Graph from ABARE
Tim Dunlop notes that the commodities boom is far from over, and in fact that its pace is set to pick up next financial year.
One of the first actions taken by the Blair Labour government in the UK (back in the days when Gordon Brown had a bit of a clue) was to impose a windfall profits tax on privatised utilities to fund social infrastructure. Writing in the Fin Review today, Andrew Leigh thinks we might well consider something similar to cushion ourselves against the possibility of a future recession:
Few issues require such careful political management as a windfall tax. But implemented properly, it is possible to imagine that such a tax could be both economically responsible and in line with fundamental Australian values. Why not raise a little more from our lottery-winning miners today, and squirrel it away for the next recession?
I think that’s an excellent idea, and Leigh makes a good case for it. It would also incidentally be a response to those in the media who keep bemoaning the lack of “big decisions” from the Rudd government. Though I’m not sure it’s a response that would be welcomed with joy by the capitalist media.
Great idea. Trouble is, the screaming and whining from the likes of BHP will drown any rational argument. And when it comes down to it, BHP and their ilk will get their way.
Hmmm. We’re already getting “windfall taxes” from our mining companies; as their profits go up, they’re paying more corporate tax.
And the other thing to keep in mind is that most of their profits end up in people’s super funds, so any windfall tax seems to me to be transferring money from people’s super funds to government coffers.
I think its pretty common these days for resource rich countries to carefully plan how these windfall profits will be saved for future use. Even without extra taxes (which I think are probably not a bad idea) the governments have been getting windfall gains themselves. However its really important that a significant portion of the money is careful preserved and protected from being used by governments for re-election. We need infrastructure development now, but we’ll also need it in the future.
Slightly off-topic – but why aren’t winnings from lotteries and gambling generally treated as taxable income? If someone wins a couple of million dollars why shouldn’t they pay about half of that to the government in tax? Buying a lottery ticket or betting on red at the roulette table is not that much different from buying a random stock on the ASX.
The point of a windfall tax, Rob, is to use the raised revenue for a specific purpose, not just as a contribution to general revenue as company tax does.
How so? Through share price increases or distribution of dividends? And won’t people’s super be screwed if we end up in recession? Note that that’s the specific purpose Leigh is arguing for – to take out insurance, if you like, against a downturn.
The Intellectual Bogan
“Great idea. Trouble is, the screaming and whining from the likes of BHP will drown any rational argument. And when it comes down to it, BHP and their ilk will get their way.”
Tsk, tsk, oh dear, such cynicism.
Surely misplaced.
After all, if our democratically elected voice of the people, aka the government of Australia, were to decide that such a tax should be placed on BHP and ilk, after considerable thought and due process, I am confident, nay absolutely confident, that BHP and mates would graciously accept such and comply without attempting to deny the validity of the will of the people in any way whatsoever.
Obviously.
Both. How do you think the performance of superannuation funds over the last five years happened?
If I’m understanding him correctly, he’s agitating for socking more money away now, for spending in the next recession. But the government can probably do that anyway; the federal government’s not going to have any net debt.
Essentially, the question is whether money ends up in the government’s coffers, to invest in global equity markets, to generate the cash to do that, or whether it sits in super funds, invested in global equity markets, and the government borrows some money to do so.
It doesn’t strike me as that big a difference, though maybe I’m missing something.
Mind you, I think I recall some economists arguing that the Reserve Bank be able to modify tax rates within a certain range, to systematize the ability to do something similar to this (on the basis that governments couldn’t raise taxes for the same reason they can’t raise rates).
Government spending during a recession is supposed to be stimulatory, but borrowing restricts the capacity of fiscal policy to adjust quickly if the economy subsequently overheats, because taxes have to be higher than they otherwise would be in order to service the debt – the cost of borrowing could also be expected to go up, even for government.
If a government wishes to take a bigger bite of GDP, let it do so in the honest way by taxing activity and turnover honestly and without fear or favour. Or better still, let royalties payments be negotiated on some pre-arranged sliding scale agreeable in advance to all parties. Don’t change the rules in the middle of the game.
What is a “windfall”? How does a “windfall” differ in nature from any other result of astute investment, intellectual coup, or ordinary good luck?
“Windfall” taxes are arbitrary and uncomfortably close to envy.
I’d like to make one point – about fairness. Rob, it’s interesting to see arguments about distribution effectively couched in terms of super fund ownership of equity. You don’t seem to cavil with Andrew’s basic argument that what are effectively unearned windfalls (because they’re the result of external factors rather than any particular business practices or productivity improvements) ought to pay some sort of social dividend, if I’m reading you correctly. That’s a core aspect of his argument, it seems to me. However, access to wealth from super is very unevenly distributed, particularly for older women and those who have never entered the full time labour market on a continuing basis, but more generally for a lot of people whose working lives began before compulsory super was introduced, which includes a lot of people my age who entered the workforce in the mid 80s. It’s precisely these sorts of people who are most at risk in a recession.
I should also note that I’ll have to bow out of this interesting discussion, as a deadline for marking essays looms this afternoon.
Except this is all based on data from ABARE, who we’ve known have had serious issues around their predictions for years.
Of course. Making a few people very rich is the price we pay for improving the living standards of everyone, not a particularly desirable end in itself. So, yes, in principle, I reckon that windfall gains should be shared around.
In practice, aside from the super issues, Katz raises a good point. Where do you draw the line? What about all the small contractors? What about the mine employees? Do we impose an extra tax on alcopops served in WA because teenagers have extra money there?
“Slightly off-topic – but why aren’t winnings from lotteries and gambling generally treated as taxable income? If someone wins a couple of million dollars why shouldn’t they pay about half of that to the government in tax? Buying a lottery ticket or betting on red at the roulette table is not that much different from buying a random stock on the ASX.”
They aren’t taxed because if the ATO started to do so then all punters would be able to claim all bets as tax deductibles. As you say – just like you can do with stock market investments.
It is a curious point as most gamblers lose in the long term so the loss to the ATO would be considerable if all our bets became deductions.
Tim, ABARE’s predictions might be out, but does anyone really believe that the commodity boom isn’t going to continue through next year? With coal, for instance, most of it is traded on the basis of contracts rather than sold on a market as such, and prices are reasonably predictable – and with regard to other commodities, while futures markets and volume and price predictions may have elements of guesswork about them, surely the trend is evident?
That’s a very unconvincing reductio ad absurdum, Rob. The basis of Andrew’s argument is corporate profits, not contractors’ incomes. And the alcopops point is not to the point.
Yes, but which corporations, Mark?
My point, made slightly facetiously, is that mining companies aren’t the only ones that have gained windfall profits from the mining boom.
Yes, taxes should be applied equitably: but we may quibble over what constitutes ‘equitable’. It was generally reported after the 1970’s oil shocks, that some Gulf states were carefully building up infrastructure “against the rainy day” (or in the Gulf, the hazy day of oil burning)… does anyone know of a reliable report that analyses how well (or poorly) thast strategy has worked out for the average Ali in such a nation? In actuallyy observed practice (not just in theory).
Or was the extra oil revenue mainly invested in European and US companies? Or was it used to buy up real estate elsewhere?
How would an Australian Govt steer extra revenues into infrastructure with the best possible future prospects of assisting the average Dianne? Should it?
Rob, it seems to me that your answer is in Andrew’s article.
That’s not the argument being made, Ambigulous. During a recession, claims on government spending rise because economic activity diminishes and thus welfare spending increases. Tax revenue also falls. What’s being discussed, as I read the article, is a way in which these claims can be met in a fashion which stimulates economic activity. Raising taxes to fund spending in a recession and borrowing are problematic, for the reasons already given.
One of the fundamentals of fiscal policy is maintaining a surplus during periods of economic growth in order to avoid this. But the surplus we currently have is not being maintained for this purpose, but allocated in the future to infrastructure spending. That may have stimulatory effects during a downturn, but it also may not be sufficient to do what government has to do during a recession.
Does this work the other way – if our exchange rate takes a dive, and international demand dries up, those most affected should be compensated from consolidated revenue? I don’t think so.
I think windfall taxes are capricious, unfairly targeting one sector that is doing well at the moment.
But I think royalties could be a good way to go about it morally – this is stuff that is part of Australia that is being dug up and shipped offshore for private profit. Since we all have an interest in keeping Australia physically here for the future, paying handsomely for the privilege of removing bits of it should be seen as fair.
A few reasons:
a) because then logically lottery ticket purchases would be an expense incurred while earning income and would then be tax-deductible.
b) The government already takes a cut of the winnings at each ticket sale.
c) If the government took half the winnings, they’d have to double the winnings to maintain sales. That’s not feasible.
See goose, golden egg, etc..
A few other points:
Few people buy stock at random.
It is a great ( and damaging ) myth that betting on the stock market is the same as gambling. The results from the roulette wheel (or poker machine) are entirely random and over time a gambler will lose roughly 1/36 of their money whereas betting on the stock market is more accurately called speculation and someone who knows what they are doing will make money. Speculation on the stock market is also a socially useful thing (providing capital by those willing to take a risk) whereas I’m not sure gambling has much social value at all.
Just quietly, over time a pokie player will lose all of his or her money, not some.
Its not actually required though is it? AFAIK lottery gains in the US are considered to be income, but you can’t deduct gambling losses from your income.
You could for example quarantine gambling losses and winnings so winnings through gambling can only be offset against losses from gambling (much like some want to do to rental properties).
I don’t agree here – people aren’t going to stop buying lottery tickets because they might have to pay tax on the winnings. Most people don’t think they’re actually going to win 20 million dollars on saturday night, and really aren’t going to complain that much if they had to pay tax on it and only end up with 10 million dollars. How much is the tax free status of gambling costing the government?
If you only taxed windfall winnings of say more than $1000 you wouldn’t burden organisations running raffles etc but still pick up a substantial amount of revenue.
Well on that basis you’d make speculation on the stock market tax-free and tax gambling winnings.
Thanks Mark
I would. But then I wouldn’t buy one if that was the case, and I expect most wouldn’t either. I’d confidently extrapolate that to an overnight $100k Saturday night prize, and the government getting only $50k. i.e. no gambling industry whatsoever, and subsequently no government revenue from it. It’s better to have 10% of a huge pie than 50% of a tiny pie.
It’s no tragedy. People gamble with after-tax money, and they give the government a substantial cut when they buy a ticket. Governments get more than their share.
Anyway we’re a long way from talk about windfall profits tax. It’s not often I agree with Katz, but in this case I do 100%.
The WA state government is swimming in cash due to mining royalties. I think whats being asked for is a bite at this paticular cherry by the federal government as well.
Id strongly disagree on a “windfall tax” as a just or fair system given the significant costs of a (at the time) fairly basic error by companies.
Im currently at a mine with an interesting little boom,bust,boom history so i hope you dont mind a bit of an inside view.
The mine im working at was owned by western Mining, at one time one of Australia’s mining powerhouses. However they made 2 stuffups which pretty well saw them bankrupted in a year. (there is a shadow company of what it was still going).
They first solf forward (hedged) a substantial amount of their projected gold sales for a year ahead. Then the price of gold crept up above what they had hedged at, AND the mine they had pinned the sales on was found to not contain anywhere near the bullion it was supposed to.
They were forced to meet the hedged gold by buying it at market cost and selling it at a loss to meet the contracts. They began to close down/mothball marginal operations first then eventually their “crown jewels”. By the time the hedging sales were done they were finished as a company
Then came my bosses, one a small mining company doing mostly nickel, and 2 brothers who were geologists. They brought the mine Im on for (it turns out) a steal, not based on what was thought to be left, but based on their knowledge of the ground.
They then spent about 1 year getting the mine back into running condition (it had been shut for about 10 years) and began mining the existing orebodies. They also started an aggressive exploration program which last year found ore reserves well over what has been pulled out of this hole in the previous 25 years it had been running.
WMCs’ drilling and exploration program missed this ore body by 10 meters…
The company also caught the huge boom in nickel prices last year, at one stage $50,000 a tone for the stuff (now back around 20). This money has been used to acquire more ground for mining as well as fast track development which was otherwise scheduled to happen over a couple more years.
The 2 brothers had their share of the company brought out by an overseas mining group and have joined the board as members.
Thats what can happen both upside and downside in the mining game. To treat increased profitability as a cash cow would be quite short sighted. However putting the onus for road/rail/infrastructure etc costs back onto existing mining giants is a more efficient way of “gaining” money in my opinion.
Mark – one thing they mentioned on the ABC news tonight was that the royalties that the WA government get also increase when the mining companies get better prices. So it does sound like they end up with windfall profits as well beyond what they get in extra company tax, GST from spending etc.
A modest windfall tax sounds like a sensible idea to me provided the proceeds are spent sensibly, for example, on important infrastructure projects, rather than pissed up against a wall in a harebrained soft-left spendathon.
Actually, the Queensland Government just introduced a two tier system of coal royalties in its recent budget – 7 per cent up to $100 per ton and then 10 per cent if the price goes above $100 per ton.
Oh, you mean apart from the billions of dollars the companies spent on exploration, establishment and infrastructure? Over and above the billions of dollars in royalties and taxes? And the fact that over the long term mining is a risky business with shitty returns? Yeah. Those thieving bastards.
I’ve been to the Pilbarra where BHP and Rio Tinto are digging up mountains and sending them to Japan and China. And I can tell you that they build more and better infrastructure than the WA Government has. Between them those two operate the largest private rail network in the world, run the longest trains with heaviest loads, have efficient private ports built with their own funds and so on and so forth.
Given a choice between letting the mining companies build their own infrastructure or letting Canberra airily promise that they’ll do it, I know how I’d prefer it go.
I should put my terms better – by privately operated I mean that their networks are integrated. They built and run the rails for their own use, rather than relying on someone else to do so. Why? Because it’s more cost effective than the alternative. Between the two big miners there’s something like two or three thousand kilometres of rail.
this is like heads we win, tails you lose. not a good policy.
Jacques – the problem you’re coming up against is that the application of capital means nothing to these people. Saving is not a virtue here. Rather, it amounts to nothing more than the exploitation of labour. Hence absurd phrases like ‘unearned windfalls’ to describe profit which follows investment. Investment which, necessarily carries risks and rewards. Mark wants a ceiling on the reward. Talk about economic vandalism.
BBB
Tradies in WA are not getting exploited, lemme tell you. It’s practically raining cash out here. If you can breathe without mechanical assistance somebody will hire you.
Jacques, comment about surplus value in 5, 4, 3…
BBB