Post-mortem on the RSPT II: observations and lessons

In May of this year, the Australian government announced a tax increase on the mining company whereby all profits over the long-run bond rate would be taxed at 40%, with off-sets for losses. This tax on the rent created by the boom in mineral prices was spent on reductions in the company tax rate and on various overall subsidies. Following a fairly extensive campaign by the big mining companies and their representatives such as the Minerals Council Australia, the government in July negotiated directly with the three major mining companies and reduced the planned tax increases in return for the explicit promise to stop campaigning. If we compare the revenues the tax would have gotten (under the revised price estimates) with the current expected revenue, it seems radio silence has come at a cost close to 5 billion dollars per year. In terms of discounted values, every dollar spent on campaigning by the mining industry seems to have paid off (ball park figure) something like a thousand dollars in less tax.
Elsewhere, I have talked about how the media campaign was made up of false arguments and wild exaggerations. Essentially, jobs and investments in mining were never truly at stake and it was a straightforward fight over money with on the one hand a few dozen billionaires who stood to lose and on the other hand millions of small businesses and consumers who stood to gain but of whom a fairly large slice was scared into thinking they were going to lose.
Observations:
1. One lesson from this saga is that negative campaigning works, particularly in an election year. The basic recipe for protecting privilege has been applied here: muddle the argument; roll out experts with minor doubts and represent those doubts as sincere opposition; get the masses to believe something unfair is happening and they have something to lose; and never once talk about money. Not once did the media blitz even try to run the argument that it is fair for billionaires to make more money out of Australia’s mineral resources. The eventual outcome, 5 billion dollar less taxes for the mining industry per year, was never put forward as the goal of the campaign. Will the mining companies give this bonanza to charity? Don’t count on it.

2. The super-wealthy stood fairly united. As I remarked in an earlier blog, other wealthy organisations who make their money from rents, like property developers, banks, and most financial institutions, could have expected to be the next in line for tax increases. This is clearly the whole idea of the Henry Tax review. Probably as a result of this, Business Councils did not line up behind the tax even though all non-mining businesses clearly won out because of the reduced company tax rates.

3. Nothing is secret when this amount of money is involved. The mining industry had clearly prepared for this campaign long in advance, even though the Treasury tried to keep the exact plans secret.

4. The dip in Rudd’s popularity was used to settle old scores within his party and his administration. They must have really hated his guts.

5. The media seems to have been a victim in all this, being fed stories about Rudd from within his own circles, being fed all kinds of storylines by the mining interests, and being bombarded with opinions from all and sundry. No wonder the mainstream media had no idea what to believe.

Lessons:


How will this affect the behaviour of politicians in the future? One clear lesson for them is only push through controversial policy changes at the start of an administration, not later on. This has been an old political adage that was violated in this case, perchance because of the personality of Rudd, perchance because of the public failure of the ETS policy, or perchance because of the timing of the tax review. Whatever the case may be, I expect both Labour and the Liberals to refrain from doing anything interesting later on in their administrations and pack all the reforms early on in the electoral cycle. By the same token, we should expect senior civil servants to now only put out the results of major reviews at the start of the electoral cycle.
How can we avoid seeing this kind of debate dominated by private consultancy reports? Using private consultancies has been a failure, with such consultancies then double-dipping in terms of also working for the other side. To prevent this in the future, Australia needs an independent public modeling capability to calculate the effects of budgetary changes. An independent modeling capability could either be housed within existing institutions, like the Reserve Bank (which has plenty of economists and not much more to do than say ‘up’, ‘down’, or ‘steady’ once a month), or in a new institution.
As to Rudd’s demise, one lesson to be taken from that is that the leadership cult that is quite normal in Queensland is incompatible with the political culture in NSW, Victoria, and Canberra: the command-and-control mentality Rudd brought from Queensland to Canberra is simply not tolerated in the more cooperative culture of the South East.

A big unknown is whether this is the end of the main idea of the Tax Review, which was to tax the sources of wealth in this country that are not based on ability or hard work, but that derive from existing privilege and political protection, such as mining rights. Fighting privilege inevitably meant a political fight.

Nicholas Gruen indicated he thinks it is now curtains for any policy that tackles privilege. If true, it means the Henry review is dead and that we are hence back to taxing the middle classes on the basis of their talents and efforts. I still hope he is wrong and that instead this episode has alerted those who care about the longer-term well-being of Australia to the fact that a privileged few are arrayed against them and will use any means of disinformation to protect the sources of their wealth. I hence hope this is the start of the long road to implement the Tax Review, not its Swan-song.

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Francis
11 years ago

Do you think they had any idea of the sh**storm that was coming? In hindsight it seems like this was a bad policy to introduce at the end of the term. But my impression was that they flicked through the Henry review, and thought, crikey, we can’t upend income tax or introduce congestion pricing going into an election… ahhh here we are, have a look at Recommendation 45 wayne, we’ll just do the ‘tax the miners’ proposal, surely everyone can get behind taxing miners and cutting company tax? Right?

At least that was how I thought about it when they first announced it. It surprised me that it became controversial.

The only lesson I can see is: try and make sure you don’t end up negotiating with the Coalition (who watch too much Fox News and take too many cues from Republicans these days) or Steve Fielding (just uughhh) in the Senate. The Greens with the balance of power is a much brighter prospect for some rational evidence-based reforms from July 2011 onwards.

Mobius Ecko
Mobius Ecko
11 years ago

The media seems to have been a victim in all this…

You have to be friggin’ kidding me.

Paul Frijters
Paul Frijters
11 years ago

Francis,

Treasury had commissioned a report by KPMG who then turned around and also wrote a report for the Australian Miners Council (on which I have written in an earlier troppo post) 9 months before the budget. Whilst I think you are right in that they didnt see the storm coming, both sides knew the tax was going to be there well before the budget.

Mobius,

I am not friggin kidding you. How were they to work out whether it was a good or bad tax? The consultancy reports with bad arguments that looked persuasive to the uninitiated were coming fast and thick. Learned people on the payrolls, billionares, and company leaders were arguing on every outlet that needed someone to fill the time how bad the tax was. On top of that, the air
ways and papers were full of attack adds. You would have needed to be a damned smart journalist, ready to defy your editor and the money stream in adds, to figure ouyt what was going on and report truthfully on it.
What is your take on it?

Nicholas Gruen
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Nicholas Gruen(@nicholas-gruen)
11 years ago

Thx for the post Paul,

I didn’t say further progress is impossible, only that it’s difficult.

And yes, doing things early makes a lot more sense. Will the Greens be able to compromise and generate good returns for Oz in the Senate? We’ll see. I hope so, but they’ve been a pretty obstreperous bunch in the past (though it is extraordinary in the case of the Rudd Govt that he refused to even meet with them).

The whole reason consultants reports are powerful is because of ‘he said – she said’ journalism. The criterion for getting in the press is newsworthiness not credibility. So join my crusade against ‘he said she said’ journalism!

One other point though, I doubt the consultant’s reports did much damage. It’s just that when people see a public stoush with the government, they figure things must be going wrong. That stoush can be manufactured with or without consultancy reports.

Paul Frijters
Paul Frijters
11 years ago

Nick,

your sources of information as to what is now the current view amongst Aussie politicians are probably better than mine, so all I can do is hope for the same thing as you seem to hope for.

I am sure the general public doesnt care much, or know much, about outside reports, but I do suspect it matters to critical journalists. Having a credible independent body telling them something would make it much harder to hoodwink them (not impossible, but harder). How many journalists are independent and have the inclination to find things out for themselves? I dont know. Your crusade against ‘he said, she said’ makes it seem the answer is ‘not many’.

Will shaming lazy ABC journalists help make them more critical? Perhaps. I get my news mainly from international sources though, so I hardly notice most of what the ABC comes up with. I guess that is part of the problem: many of those most interested in high-quality news don’t even try getting it from the ABC and hence are no longer their staple customers.

Nicholas Gruen
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Nicholas Gruen(@nicholas-gruen)
11 years ago

I think the ABC is high quality, but not so much for news which is mostly focused on entertainment. I admired SBS back in (was it) 1983 when Australia won the America’s Cup and they gave it appropriate coverage – at the end of the news. It topped the sporting segment!