Super Taxes and Hauser's Law

Will a 40% tax on mining profits increase government revenue from the sector?

If you apply the theoretical perspective of Hauser’s Law, maybe not. Hauser’s Law is based on an empirical observations that no matter what the tax rates have been, in postwar America tax revenues have remained at about 19.5% of GDP.

max-income-tax-rate-and-federal-tax-receipts-1946-2014

It easy to see that constant revenue, whatever the tax rate, could give rise to the niche-like Laffer curve, a humped distribution where rates of taxation above or below an optimal rate depress overall revenue. Hauser’s Law says that the unavoidable equilibrium rate is about 20%.

Sinclair Davidson calls another foul on the Rudd Government on their new big tax.

Both Kevin Rudd and Wayne Swan have told the public and parliament through the past two weeks that oil and gas production in Australia has remained strong under the Petroleum Resources Rent Tax scheme, a central tenet of which is a 40 per cent tax rate.

The front page of the Australian accuses the Rudd Government of misrepresentation (aka lying).

Roughly, if Australia’s GDP is 1 trillion $US, and the contribution of mining to that GDP is 10%, then the industry estimate of contribution to tax revenues of $US 22bn or around 20%, a confirmation of the Hauser’s Law on a sector basis.

It defies common sense to argue that increased taxes won’t depress investment. If the aim is to slow down the exploitation of minerals there are mechanisms to do that directly, such as mine approvals and infrastructure development, without imposing new and baroque taxes.

Hauser’s Law suggests that the issue of fairness and other justifications of tax rates are probably irrelevant. 20% of gross is all that is achievable long-term, however you slice or dice it. Since the tax returns of the mining sector are already at 20%, its not going to increase with more tax.

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