There is nothing a politician loves more than free money. Often times they treat regular taxes as free money, but there is also a general realization among our elected officials that they cannot raise taxes infinitely – there is, in other words, a political cost associated with high taxes. The fact that taxes, especially high taxes, are costly to the economy is rarely part of their picture.
Even more interesting is how politicians respond to taxes from sources far away from the average voter’s/taxpayer’s life. Taxes on the extraction of natural resources is a good example. Everywhere a country has a wealth of resources in the ground, or under the sea, lawmakers want a share, often with the motivation that the tax does not hurt regular economic activity. In fact, here in Wyoming the argument for the so called severance tax (a tax on the act of severing natural resources from the ground) is that it allows the state to have a zero income tax. A similar argument is often made in Alaska, where oil production brought wealth to wilderness.
But taxes on natural resources are not free revenue. Mining (which by the definitions of national accounts includes oil and natural gas production) is an industry like any other. It requires labor, capital, investment, risk taking and interaction with the rest of the economy, just like any other industry. A tax on that industry is going to work just like a tax on any other industry: it is going to raise the production cost and thus drive down activity, jobs, profits and labor earnings.
This does not seem to get through to politicians. A good example of this is the minerals tax that went into effect in Australia last year, after having been announced as a political goal already in 2010. According to the BBC it was passed by the federal senate after dreamy-eyed politicians had been seduced by the usual prospect of padding government’s pockets:
The tax will raise A$10.6bn ($11.2bn, £7bn) over three years from major companies including BHP Billiton, Rio Tinto and Xtrata. Strong demand for raw materials from China and India has lead to a resource boom in Australia. The mining tax is aimed at distributing the benefits of that revenue to other segments of the economy.
This 30-percent tax, as absurd as it is, was a scaled-down version of an earlier, unsuccessful proposal for a 40-percent tax on mineral industrial activity. Equally unsuccessful was a lawsuit filed by a mining company and two states against the tax.
Aside the fact that taxes on natural resources burden the industry as such, there is always the problem with what politicians do with the tax revenue. In the case of Australia’s mining tax the original promise was to plug a hole in the federal budget, i.e., help pay for regular government spending. But minerals is a volatile industry that often goes into a recession earlier than other industries. Its swings in production are also larger, making tax revenue from minerals a great deal more volatile than taxes on other economic activities.
This is the main problem with the tax for the Australian government, though there are others. You cannot promise to pay for a steady stream of government spending with a volatile tax. As my home state Wyoming has proven, legislators will always end up demanding other revenue sources to make up for the minerals tax shortfall in bad years. Yet that seems to be what politicians always do when they find “free” money – or profitable mining companies – lying around.
I am going to elaborate on these points in a later article. Stay tuned!