Monday, May 03, 2010

Australia's Beggar Thy Neighbor Tax Policy

More news from "Down Under": The Australian government is planning a 40% tax on profits of miners. This is bad news not just for the miners, but for the world economy as a whole as well.

The result of this tax will inevitably be to reduce mining activity in Australia. The result of that in turn will be to push up commodity prices. For Australia's economy the effect is ambiguous, as lower output volumes will be counteracted by higher export prices. For the world economy as a whole, the effect is by contrast unambiguously negative as the higher prices are simply redistributive (Australia as well as other miners will gain while the buyers will lose an equal amount). By contrast the lower mining output won't be compensated by higher output in other sectors. Indeed, the effect of higher input costs is probably negative.

So while the net effect on Australia's economy is uncertain, and while miners in other countries will gain, it is certain that the net effect for the rest of the world is negative and that total global output will be lower. The Australian government is acting as a "text book monopolist" that tries to gain at the expense of others by raising prices and restricting output.