This piece in The Australian today is unfortunately behind a pay wall. If you insert the title of Henry Ergas’s piece in a Google search you will get the whole article. Henry Ergas is a professional economist who has some very sensible things to say on other issues but who evidently he doesn’t understand the notion of a neutral tax – if you search through the comments thread at the base of Henry’s piece you will find that economist Judith Sloan doesn’t understand it either. That a tax on profits does not distort incentives because, for a mining project that is a reasonable goer, given tax rate t maximising gross profits PROFITS gives the same production plans as maximising net profits (1-t)PROFITS. Output-linked state royalty payments of course have strong disincentive effects and are vastly inferior. It is a proposition that has been taught to undergraduates for decades so one wonders what happened to Ergas-Sloan. The neutrality argument is the reason Nobel Laureate James Mirrlees – perhaps the world’s leading authority on tax and the co-developer of the “optimal tax” literature – supports such taxes not only on mineral resources but also fixed assets such as land. Ken Henry was exasperated by the fact that the original RSPT was modified so extensively to account for mining interest group concerns by the Gillard Government that it became a nondescript “dogs breakfast”.
Or is it just that the right of Australian politics oppose all taxes as a sign of the sinister encroachment by the “socialist state”. Even congestion taxes and other externality internalising taxes are just “taxes” because they have excessive transaction costs etc etc etc…… I have heard this recently and was astonished at how out-of-touch those advancing such views were with the highly-developed literature. But, yes, think of any tax or any tax reform and the libertarian right can manufacture a concern about it that is so overwhelming that reform makes no sense. The only desirable tax reform is one that cuts a tax because the community does not really want a public education or health system and those claiming unemployment benefits are all a bunch of dole bludgers. Perhaps I am exaggerating but the libertarian lunacy in Australia is increasingly paralleling that of the US Tea Party Republicans.
I was chatting with a liberal-lefty the other evening and bemoaning this stupidity. His response provided a basis for optimism – the lunar right wing crazies from the IPA and their fellow travellers in Australia and the Tea Party crazies in the US are progressively isolating themselves with their foolish views. As they do so a basis for thinking about serious microeconomic reform that involves replacing poor taxes with better ones should shine simply because it faces no economically literate competition. (1741)