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.