Peter Strong: Why Labor’s budget should reconsider the mining sector to advance Australia’s manufacturing base

At the recent Jobs and Skills Summit the noted economist Ross Garnaut resurrected the idea of a mining tax. Why? 

I agree we should tax the resources sector at a much higher rate, but for those companies that invest in value-adding processes on the raw materials, there can be a substantial tax break.

Give these big resource businesses the motivation to pay less tax by developing Australia’s manufacturing base. That is good for the taxpayer, for small business, for workers, and for the budget bottom line.

It is good for the long-term prosperity of the country, as a broad manufacturing base provides greater certainty in times of stress and crisis. It provides Australia with less risk to its sovereignty by less reliance on other economies for essential items.

The Albanese government’s first budget is soon. Will it address at least parts of the tax system and create a fairer, more agile, and targeted economy? 

As some background, while I was CEO of the Council of Small Business Organisations Australia (COSBOA), there was a great debate about company tax in 2018. Small businesses received a cut to company tax from 30% down to 25%. COSBOA also supported the decreasing of company tax for all businesses, not just small business, to 25%. This was controversial and surprised many people, yet we came to that decision after much debate and research.

One telling bit of information we discovered was the fact that company tax in Sweden was 23% (it is currently 20.6%). We asked how could that be and why is it so low? Sweden is known as a high taxing country with, for example, a GST equivalent of 25%.

In developing our response to the company tax debate I also had cause to catch up with the economist Chris Richardson, of Deloitte Access Economics. We discussed tax issues and a point he made was that tax policy development will also include consideration on whether those taxed can easily just up and change countries. When a government has a captured market (workers) they can tax them at whatever rate they deem fit knowing that they (the taxed) cannot leave for a lower taxing country — unless, perhaps, they are very highly-skilled workers in high demand.

In many cases, big multinational businesses, particularly manufacturers, can up and leave for another country that has more favourable tax provisions as well as, perhaps, lower wages; whereas the workers and others cannot. If too many big businesses do leave, there will be fewer jobs for local workers and fewer workers to tax. There will also be fewer opportunities for small businesses. Thus, the lower rate for certain types of businesses is important to keep jobs in country.

There is an argument that this is unfair as shareholders get a tax benefit. But if profits are distributed as dividends, then those receiving the dividend (if they are local citizens) will be taxed at the higher rates for individuals. 

This scenario can create an incentive for businesses to reinvest their profits back into growing the business rather than paying dividends that will get taxed anyway. This would create more jobs which can then be taxed at the higher rate.

The issue of taxing dividends that are paid to shareholders in different countries can be dealt with by each government as it sees fit.

So how does all this that apply to Australia? 

If we increase tax for those big businesses that cannot move away from Australia – seeking low tax rates – then why shouldn’t we do that? 

In Australia we have a commodity sector that makes big profits, particularly over the last few years. The big mining businesses cannot actually move to another country because their source of profit – iron ore, gas, rare earth and coal – is stuck in Australia in the ground. They can’t secretly carry it away to another country to be dug up there.

As many are aware, some years ago a previous Labor government tried to introduce a “Mining Tax’ and were severely beaten up by the Minerals Council and others who spent over $20 million making sure their members were not taxed at a higher rate.

Post-COVID, we now have a Labor government that appears to be very shy of increasing taxes. We have seen the commodity sector making huge profits and the workers in those sectors being paid very high wages. We have also seen all sorts of problems in our supply chains. For example, there are shortages of microchips and building materials. There is definitely a shortage of workers across most industries. 

We have also seen the problems created by a lack of ability to provide essential health products during the pandemic. We see the workers in the mining sector paid very well while those workers relying on government support are not paid so well – the female-dominated industries of aged care and health being prime examples.

We need to broaden our manufacturing base to provide greater certainty during crisis such as COVID and also during global economic and political crisis. This will provide a welcome opportunity for the innovative small business folk around the country to get involved. That will benefit the other small businesses that provide goods and services.

We know Australia cannot compete in labour-intensive manufacturing as our wages are some of the highest in the world – and we do not want our wages to go backwards. We must therefore develop hi-tech manufacturing (and the training regime to go with it) and add value to the raw materials we currently send off to other economies.

The ball is in Chalmers’ budget forecourt. Creating targeted tax incentives and tax burdens is the way forward. Thank you, Ross Garnaut.