In picking on mines Australia's luck may run out

Australia is often called “The Lucky Country”.  Blessed with abundant minerals, an agreeable climate, sensible politicians and a relatively small and highly-skilled population, they have done rather well out of the world economy.  Until now.

On Sunday, 2 May, Prime Minister Kevin Rudd announced that he would be implementing a 40 percent tax on mining company profits in order which, he claims, will raise some $11 billion in two years. 

The deficit in his state expenditure is $35 billion on the $323.6 billion that government raises every year, so this tax is quite a quick fix. Assuming that companies ignore the increase.  Which they haven’t.

When markets opened for trading share-prices plunged 3 percent, or $6.5 billion. In one day.

While mining is only about 6% of the local economy it constitutes 35% of exports.  Mining companies have said that the new tax threatens $100 billion of new investment.  BHP Billiton, the world’s largest mining company, estimates its Australian tax rate will jump to 57 percent from 43 percent.

But let’s ignore all this chaos for the moment and what a colossally bad idea it is to punish one industry for doing well.

Governments don’t reign in their spending.  If more money is available then more spending will take place.  An assumption of continued prosperity underpins increased spending.

When tax collection is balanced across an entire economy then government revenues are innately hedged against adverse events in one industry.  When tax collection becomes overly dependent on that one industry all sorts of sorry things start to happen. 

Mining is already responsible for 18% of company tax and this will rise to 21%.  A government that depends for so much extra revenue from one industry will have to give some return to them.  Say farewell to the Rudd’s obsession with a carbon tax to reduce the impact of global warming.

Worse, though, is that all industries are cyclical.  Over exposure to mining means over exposure to the price of commodities.  As it says on every investment prospectus: “shares can both rise and fall and past performance is no guarantee of future success”.

It’s not like we don’t have ample evidence of what poor tax policy can do to economies.  The credit crisis impact on government was due to over-reliance on taxes on bank profits and banker’s bonuses.  Cheaply collected taxes have resulted in Greece’s credit default.  In the US the government promoted cheap loans for first-time-buyers through state agencies like Freddie Mac.  This parastatal has just begged for an extra $10.6 billion in aid bringing their total rescue package to $61.3 billion. 

Governments have spent so much time railing against the iniquities of bankers that they have started to believe their own rhetoric.  “Clearly,” goes the reasoning, “we made the wrong bet.  Bankers are evil and unstable.  Far better to pin our hopes on miners.”

That’s the wrong lesson.  It is impossible to understate just how dangerous it is for any government to pick winners in their economy in the hopes that this one winner will support an economy.  Even if that industry doesn’t attempt to duck punitive taxes they certainly won’t manage to avoid market fluctuations in the future.

So, net result of singling out mining is that Australia drives away investment, becomes overly dependent for its tax revenue on one industry, and sets itself up for a fiscal crash in a few years when commodity prices drop in value.

If it were possible to raise a politicians’-stupidity tax the rest us would never have to pay taxes again.

The worst of all this is the dangerous precedent it sets to future innovators and entrepreneurs.  They have been warned: invest your money and make a gob-smackingly impossible loss that undermines our entire state and we’ll bail you out; but if you happen to do well, we’ll take it away from you.