Australian Resource Tax Will Dampen Innovation (Letter to the Editor)

Australian Resource Tax Will Dampen Innovation (Letter to the Editor)

June 03, 2010
Originally published in The Financial Times

Sir, Your editorial, “Taxmen vs miners: Australia’s resource super profit tax is a good idea” (May 31), argues that “natural resource profits are not like other types of income” and that “once out of the ground, a treasure’s value bears no relation of the costs it took to dig it up”.

That approach would tax away all profits from breakthrough innovations – from software to pharmaceuticals to (yes) all forms of resource exploration and development. If one ignores the costs of discovery, then taxing away profits can make sense. But why would anyone innovate in a static world?

As Joseph Schumpeter noted long ago, extraordinary profits are “the baits that lure capital on to untried trails”. Much exploration and development uncovers dry holes. It is the hope of potentially large gains that leads private parties into such heroic efforts. A stagnant economy with only state-subsidised mineral development efforts would create the Malthusian scarcities that green activists fear and markets have long fended off.