[Land-and-Labor] Letter to Katter and Crook

[lev.lafayette at isocracy.org]

Mr. Bob Katter, MHR
c/- Cnr Simpson & Grace Sts
PO Box 2130, Mount Isa
Queensland, 4825

Mr. Tony Crook, MHR
c/- PO Box 1418,
West Perth,
Western Australia 6872


Dear Mr. Katter and Mr. Crook,

Let me congratulate you on your respective elections to the Federal
Divisions of Kennedy and O'Connor. In the current political circumstances
the authority of more independently-minded individuals such as yourselves
will carry additional privilege and burden.

Although I am a long-standing member of the Australian Labor Party, I am
not writing to recommend who you support in the current 'hung' parliament.
Rather I wish to discuss the matter of the Mineral Resource Rent Tax,
which I believe that both of you have expressed opposition to in the past.
I wish to put an argument forward that suggests that such a resource rent
is indeed beneficial for Australia's productivity and to the mining
industry. I humbly pray that you will give the arguments consideration.

Natural resources are a very different factor of production compared to
those of human labour and capital machinery. In the latter two factors,
when a tax is introduced an additional fee is applied to a good or service
or, in the case of transaction taxes, to the consumer when they receive
the good. The effect in either case is that the market price increases and
the quantity demanded falls. Part of the consumer and producer surplus is
converted into government revenue. In addition to any administrative costs
in collecting a tax, there is also a loss in social surplus as as
potential trades are reduced (the "excess burden of taxation"). These
effects are however not the case with public income derived from natural
resources. Because the supply of a resource is fixed any costs must be
borne on the excess profits derived from economic rent.

With regards to the Australian mining industry, part of their profit is
derived by productive labour and capital. This includes all the costs of
extraction, exploration, transportation, administration & etc. Taxation
increases in these activities reduces the international competitiveness of
the industry, negatively effecting employment, investment and so forth.
However some of the profit is derived from the locational resource value;
this a type of unearned and excess income above the amount required to
draw the resources into the processing and distribution. The existence of
this income reduces the productivity and employment, both in the industry
and in Australia in general - but it does provide extra profit for the
companies in question. That is, higher profit from lower productivity. It
should be obvious what this implies.

Such a situation obviously has negative effects on Australia's
Commonwealth. There are two ways to reincorporate this resource value back
to the public. One is to place a levy effectively on the volume of
production; this is the method that is currently used on state-based
royalties. This is a very inefficient method, which is particularly
punishing for small mining companies who are unable to leverage large
capital intensive production when world markets have high resource prices
and suffer when prices are low. In comparison a tax on economic profits
(that is, business profit plus opportunity cost), such as the proposed
Mineral Resources Rent Tax, does not suffer these effects. As you would
know, the MRRT will be levied on 30% of assessable profit, defined as at
the long term government bond rate plus 7% minus a 25% extraction
allowance. State royalties will be deductible for MRRT purposes, and MRRT
payments will be deductible for company income tax purposes. I have no
doubt that you are also aware that Western Australia and Queensland will
also receive more than $2 billion each from a $6 billion regional
infrastructure fund that comes from the proceeds of the tax.

If I may reiterate my fundamental point - something which I have learned
throughout my undergraduate and postgraduate studies in economics, from
evidence both rational and empirical - taxes on resources are not the same
as taxes on labour and capital. The fact that they are in fixed supply and
are, effectively, a pre-existing gift of Creation, means that deriving
public income from this source is highly efficient and morally sound. I
urge to consider these matters with an open mind, and raise any further
questions with the Secretary of Treasury and Finance, Dr. Ken Henry. I
have confidence in his knowledge of this subject matter, and his capacity
to provide further clarification and examples of the points that I have
raised in this correspondence.

Yours most sincerely,



Lev Lafayette