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Wayne Swan versus the mining magnates

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12 March 2012

Professor Yew-Kwang Ng
Professor Yew-Kwang Ng

By Professor Yew-Kwang Ng

Last week Wayne Swan suggested that mining magnates have overstepped the mark in their attempt to influence policy. Was he right?

Both sides of the debate have made exaggerated claims.

It is obvious that there are few, if any, people in Australia who want a class war or the overthrow of a free-enterprise market system which has delivered political freedom and economic prosperity.

No one wants to deny the freedom of speech, even to mining magnates when they are trying to influence public policy against the national interest. In particular, Wayne Swan does not want to go that far. So what really are the main issues?

One of the most important is whether the minerals resource rent tax and the carbon tax – which some mining companies or their owners have criticised heavily - are in the national interest. The precise ways and the processes through which these taxes were introduced may have been imperfect, however these taxes are clearly both in the national interest and consistent with economic efficiency.

The extraction of minerals for production or for export involves high costs associated with exploration, mining, transportation, etc. However, even before the minerals are identified – when they are just lying in the ground – they already have scarcity values.

Both ethically and legally, they should be owned by all Australians. The mining of these resources reduces their availability for the future, thus a resource rent tax makes economic sense. Not only will it allow most Australians to share more fairly in the mining boom, it would also improve efficiency by discouraging excessive mining.

In short, the scarcity values of minerals underground should be priced.

Another important issue is the question of whether the mining tax should be in accordance with the amounts or values of the minerals mined, rather than in accordance with the profits made from their sale. Taxing profits partly taxes luck, which may be desirable, but it also partly taxes efficiency. This is so since high profits need not only be due to the luck of striking gold but may also be due to superior management, foresight, and enterprise. Moreover, taxing profits may encourage miners to hide profits by inefficient measures.

The argument for taxing carbon and other forms of environmental disruption is even more compelling. The Royal Society in the UK has announced that man-made global warming is as certain as evolution and gravity. We must thus do something to mitigate its effects. Opposition leader, Tony Abbott is against taxing carbon; he favours direct action instead. Good economics shows that direct action alone will be more costly, as Ross Garnaut and the Australian Productivity Commission have already shown. With taxes on carbon, people will be motivated to use less disruptive means of production and consumption.

To put it more simply, suppose some children are making the house dirty. Tony Abbott’s argument says that we should only clean up their mess; no effort should be made to discourage the children from making more mess.

Both the carbon and mining taxes are in the national interest. Though everyone should have the freedom to voice their opinion, great efforts to shift public policy against the national interest should at least be criticised.

Professor Yew-Kwang Ng works in the Department of Economics at Monash University.