Federal

The Death of the Certainty of Taxation

Zach Cole discusses why business does not support the Gillard Government.

Julia Gillard claims that business wants her mineral resource rent tax (MRRT) ASAP. Although it may be correct to say that business does support the introduction of an MRRT to stifle the uncertainty which the Gillard Government has created, such a statement is deeply misleading. The ‘on a whim’ announcement of policy such as the MRRT and carbon tax, which lacks sufficient detail, significantly impairs business and market confidence. It is thus essential that any change to government policy occurs quickly. However, business’s willingness to openly encourage the government to quickly implement these policy measures should not be misconstrued as support for any policy measure itself. To put it simply, business supports only the quick introduction of any change to government policy. Business does not ‘unilaterally’ support the introduction of an MRRT.

The nature of the Gillard MRRT is that it will increase the burden of taxation on the mining sector. That is the aim of the policy, and Gillard Government is continuously sprouting that the power brokers of Australian mining, the large-cap miners (BHP and Rio Tinto), are in favour on an MRRT.

If the MRRT will increase the burden of taxation on miners, that necessarily means that they make less profit. And thus, no miner can justifiably argue that the introduction of an MRRT, compared to the situation in which there is no tax, which would make them better off. Put it simply, this is a zero sum game. When increasing tax, the government wins and the miners lose.

If the question put to BHP or Rio was to whether they would prefer a tax, or not a tax, the answer is clearly that they would prefer no tax. To put it simply, business does not want any more tax.

It then may strike some as strange as to why BHP and Rio, are not campaigning against the tax, like the small, or mid-cap miners. But the answer is simply that business knows that it can’t argue with the giant that is the government because they make the rules. Instead, the big miners are attempting to reason with the giant, so that the damage caused to them is as small as possible.

Business is an industry of negotiators; they know that a fight with government is not in their best interests. Instead, they’ll wine and dine Julia and Wayne until they can knock the tax brackets down a bit, or receive some preferential treatment.

An analogy will explain this a bit better.

You still live at home. Mum decides it is time that you had a few little chores around the house. She suggests that you unload the dishwasher everyday. You know that kicking and screaming saying it is unfair that you have to help out won’t get you anywhere. Instead, you smile, say you are willing to help out, but that you already contribute, so you think it is only fair you do the job just a few times a week. In this game, you recognise that no matter what your response is, you will have to do the dishes. So you attempt to minimize the loss.

When business comes into conflict with government, it is the same story. Government is, crudely, a mean giant. It won’t let you off with a warning. It will either make you do all the dishes, or if you negotiate well enough, they might only make you do them a couple of times per week.

This explains why the big miners didn’t jump on the anti-tax campaign like the little miners because it would make them appear that they’ve sided straight with the Coalition, the opponent. Big business knows that it is in their best interests to get the ‘best’ outcome, not a utopian fantasy of zero tax.

When Julia Gillard gets on her soap box and tells you that business supports her plan, and you see mining executive patting her on the back, or Gail Kelly saying that it is all about business confidence, take that all with a pinch of salt. Julia is getting played by big business. She’s getting softened up and the big business will market themselves as just another hard working Australian business, who contribute to the economy and are just really good blokes. Not because they like the tax system, or Gillard’s policy – but because they want the lowest tax rate possible.

Is business doing the right thing? Should not they just grow some kahunas and take to the streets like the Libyan rebels?

No. Firstly, there is no guarantee that siding with the Coalition and fighting the tax will result in a Coalition victory. Worse, there is a possibility that if it backfires, the public sides with Gillard and the tax is increased because the miners are portrayed as greedy resource thieves.

Secondly, businesses have taken a risk assessment of what is occurring, and have hedged their bets. Big business knows that their best option is to work on reducing the tax, not eliminating.

However this theory breaks down with respect to the small to mid-cap miners who have ardently opposed the MRRT from the beginning, significantly funding the AMEC campaigns.

However, the small miners’ strategy is very clever.

They understand that the government won’t implement a tax which discriminates against particular mining companies. Therefore, if BHP and Rio manage to bargain Gillard down on the tax, the small miners benefit. This is an example of the classic free rider problem, similar to when non-union members take advantage of the successes achieved by a union.

It is even possible that there might be some subtle co-operation between the large-cap and small to mid-cap miners. Allow the large-cap miners to soften the government, whilst the small-cap miners create the groundswell of public opinion against the Governments MRRT.

If you are wondering why BHP and Rio seemingly want these taxes, it isn’t because they like the tax and it isn’t because Julia Gillard’s policy is good for business. It is because they are playing a game against her to attempt to get the lowest tax rates possible.

The most important thing for business in an era with an incompetent government is business confidence. But that is not good economic management. If industry says they want policy implemented for ‘confidence reasons’ it isn’t because the policy is economically sound. It is because business is afraid at the government’s chopping and changing, that it just wants it to have some sort of economic policy, however bad, that is consistent. There is only one thing worse for business than bad economic policy, and that is bad economic policy that keeps changing. With consistently bad policy, at least business can plan for the grim future.

It is said that the only two certain things in life are death and taxes. If major political parties decide to disregard the idea of certainty in the taxation system, they can be certain that they will face their death. Australians dislike nothing more than broken promises and weak government.

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