Australian Mining Tax Policy to be Abolished, Pigs to Fly

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The Australian Financial Review’s front page recently featured a headline that is either delusional or pure genius. It claims that former Treasury Secretary and current government advisor Ken Henry has doubts over the monster he created:

‘Henry asks if mining tax ‘worth it”

Really? As a rule, policy makers do not question themselves.

For a moment, let’s leave aside whether politicians and their minions actually care about the effects of their policies. If government employees and politicians ever asked themselves whether their policies were ‘worth it’, they would stop coming up with new policies pretty quickly. Because their policies consistently make things worse, don’t have any effect, or are too expensive relative to the effect they create. Yet policy makers around the world are still at it. So, clearly, they don’t ask themselves whether their policies were ‘worth it’.

Now headlines can often be misleading, as this Daily Reckoning’s headline proves. So let’s take a look at what overlord Henry actually said:

‘The obvious question I dare not ask is whether it was worth it … I dare not even think about the question.’

See, told you so. No government meddler ever dares ask what happens as a result of their policies. The last Australian policy maker who did have the balls to ask themselves that question was fictional. ‘Alison’ is featured in the book Trust Your Enemies, written by our friend Mark Tier. She worked in the plushest halls of Canberra and was passionate about teaching people self defence. Unfortunately, the wrong kind of people turned up to the free self defence classes she organised. The end result was that government financed more effective street violence against those it sought to protect.

Greg Canavan reckons the Australian Financial Review headline was a case of wishful thinking, not an error. Perhaps the paper is telling Ken Henry what he should be thinking, even if he isn’t. Perhaps Henry will take the hint and rid us of the mining tax. That would make the headline brilliant. Why not cut the carbon tax too, while he’s at it?

What Will the Mining Tax Really Achieve?

What has us confused about all these taxes is the assumptions behind them. For example, if there is a mining tax, will there be as much mining? Why not send your capital to less taxed parts of the economy? Or less taxed parts of the world? Sure enough, Deloitte Access Economics’ new report points out that new mining projects and investments are looking a lot less likely these days. We’ve got a pipeline of two years and then things are looking dire after that. The team at Deloitte are one step ahead of the politicians when it comes to unintended consequences. Not an awesome achievement.

Of course, it’s not just the mining tax that’s at play here. More on that this afternoon from Greg Canavan.

Why the Mining Tax Won’t Necessarily Increase Tax Revenue

If you want to see what effects the mining tax might have on tax revenue in Australia, take a look at this: In the 1980s, the US created an oil ‘Windfall Profits Tax’. Sounds like a ‘Super Profits Tax’, right? How did it go? Miserably:

Projected vs Actual Revenue
Source: Taxfoundation.org

The tax’s revenue was a joke compared to its projections. But that’s not the end of it. In fact, the tax’s effect on oil production was so bad that it plays a part in the story of America’s energy dependence problems:

‘… according to the Congressional Research Service (CRS), is that the 1980s windfall profits tax depressed the domestic production and extraction industry and furthered our dependence on foreign sources of oil.’

Hopefully Australia won’t experience a shortage of iron and copper in coming years…

Keep Your Eye on Commodities Exempt From the Mining Tax

There is one interesting commodity exempt from the mining tax though. It created quite a controversy at the time the exemption was announced. Dr Alex Cowie has put together a report on four companies that happen to mine or look for the stuff. Plus another company that mines its closest relative, which is also exempt from the tax as far as we know. He doesn’t mention the exemption from the mining tax as a reason for buying these stocks though. To be honest, he has a much better reason. You can find out what the bi-millennial ‘Dutch Anomaly’ is here.

And if you’re not convinced by Alex’s argument, here’s another one from our friends at the 5 Minute Forecast in the US:

Destined to Grow

For gold to return to its rightful place in our economy, one of two things will have to happen. Alchemists will have to begin mass production, or the gold price will have to rise in value dramatically. Discarding, for the sake of argument, the first option, consider what a rocketing gold price would do to gold stocks.

Alex has considered just that, and come up with some valuations of his five companies. The gains are rather juicy, if he’s proven right.

Back to taxes and policies.

Will The Carbon Tax “Be All That”?

The same arguments against the doomed mining tax apply to the carbon tax too. Either carbon pollution is reduced and the government doesn’t collect much tax revenue, or pollution continues and they do collect the revenue they expect. They can’t have both the revenue and the reduced pollution.

That’s what the Europeans have figured out with their carbon exchange. The price of a permit to pollute has fallen so much due to the recession that it has encouraged dirtier power. The solar and wind industry is suffering as a result. But do the politicians get rid of the failed policy? Nope.

The Over-looked Consequences of Government Policies

Some effects of government policies are quite predictable. Like the fact that the pokies and Woolworths pocketed a nice portion of the government’s recent and upcoming handouts. And the vast cost of complying with regulations is quite predictable too. Or is it? Zerohedge points to a think tank which crunched the numbers:

‘In their Ten Thousand Commandments 2012 report which was released in June, the CEI estimates the cost of US government regulation at $US 1.75 TRILLION. That is just under half (48 percent) of the budget of the federal government. It is almost ten times the total of all corporate taxes collected and almost double the total collected from individual income taxes. It is also one-third higher than the total of all pre-tax corporate profits.’

For another classic example of policy blunders, there’s this from one of our favourite economists, Thomas Sowell:

‘Back during the 1980s, when there were huge losses of jobs in the steel industry, the government restricted the importation of foreign steel. It has been estimated that this saved 5,000 jobs in the American steel industry.

‘But of course restriction of competition from lower-priced imported steel made steel more expensive to American producers of products containing steel. Therefore the price of these products rose, making them less in demand at these higher prices, causing losses of sales at home and in the world market.

‘The bottom line is that, while 5,000 jobs were saved in the American steel industry, 26,000 jobs were lost in American industries that produced products made of steel. On net balance, the country lost jobs by restricting the importation of steel.’

Some policy costs and unintended consequences are easy to point out. But economics is about the unintuitive as much as the intuitive. Take for example the idea that energy efficiency is a great way to reduce pollution. If we can make our cars, trains and planes more fuel efficient, we will reduce our emissions by X. But what if people just travel more when their cars are more fuel efficient? What if more people take to the sky when fuel costs fall because of better aerodynamics?

Both of these things happen, and yet fuel efficiency is put forward as a pollution reduction cause. Miles per gallon regulations and the like are created by governments around the world. It’s another case of policy makers not taking a look at the effects of their policies.

So what is so inherently wrong with the idea of changing something by making a law about it? Well, policies rely on constants. To justify a policy, it must have a predictable outcome. But there are no constants in life. Too much changes and things are too interrelated for any government policy to anticipate and adapt to. It’s like the old butterfly story. When a butterfly flaps its wings on the other side of the world, it causes a catastrophic storm here. (In the case of New Orleans and hurricane Katrina, this metaphor may ring a little bit too true. Government engineers catastrophically rearranged levies years before the storm hit, proving their inability to predict the effects of a hurricane.)

It’s time to acknowledge that government policies don’t work. That they backfire. Why is it time for you to realise that? Because you can make and save money from it, by investing in companies that mine resources not subject to the new mining tax, for example.

But the biggest benefit to acknowledging that government policies don’t work comes from realising that you need to protect yourself from their failure. Right now an entire economy is being run by government policy. And it’s set to fail. Which is set to be disastrous for Australian investors.

Greg Canavan has been working on just what to do about Australia’s most pressing crisis. This afternoon, he’s set to share his thoughts with Daily Reckoning subscribers.

Nick Hubble
for The Daily Reckoning Australia

From the Archives…

Customs, Capital Controls and Airway Robbery
21-07-2012 – Nick Hubble

China’s Coming Assault on the Western Financial System
20-07-2012 – Greg Canavan

Has Bernanke and the Fed Discovered a New Invention in Wealth Creation?
19-07-2012 – Greg Canavan

Why You Should Watch Your Blind Spot For An Oil War
18-07-2012 – Dan Denning

Flexible Investing to Become a Relaxed Investor
17-07-2012 – Murray Dawes

Nick Hubble
Nick Hubble is a feature editor of The Daily Reckoning and editor of The Money for Life Letter. Having gained degrees in Finance, Economics and Law from the prestigious Bond University, Nick completed an internship at probably the most famous investment bank in the world, where he discovered what the financial world was really like. He then brought his youthful enthusiasm and energy to Port Phillip Publishing, where, instead of telling everyone about The Daily Reckoning, he started writing for it. To follow Nick's financial world view more closely you can you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails.
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2 Comments on "Australian Mining Tax Policy to be Abolished, Pigs to Fly"

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Nathan Chattaway
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Hi Nick, You said: “The tax’s revenue was a joke compared to its projections. But that’s not the end of it. In fact, the tax’s effect on oil production was so bad that it plays a part in the story of America’s energy dependence problems: ‘… according to the Congressional Research Service (CRS), is that the 1980s windfall profits tax depressed the domestic production and extraction industry and furthered our dependence on foreign sources of oil.’ ” Come on. US domestic oil production peaked in 1971 as predicted by Hubbert. It would suit peak oil deniers to claim that a… Read more »
Nathan Chattaway
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Sorry, lost the link. Check this out:

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