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Rudd's disastrous resource rent tax: how the right let the country down again
Gerard Jackson
A short time ago Gina Rinehart — Australia's richest woman — helped lead a protest in Perth against Prime Minister Rudd's destructive resource rent tax. The striking thing about this event is that no one who addressed the crowd, including Rinehart, indicated even a passing acquaintance with the true nature of the tax. If they had done so perhaps they would have realised that the reasoning upon which the tax is based is totally fallacious.
I suspect that like the rest of the mining industry's leaders Gina Rinehart has something of a rolodex mentality, meaning that when faced with an economic problem her solution is to always ring "the usual suspects". One should not, I suppose, be too hard on these people. After all, economics is a difficult subject, and they have come to believe that when conventional opinion has coalesced with respect to a theory it must be because the theory has been proven correct. And so it is with doctrine of economic rent that Kevin Rudd and Ken Henry (or should I say Kev and Ken?) are striving to impose on the country.
This is where our rightwing (the self-appointed defenders of the free market) have once again let the country badly down. As they nobly took it upon themselves to defend the market against predatory politicians and the threat that economic illiteracy constantly poses to the nation's welfare, it was incumbent upon them to discredit Rudd's resource rent tax by publicly refuting the theory upon which it is based. Instead, they responded to the proposal with sneers and statements — albeit correct — about the damaging consequences of the tax.
What they did not do is actually challenge the concept. It seems to have completely eluded them that if a resource rent tax is economically harmful then the theory itself must be false. This is because the theory concludes that economic rent (a surplus created by a differential) can be completely taxed away without harming investment and output. (This theory reminds me of George Well's observation that some things are so stupid only an intellectual could believe them because "no ordinary man could be such a fool".)
To its detriment the mining industry has yet to realise that our rightwing has put itself in the peculiar position of damning Rudd's tax while simultaneously supporting the theory on which it is based: for proof one need look no further than the Institute of Public of Public Affairs. Now the IPA publicly condemns the tax. However, Alan Moran, clearly supports the doctrine, a fact that he made clear in Land Regulations, Housing Prices and Productivity and
Marginal Costs and Prices in the Electricity Industry. No wonder the IPA has failed to provide anything approaching an adequate critique of Rudd's tax. Even worse, Moran seems to have a very sketchy notion of what quasi-rents really are. He stated that
Australia's proposed taxation arrangements confuse super profits with high profits based on normal business activities. Some mining businesses do earn high profits as a result of two factors. The first is termed quasi-rents. These differ from economic rent in that the high profits for successful firms are matched by losses for the unsuccessful.
First and foremost, all profits are abnormal. Only someone under the influence of the fallacious pure competition model could claim that there is a fundamental difference between "super profits" and "high profits". Moreover, to argue that so-called "super profits" are the result of quasi-rents (another fallacy) is grossly misleading. A company can earn quasi-rents while still making a loss. This is said to occur when the net returns to man-made factors exceed prime costs while still falling behind average costs.
It is essential to grasp at this stage that Alfred Marshall made it clear — as did Ricardo — that economic rent (pure rent as it is sometimes called) applied only to land, including land that is being mined. This is why in his Principles of Political Economy and Taxation Ricardo did not have a chaptes on rent and manufacturing but he did have one called On the Rent of Mines. To top it off, Professor Sinclair Davidson, an IPA fellow, erroneously stated:
Economic rent has its origin in the labour theory of value. Classical economists couldn't understand why natural resources had value when human labour hadn't yet added value.
This is a truly unforgivable error for any economist to make. Economic rent is a surplus, a differential created by the emergence of marginal land. It has absolutely nothing whatsoever to do with the labour theory of value. (See chapters II and III of Principles of Political Economy and Taxation.) If this error had quickly disappeared it probably would not have mattered that much. However, one of my readers, someone heavily involved in mining, told me that an industry executive had used Davidson's article to attack the resource rent tax and that others had done the same.
Yet the IPA still insists on standing behind Davidson's article, adamantly refusing to make the necessary correction. This is the same outfit that is crowing about having exposed the Treasury's dodgy figures on government spending and GDP, successfully demanding that it publicly admit its error. We now find that the IPA refuses to hold itself to the same lofty standard that it rightly applies to the Australian Treasury. Don't hold your breath waiting for this lot to explain their double-standards. They never did so in the past and they are not about to start now. And this is why they will never publish an article challenging the economic rent doctrine.
The IPA is not the only guilty party. Peter Smith launched what can only be described as a sneering, insulting and very aggressive attack on 20 leftist economists who came out in public to support the resource rent tax. (Quadrant, Peter Smith, The "dumb" twenty, 27 May 2010.) Although I share his opinion of those who admit to being leftists while calling themselves economists, the fact remains that his article was vacuous. These economists are simply applying the theory of economic rent as laid out in every standard textbook. If they are wrong, so are the textbooks.
Professor John Fairbairn, who holds the Ritchie chair in economics at the University of Melbourne, is one of those dummies. According to a recent report Fairbairn argued that taxing away nearly all of the mining industry's so-called rent would have no adverse concequences. If he actually said this then he is being absolutely true to the theory as it is taught today. Therefore, what Smith and the rest of the rightwing crowd won't admit — or haven't grasped — is that according to the current interpretation of the economic rent doctrine a 100 per cent tax on rent is both feasible and desirable. James Stuart Mill certainly thought so*.
Unless Peter Smith is prepared to come out and publicly attack the concept of economic rent he really has no business calling those who support a tax based on this theory as a bunch of dummies.
This leaves the Centre for Independent Studies whose recent paper in support of a carbon tax was an absolute disgrace. Having accepted a donation to produce a sleazy rationale for a carbon tax that would have devastated the economy Greg Lindsay is now whining about the damaging effects of a resource rent tax. When it comes to double-standards the CIS is even worse than the IPA.
What is truly bizarre about the present situation is not a single member of our rightwing has come out against the theoretical basis of Rudd's tax. Not bloody one. Equally bizarre is their refusal to acknowledge that the theory of economic rent has been effectively debunked, even though they are stridently attacking the tax.
*However, Mill was specifically referring to agricultural land, as was Ricardo.
Kevin Rudd and the mining industry's super profits myth
Ken Henry's fallacious resource rent tax and the mining industry's failed response
The Treasury wants to impose the fallacious rental resource tax on mining companies
Ken Henry's dangerous fallacy of taxing "imputed rent"
Gerard Jackson is Brookesnews' economics editor
BrookesNews.Com
Monday 14 June 2010