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For Australians, note that economic rent is common in mining. Some minerals are in high demand, but limited global supply. Some mines are better located, or have deposits that are higher quality or nearer the surface.
Note, too, that pop stars and film stars also receive economic rent. Some of them earn far more than others because they have more charisma or a bigger following. (Please don’t tell my boss, but even I make a bit of rent. I’d do this job for a lot less than I’m paid. And nor could I make as much in some other occupation. So why doesn’t the boss pay me less? I guess because he’s worried some rival editor might offer me more.)
In other words, there are many companies and individuals earning economic rent that we can’t do much about. The commission sees this as a problem because the ability of some businesses to charge higher prices than necessary reduces the economy’s efficiency and causes living standards to be lower.
Which brings us to company tax and taxes generally. Economists worry that imposing taxes on certain activities distorts people’s behaviour. Taxing companies’ profits, for instance, may discourage them from expanding – or setting up in the first place.
So how widespread is economic rent? The commission says that modelling undertaken for its inquiry estimates that 54 per cent of the company income tax base takes the form of economic rent. This is up from an estimate of 41 per cent in 2018.
Taxing individuals’ incomes may (repeat, may) discourage them from working as hard. And taxing the purchase of some goods and services but not others may encourage people to buy stuff that’s not what they would prefer.
Treasurer Jim Chalmers and Productivity Commission chair Danielle Wood. The commission wants to make sure we all understand economic rent.Credit: Alex Ellinghausen
See where is this leading? We often need higher taxes to cover increased government spending and stop the government’s debt getting too big. However, economists worry that higher taxes will discourage people from working and investing, as well as distorting their purchases.
But if economic rent is bad for the economy – if it reduces efficiency and holds back living standards – doesn’t that mean taxing it, even taxing it quite heavily, can help reduce the budget deficit without harming the economy?
This is why the commission wants us to cut back ordinary company tax and start moving to a new 5 per cent tax on companies’ net cashflow. On one hand, ordinary company tax discourages investment even in companies that aren’t earning economic rent because it reduces their after-tax rate of return.
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On the other, the commission argues, a cashflow tax would not distort decisions to invest via companies because it’s designed to tax only their earnings above their required rate of return. That is, it’s designed to tax only the companies’ economic rent – if any.
Remember, we’re supposed to be finding ways to improve our productivity. The commission notes that one of the main ways businesses have increased the productivity of their labour over the years has been to give their workers more and better machines to work with. Lately, however, firms’ spending on plant and equipment has grown only slowly.
That would be another benefit of transitioning from ordinary company tax to a cashflow tax. Under the old way, spending on new equipment reduces taxable income only over a number of years via annual depreciation.
Under the cashflow tax, they would get a full deduction for such spending in the year it was made – which should encourage companies to spend a lot more on productivity-enhancing equipment.
Now, tax economists have long been huge supporters of a cashflow tax. But no country has been game to try it yet, and I doubt if Anthony Albanese is the guy who would like to go first.
Ross Gittins is the economics editor.
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