Company Taxes and Rent

Regarding:

ATO data shows ‘Mining and Resources including oil and gas’ AUD$32.38bn against ‘Beer, drinks and associated retail/hospitality as a broader definition’ AUD$717.2m. As an example, Asahi as the top beer company does not come even close to Woodside.

Company taxes are a distraction here. It is better to analyse with no company tax, which is the correct rate anyway: production should not be taxed.

Alcohol manufacturers pay for their capital equipment and inputs at market price, and as such their return on capital is not persistently different to other industries. Alcohol excise is effectively a tax on the production of alcohol manufacturers such that a portion of that market’s surplus is transferred to government and another portion is lost entirely. This is welfare reducing unless it can be shown that alcohol consumption is inefficiently high.

Resource companies pay for their capital equipment and some inputs at market price, but record nothing in their COGS for the natural resource itself aside from royalties. This means their return on ‘capital’ is persistently high.

Ricardo told us the real story in 1817. Return on capital should never be persistently high in one industry over the long term due to competition. Instead some of the return on ‘capital’ for a resources company is in fact return on land: rent. ‘Persistently’ is important because some part of the returns may be quasi-rents on inelastic capital, and those are rightly attributed to the investor.

Unfortunately royalties are a poor mechanism because they fall equally on different qualities of deposits and leave much of the rent on the table at the best deposits. The PRRT has the right idea but is poorly designed giving incentives for wastefully high investment in capital.

Ideally, would-be extractors would bid for the rights to extract a quantity within a time period thus revealing the rent. Instead of collecting a small portion of the rent via company taxation, the full rent at the time of bidding can be collected, leaving no reason to tax other returns on capital and labour.