It has been announced that the new Peruvian government has begun negotiating with mining corporations concerning windfall taxes on extractive industries, currently profiting from the continuous increase of mineral prices in global markets, but that –anyway– remain unwilling to accept any tax increases.
When studying production, international trade and general equilibrium, neoclassical economic theory does not generally distinguish between renewable and non-renewable resources and, apparently, we should not be able to find solid arguments in favor of higher taxes –or a different tributary regime, in general– to be applied to corporations exploiting non-renewable resources.
However, I will try to suggest here some arguments in that sense. A first question to be considered is that the difference between exploiting renewable and non-renewable resources is analogous to the difference between renting and selling a property: when renting a property we remain the owners of the property at the end of the renting contract, which is not the case when we sell it. In effect, although the business press typically uses the term “production” when referring to the extraction of non-renewable resources, it is clear that such resources cannot be produced, and are depleted by their exploitation.
A second question to be considered is that the extraction of non-renewable resources is a case of intergenerational trade: if we consume our non-renewable resources now, future generations will not be able to do the same. Obviously, it can always be argued that we can presently invest the revenue acquired by extracting those resources, thus allowing future generations to enjoy at least part of the benefits. However, there is not only the problem that we will not necessarily invest those resources in a productive way, but also the fact that it would be impossible to find a sensible way to distribute those benefits among different generations.
Going to the point, it is important to understand that a concession to a foreign company for exploiting renewable resources is equivalent to renting a property for which we receive periodical payments, and regain control of the resource at the end of the contract. We can be certain that such operation will have a positive return as the discounted value of the periodical payments will necessarily be larger than zero for any positive discount rate (we are assuming here that the resource does not suffer any deterioration during the concession period).
On the other hand, a concession to a foreign company for exploiting non-renewable resources is equivalent to selling a property for a given price (payment). In order to make the comparison easier, we can assume that the payment is made through a period of time. In this way, we can say that the operation will have a positive return only if the discounted value of those payments is larger than the current value of the resources being sold, and this cannot occur for any positive discount rate.
As we can see, even if we cannot directly compare the rates of return of both operations – to begin with, we do not have the current value of the non-renewable resources being sold, although we are assuming it is positive– we can be certain that the rate of return of the concession of non-renewable resources will not necessarily be positive. Thus, higher taxes on these operations can be seen as a way of increasing the probability we will obtain a positive return.
But we can find even additional reasons for higher taxes to be charged on corporations operating in the extraction of non-renewable resources. One of them is the low domestic value added they generate because of their use of capital-intensive technology –that reduces the demand for labor and, thus, the amount of wages they pay– and the fact that they are usually foreign-owned –which lowers the amount of profits that remain in the country.
Another reason has to do with the environmental damages caused by extractive industries, which imply that the final domestic value added is actually lower, as it is necessary to subtract the cost of fixing such damages. This fact is behind the numerous uprisings of Andean communities in Southern Peru rejecting the entry of mining corporations into their lands.
One more reason is that taxes are usually charged on the corporations’ profits, which can be easily undervalued by the manipulation of transfer prices. Besides, although an exchange rate revaluation is usually brought about by higher export revenues (the “Dutch disease”), which can have a negative effect on their profits –and those of other businesses in the tradable sector of the economy–,central banks’ intervention in foreign-exchange markets usually seek to revert such effect.
One final reason is given by the fact that the prices of minerals and other natural resources will most likely keep on going up because of the larger demand that results from the growth of emerging economies and their closer integration to the global economy; and the higher taxes would be a way for developing countries to receive a fair share of the earnings.
Transnational corporations operating in this business have their own counterarguments. The stability-of-the-rules argument is fallacious and used by them because they currently enjoy favorable tributary conditions, and would not be used otherwise. In any case, rich countries have found in the signing of free trade agreements –negotiated bilaterally– an effective way of protecting the interests of their corporations by including this issue among the clauses of those agreements.
The country-risk argument –or the threat of capitals moving out of the country if taxes are increased– is simply nonsense. First, because exporting developing countries can reach agreements concerning similar tributary regimes on extractive industries. Second, because it would be very difficult for those corporations to find alternative activities in which they would be able to obtain the same -or higher- profit rates, as a global depression of such rates is currently being observed.
Because of the support foreign corporations receive from the domestic private sector and corrupt politicians –something that increases their negotiating power– it usually results cheaper for them to defend their interests spending in propaganda, instead of agreeing to pay more taxes or investing in the protection of the environment.
The fact that during the recent presidential campaign in Peru all main candidates expressed their support –some of them perhaps unwillingly– to the introduction of windfall taxes, reveals an increasing public awareness of the problem that politicians will not be able to ignore.
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