The Tax That Broke The Camel's Back: Australia's First Female Prime Minister, Julia Gillard, Faces An Uphill Battle
A new era has dawned for the Australian people. Earlier this week, Ms. Julia Gillard, a rising start in the Australian Labor party, was sworn in as Australia's first female premier. Ms. Gillard replaced a slumping Kevin Rudd who fell abruptly from grace after proposing a controversial 40% tax on mining profits. Prime Minister Rudd, expecting to suffer an embarrassing defeat on the internal ballot, did not submit his name for consideration and bowed out tearfully from the race. During her brief mini-campaign, Ms. Gillard argued that good government in Australia was loosing its way. She vowed to revive Labor prior to the hotly contested general election this October, while pledging to reopen discussions with labor unions, corporate interests, and well as the angry public. While Ms. Gillard's appointment has been received warmly, one cannot help but wonder how significantly her position on resource taxation will change. She recently announced the opening of government doors to industry, and invited business to a new series of discussions on the highly contentious tax. Yet, one has to wonder how extensive these discussions will be? Is this appointment simply a reflection of the growing power that large corporations have in influencing government policy? Will Prime Minister Gillard be able to negotiate a sustainable resource tax that maintains Australian's economic growth and appeases the resource sector? Does her appointment as PM signal a dramatic shift in the policies of the Labor party? Or, are these desperate changes coming too late to rescue the fortunes of the Labor in Australia?
For observers, the events leading to Ms. Gillard's appointment, as well as the pace of change, was extraordinary. At the beginning of 2010, Kevin Rudd was Australia's most popular PM, achieving ratings unheard of since the days of Bob Hawke. For many, Mr. Rudd's downfall began when he shelved the centerpiece of his environmental strategy, a carbon emissions trading scheme. Many thought it was an act of political cowardice - gutless was the oft-heard word - and one that undermined his credibility, values, as well as the credibility of the Australia nation. Citizens rallied against the back-step, industry united, and ultimately, the uncoordinated introduction of the proposed tax sealed his fate. When introduced, the proposed tax sparked unprecedented clashes between heavyweight mining barons from BHP Billiton, Rio Tinto and Xstrata, who predicted the demise of the Australian mining industry, and leftward-leaning politicians, including Prime Minister Rudd, who argued that the Australian people deserved a greater share of the private sector bounty.
Using tax revenue to support public spending is not new. In many nations, governments rely on taxes to fund critical social projects, infrastructure development, education, health, and trade. What then was so wrong with Australian tax? According to a recent review, the International Monetary Fund found no indications that the proposed mining tax would derail Australia's future growth. One could argue that a tax on profits would make more sense than the current output-based tax system, where corporations operating at a loss are taxed at the same rate as profitable ventures. According to Mr Rudd, who planned for the Resource Super Profits Tax to come into force in July 2012, the tax would raise around AUS$9bn (US$8.3bn; Â£5.5bn) annually, allowing significant infrastructure and social service investment in resource rich provinces. From a corporate perspective, the biggest issues seem to center around competitiveness. Many within the mining industry argued aggressively that the tax would jeopardize foreign investment, and encourage the capital outflow of resource funds. In opposition, Xstrata announced that it was shelving investment in two mines in Queensland because of the tax, while Fortescue Metals threatened to abandon two projects in the Pilbara region of western Australia unless plans for the tax were reviewed. Throughout, both companies insisted they were not opposed to tax reform in principle. Rather, they were simply opposed to a tax that jeopardizes everything that the Australian mining industry represents, as well as the long term viability of the Australian economy. Mineral companies provide jobs for some 700,000 Australians, and super-charged demand from China, especially for iron ore, has helped to protect Australia from the global recession. The new tax was argued to potentially decrease the marginal profitability of projects, reduce financial efficiency, while increasing the attractiveness of foreign markets in countries including Canada, who have a rich resource base and significantly reduced taxes.
Despite good intentions, I believe that neither side presented a compelling argument. Resource manufacturers have a responsibility to share their wealth equitably with governments and citizens. That said, I am opposed to excessive tax schemes that burden corporations unfairly. To the mining industry's credit, Australia miners pay some of the highest levels of taxation today, and a tax on profit would be nothing short of a gluttonous dagger through the heart. On the other hand, I remain sympathetic to the governments motivation, and believe that profit taxation encourages the efficient distribution wealth. By excessively taxing new ventures operating at a loss, entrepreneurial exploration, and long term government tax revenues, would be jeopardized. Did the Rudd government get too greedy? Perhaps. Were they trying to achieve a sensible goal that maximized welfare for all citizens of the state? Arguably. Did corporations respond by engaging in a threatening public relations campaign designed to instill fear into the hearts and minds of Australian workers and citizens? Clearly. Were corporations really focused primarily on protecting their own interests, or was the primary motivation one regarding the maintenance of high cash flows in a challenging economy? Only time will tell. Regardless of ones position, it is clear that mistakes were made on both sides of the court. The aggressive posturing by government and industry was completely unnecessary, and, while corporate interests were successful in helping remove Mr. Rudd, threats to corporate profitability still remain. Moreover, there is no guarantee that the new Prime Minister will change her tactics or approach, and arguably, no reason for her to. Should Ms. Gillard, or any other government for that matter, allow corporations to dictate policy or the pace of political reform? Fortunately, the new Prime Minister has some time to right the ship, open discussion, re-establish trust, and restore credibility. While the vicious advertising campaign between the government and corporate stakeholders has been put on hold, there is still much work to do. The proposed tax is complex, and negotiations between parties will invariably take time. Furthermore, Prime Minister Gillard must revisit the initially proposed carbon-trading scheme, which looks to provide many advantages to a variety of Australian industries as well as its government.Â As long as the new Prime Minister can wipe away the mess that Mr. Rudd created, and ignore the political desperation that may increase as the October election inches closer, she has the potential to position herself, as well as the Labor party, as a strong leadership choice for the Australian people. If she cannot, then Australia as a nation risks falling backwards, rather than forwards, alienating industry, further destroying public support, while setting the Australian economy up for long term disappointment.