Why higher taxes on mining and resources are good economic policy

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Amongst all the focus on carbon trading around the world, the power and simplicity of taxes has taken a bit of a back seat. This may be changing with new moves in China and Australia, along with renewed debate elsewhere, to use direct taxes and charges to drive social and environmental objectives.

With trading schemes struggling to get up in democracies like Australia and the US, and governments everywhere facing huge mountains of debt, taxes may start to make a comeback. China is reported to be considering a carbon tax from 2012 and is also directly targeting high-energy users like aluminium by dramatically increasing their electricity charges as reported here. In Australia, where the government has shelved plans for carbon trading until 2013 after it failed to get the legislation through the Senate and decided the issue was politically unappealing, there is now a proposal for a mining “super profits tax”. It’s basically a higher tax rate being applied to mining and resource companies when, and only when, projects are very profitable.

The government argues this is about more equitably sharing the huge profits mining giants have reaped in the resources boom as China gobbles up the Australia’s resources. The money raised will used to build infrastructure, lower the standard company tax rate and boost investment in pensions for the public as whole. There is of course a huge uproar against this, with a well-funded campaign by mining companies that have become accustomed to the boom, not to mention the resulting huge executive bonuses. They are crying lost jobs, investment driven off shore and Australia becoming uncompetitive. Some are threatening an investment strike with the shelving of planned projects.

These cries are self-serving, short term and should be ignored by intelligent policy makers. Putting aside the irony of the Australian government embracing a new resources tax as it runs full speed away comprehensive climate action, this is still good economic and environmental policy. Here’s why.

Resource extraction is very different to other economic activity. If a country misses a trend like solar power, high-speed broadband or competitive manufacturing, it’s really hard and expensive to catch up. The train of economic opportunity has often left the station. Resources are different. When a major global company threatens to take their wind turbine manufacturing offshore they can do just that and it’s gone. However when BHP goes and invests in a mine in Kazakhstan instead of Australia, the minerals stay put. Is there potential loss? Yes, clearly investment leads to jobs, taxes and other benefits so in the short term there may be but what about the economic impacts in the medium to long term?

To answer that we need to consider the other way mining resources are different. Unlike innovation, knowledge and technology, which we create, mineral resources are limited and we can’t make any more of them. We have now arrived at a point where the global economy is stretching our capacity to feed it with these natural finite resources. That’s why when we grow the global economy up against those physical limits, as we did in 2007 and 2008, the prices of things that come directly from the earth, like food and oil, rise so rapidly. I cover this in detail in my writing on The Great Disruption.

Where will this approach to growth lead us? Consider the current state of our system, which is well and truly up against its limits, as having a starting measure of 100. This measure of 100 represents our current burden on a strained system, one where we have barely adequate resources to feed our economic and social needs. Then we plan to go to around 9 billion people by 2050. That takes our system to 150. Then we plan to increase the per capita income (and consumption) in that time frame by around 2 – 3 times as well, taking our system up to 300 to 450. So if prices spike and the system shows strain at 100, guess what happens at 450? Many things, but one of them is that resources become a lot more valuable and we use them a lot more carefully.

The economic implications of this are clear for countries that have a strong natural resource base. These resources are of absolutely limited supply and their value will keep going up. And up and up. This means those countries have plenty of time to extract them and the longer they leave it the more value they will get for doing so. The finite nature of those resources also means it is good policy to invest the resulting income to build long term economic security, not to grab the quick bucks or short term jobs on offer.

More broadly, it also means we will have to accept that an economy built on “stuff” is inherently risky when the supply of the original “stuff” is limited, as argued by proponents of peak oil. So we are all going to need to use our resources much more efficiently, and the higher the prices we pay for them the more efficiently we will use them. This means we need to steadily shift our tax base away from employment, which we want more of, and towards stuff and pollution instead, which we want less of. So the logic of higher taxes at the start of the “stuff” value chain, by taxing mining companies more, and lower taxes for activities further down the chain by taxing other companies less, is good environmental as well as economic policy.

So for Australian readers in particular: as you watch the debate on this issue rage over the coming months, consider both your economy and your kids’ economy. Think about where we are all heading and what kind of economy we need to build. And when a mining CEO earning $6 million a year talks about his heartfelt concern for Australian miners’ jobs and Australia’s economy, just observe the whole process with that great quote in mind “Hell hath no fury like a vested interest disguised as a moral principle.” And realise that this is just the beginning of a long and inevitable economic transformation.

7 thoughts on “Why higher taxes on mining and resources are good economic policy

  1. Paul Fairweather

    A well grounded argument! It is very clear to me that what is in the earth belongs to us all and should be shared as such!

  2. G’day Paul,

    Your article touches on the crucial difference between “Real” and “Virtual” wealth. Real Wealth (or Natural Capital)is finite where as Virtual Wealth is but an exponentially growing set of claims on this Real Wealth. In a fractional reserve interest bearing debt economy, a gross adjustment in taxation at source is still only tweaking the system. It doesn’t address the root cause which manifests the fundamental growth based system dynamic. Our real challenge is to transform our economic system into one that is “steady state”, where the judicious management of finite natural limits is paramount. The works of ecological economists such as Herman Daly, David Korten, Gus Speth et al (and our own Richard Sanders, Steve Keen, Phil Lawn ) clearly show the illusory nature of the current global economic system…a system that by its very design can only operate on exploitation, inequity and the liquidation of natural capital. The New Economics Foundation in the UK and the Centre for the Advancement of the Steady State Economy in the US are also good sources of information re steady state concepts.

    Such a transformation strikes at the very identities and world views that we create for ourselves as part of the western success ethic. Examining the underlying assumptions and making the necessary changes requires a sort of leadership and eldership that we have not prepared the Western world for. I wonder if we can catalyse the necessary mass shift in consciousness before economic collapse, energy security crisis or runaway climatic conditions! It is good to see movements like “4 Years Go” shaping up to at least give it a good try.

    Cheers

    Wilf
    p.s Don’t forget that we still need to talk about climate, energy and resource security scenario development.

  3. Mike Greenacre

    Makes sense Paul. Governments are so into short term gain so they keep the mining GIANTS and others happy. I like the sound of your long term strategy which our economy will benefit from.

  4. Tony G

    It makes sense that if we are going to leave the next generation a massive population, a huge debt burden and a deforested landscape its only fair we leave them some minerals in the ground
    That way at least they can try to clean up the mess we left them.

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