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Creative Commons License photo credit: ob1left

Australia’s tax system protects foreign producers against their Australian competitors, writes Gavin R. Putland in this LVRG article.

The Resource Super Profits Tax (RSPT) was sunk by the advertising firepower of the big miners, ostensibly because it would make Australian mineral deposits less competitive with foreign alternatives. The complex, bureaucratic, maximally-interventionist Carbon Pollution Reduction Scheme, which was a pollution tax in so far as the permits were sold rather than given away, was opposed by big polluters, ostensibly because it threatened the international competitiveness of trade-exposed industries. The simple, small-government, minimally interventionist alternative, namely a carbon tax, is opposed by the same interests, ostensibly for the same reason.

The need to maintain international competitiveness is indeed a popular argument against any new tax. That the argument comes from those who stand to pay the tax is of course purely coincidental. Nevertheless, it might be instructive to work out how much the existing system cares about competitiveness, just in case the altruistic, patriotic indignation of the opponents of new taxes could perhaps be better directed elsewhere.

In seeking a benchmark of competitiveness against which various taxes can be measured, one must understand that “free trade” does not mean what it says; it is not a system in which trade is free of taxes and restrictions, but rather a system in which any such taxes and restrictions don’t discriminate between domestic and foreign products. Thus the heroin trade is “free” because it is equally illegal regardless of which country the heroin comes from, while a “free trade agreement” obliges us to impose another country’s restrictive trade laws on our domestic producers. What is called “free” trade would be more accurately called “impartial” trade. To avoid confusion, I shall use the latter terminology here.

My approach is to adopt a particular tax or combination of taxes as the benchmark of “impartiality”, with which the major existing taxes can be compared. If, compared with the benchmark, a tax is easier on domestic producers and harder on foreign producers, I shall classify it as protectionist. If it is easier on foreign producers and harder on domestic producers, I shall classify it as reverse-protectionist.

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