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

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.