Beware the Green/Labor 'super profits' tax – it could be coming to ruin an economy near you

I was shocked when I was asked by the Labor and Greens participants in a parliamentary inquiry a month ago why a super profits tax shouldn’t be applied to the coal mining industry.

Hadn’t this sort of nonsense been laid to rest years ago?

I’d thought when the Labor government raised the royalties on coalmining to a tiered maximum of 40% that they were just opportunistically slugging an industry, unpopular because of climate change, that had received a windfall because of temporarily high commodity prices.

The questions assume they have a more methodical and ideological approach to royalties. If that’s the case, and they think super profits taxes are a good thing in principle, then that would be a financial, and sovereign risk, threat to miners of other minerals, like gas, oil, iron, alumina, copper, lithium, vanadium, graphite and so on.

They quoted the Henry Tax Review to me. Well that was 14 years ago, so I was a bit rusty on exactly what it recommended for mining, and I have little regard for Ken Henry.

They had treasury officers lined-up after me who they indicated they would also quiz on the Henry Tax Review, specifically on this issue.

Henry was the treasury secretary who came up with the plan to save us from the Global Financial Crisis involving subsidising pink batts in suburban houses and building over-priced school halls, all of which arrived after the crisis had passed.

A Labor favourite, but not what I would call a successful, practical economist.

Now I find it wasn't just an idea that was being floated.

Today I see the Greens were serious about the tax.

According to The Australian, under the heading "Greens go ‘Robin Hood’ in $514bn big business tax threat to Labor":

Adam Bandt will demand a $514bn tax hit on big business in return for the Greens supporting Labor in a hung parliament, under what the party trumpets as “Robin Hood” reforms targeting miners, coal and gas companies, banks, telcos and retailers.

The left-wing minor party, which is picking off seats from Labor and the Coalition across the country, will take a Big Corporations Tax package to the next election involving a 40 per cent tax on companies’ “excessive profits” to fund new cost-of-living measures.

The idea of a super profits tax is that there is a certain rate of earnings that is reasonable, and anything over that doesn’t really belong to the company, or isn’t needed by it.

The super profit is thought to be “surplus to requirements” so the government might as well take it away and redistribute it to someone who needs it.

These are nonsense propositions.

Profit is a residual that remains after all other costs have been met and is reserved for the owner. It is the riskiest financial part of a business and means the owner is in the riskiest position. It is also the reason that the owner invests in the first place. No profit, no investment. Greater profit, greater chance of investment.

There is also a relationship between risk and profit. Generally the higher the risk, the higher the potential profit, in recognition that higher risk propositions require a higher reward to compensate for the risk.

  If high risk isn’t rewarded, then the more innovative and speculative investments won’t be made. Who are the richest people in the world today? They are people like Elon Musk, Mark Zuckerberg, Geoff Bezos and Bill Gates.

For every Musk, Zuckerberg, Bezos and Gates, there are hundreds of entrepreneurs who failed in the same space.

It might be that these four all just got lucky too. There is some element of luck in their success – why did Facebook succeed when Spaces or Second Life failed?

But without the outsized potential rewards the thousands of entrepreneurs who were attracted to the area wouldn’t have bought a ticket on the train of ambition.

Their businesses just happen to be the most innovative as well.

Super profits also perform a function in introducing competition into an area. If the supermarket in a particular area is earning above average returns it is likely that another supermarket will set up on the basis that there is obviously a market which is underserviced.

You might argue that super profits in mining are just luck and due to fluctuations in the underlying price of the product. To some extent that can be correct in that the Ukrainian war was responsible for boosting coal prices, and they have now fallen back to lower levels.

But that there will be higher prices at some time is factored into the decision to invest in mining, just as is the fact that there will be times when mines will be unprofitable.

The belief that over time prices for the underlying commodity will be at a level that will justify investment is what keeps people investing.

Mining is also an inherently risky proposition, not unlike starting new media companies, in that many more fail than succeed.

Some of the capital in mining is supplied by people who are more speculative and who invest at times when they think the price is low, hoping to be rewarded when it is higher. While speculators are often criticised, they are a valuable part of the market.

Sometimes people just need to sell an asset. Without speculators the market would be much thinner, and those necessary sales, particularly in industries like mining when prices are at a low point, would be much more difficult, or impossible, to achieve.

High profits are also a reward for people who are better at their job. Ironically, the same politicians who are likely to complain that companies make too much money are the ones who will criticise superannuation funds for making too low a return on investors’ funds.

How do superannuation funds make returns on investors’ funds? By investing in the most profitable companies. The stock market is full of companies that outperform other companies in their own industry by significant margins, and industries that outperform other industries.

Superfunds try and invest in those companies and industries. The fact that some superfunds do better than others is a sign that it isn’t so easy to predict which companies or industries are going to outperform.

Super profits and high profits also contribute to a higher economy-wide performance.

Not everyone is as good at making money as everyone else.

What higher profits do is deliver more assets into the hands of those who are best at making money so they can do more of what they are good at with our collective assets.

That is why free market economies are better at making wealth, and distributing it, than command and control economies, like the ones the Greens’ and Labor policies favour.

When governments tax higher profits at a higher rate they are penalising the outperformers. They might also be penalising the lucky, but it is not easy to tell the difference between those who outperform and those who are just lucky.

And when governments take that money, it is often not applied to uses which will return a profit. In Queensland the super profits on coal have been used to pay money to electors to compensate them for a higher cost of living unrelated to coal prices.

This is a policy that frustrates itself. The higher taxes on coal will drive investors away from coalmines in Queensland as there are plenty of other places to invest with tax rates that are not punitive, like New South Wales. That means that the additional revenue won’t be available to the government over the long term as it will dwindle away to virtually nothing.

The decline in the industry will also mean a decline in living standards overall, and fewer people able to pay for products, the production and sale of which, allow other Queenslanders to meet their cost of living.

Industries that make high profits also tend to be highly productive per employee, and pay higher wages, as well as lifting overall national productivity. The things politicians tend to spend the money on are often low productivity, and redistributive.

Politicians would do less damage if they invested in transport infrastructure, for example, because good transport infrastructure can raise national productivity. Or in paying back debt, because that would shrink the size of the government, which is low productivity, and allow private interests which are higher productivity, in.

But paying households $1,000 as a credit towards their electricity bills, as Queensland has done, when state government policies are the reason those bills are high in the first place is an exercise in futility and wealth destruction.

The politicians on the committee made a comparison with personal tax rates where higher earners are taxed at a higher rate. Many economists would say this should be a flat rate too, but putting that to one side there are fundamental differences about how you treat human beings and economic entities.

We don’t want our citizens to die or suffer because of lack of resources, which is why we redistribute some money from the better-off to the poorer. We do want companies to die, at least the ones that are not profitably using their resources.

In fact, even amongst successful companies the rate of death is high. The most successful companies tend to be on the stock exchange. In the 2023-24 financial year 156 companies were delisted from the ASX and, netting-out with new entrants, the total number of companies fell from 2,255 to 2,155.

Commerce ought to be a continuous redistribution from those who can’t to those who can. That’s how we maximise national wealth and have the resources to look after those individuals in the community who need it.

No business has a right to survive, but every person does.

However, if governments go around clobbering the most successful businesses with higher taxes, then none of us will be surviving as well as we could. The zombie needs to be put back in its coffin, and some of our politicians need to be “delisted” too.