6 discusses the 6 forms of resource rent tax. In so far as there is no moral requirement that such taxes relate to use of resources which government has any claim to, or to the extent that they do not have any relation to any service voluntarily used by a mining company, any such rent is illegitimate, and ought not be levied. Perhaps the most compelling reason for economic rent comes from cost recovery for any work performed by governments. i.e. Geological investigations by the state department of mines. This ought however to be a state tax, and it ought to be based on user pays principles. Any use of mineral rents to fund welfare and government are really schemes to avoid accountability by government.
There is some appeal to the idea of "competitive bidding for a fixed fee for leases", however I would argue that such a policy is fraught with moral relativism since it is probable that governments around the world will align their revenue objectives so that there is a neutral impact on miners, so instead the burden would be carried by consumers of end-products.

"A disadvantage of the Brown Tax (BT) is that it entails the greatest risk to the government". (p.9)
The implication is that the resource rent tax is a burden upon government. There is the prospect that government is taking a 'market or commercial' position, and the implication setting up taxpayers for further claims when governments get it wrong by erroneously forecasting future prices, and thus expected revenues. Another concern is the difficulty of understanding the tax; particularly for foreign investors. Smaller funds will simply avoid Australia because of their lack of resources for understanding the 'unique' Australian market. It could be argued that small funds will outsource funds managers to local fund managers; but others will simply go to familiar markets like the USA and Canada.
This paper needs further consideration with respect to the mechanisms of the tax, however I will stop here, so this post is confined to the ethical considerations.

*IMG source. Wikipedia
Andrew Sheldon
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