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Posted on March 19th, 2013, by

According to Adam Smith, there are 4 canons of good taxation: equity, convenience, economy and certainty (Dennis-Escoffier & Fortin, 2007). Equity means that individuals or businesses with similar incomes face similar taxes; economy is reached when government income from the tax is optimized; convenience requires the minimization of efforts for paying the tax, and certainty is when tax payer is certain about the consequences of a transaction. Taxes can be classified as direct and indirect according to their form of payment and as proportional, progressive and regressive according to their amount calculation structure (Layton & Robinson & Tucker, 2009). Finally, the very purpose of the taxation system is to make the markets work in a better way.
The mining tax on the super profits of mining companies is currently known as Mineral Resource Rent Tax. This tax was initially formulated as Resource Super Profits Tax. In its original version, the tax related to all Australian non-renewable resources and constituted 40% of the realized value of resources less associated costs (including a given percent of “normal”¯ profit, commonly set at 7%) (Manne, 2011). This tax can be classified as direct proportional one.

The goals of this tax is to compensate the costs of spending non-renewable resources, and to reduce exhaustion speed for these resources. However, this tax would also strongly affect the competitive position of Australian companies at the global market. In my opinion, the “milder”¯ version of this tax ”“ the Mineral Resource Rent Tax, which sets a rate of 22.5% of super profit tax for only iron ore and coal will allow greater competitiveness for Australian companies (Manne, 2011). At the same time, this tax does not fully comply with the principles of equity and certainty.
5. In case of a flexible foreign exchange market model, the exchange rate follows the rules of supply and demand (Fig. 3).

Figure 3. Flexible exchange rate (Mankiw, 2008)
Here S and D curves are based on the quantities of the currencies, and exchange rate is the equilibrium price of one currency with regard to another. If there are foreign exchange reserves, the country can perform foreign exchange intervention (thus, moving the curve to the right) and devalue own currency. This situation is good for exporters and bad for importers. China’s foreign exchange policy since 2005 is based on the fixed exchange rate. This is creating beneficial situation for Chinese exporters, and places the burden on US importers. The imbalance is deepening, and if the currency exchange rate is not adjusted, it will further increase current account deficit of US.
6. There is a trade-off between inflation and unemployment in the short-run, which can be illustrated by the downward sloping Phillips curve (Fig. 4). This trade-off is caused by the output gap between the changing aggregate demand and corresponding aggregate supply. This gap increases inflationary pressure, and the next demand-supply equilibrium is already reached at a higher price level. Fig. 4 also shows the trade-offs with regard to the equilibrium position (U2-W2).

Figure 4. Short-run Phillips curve (Mankiw, 2008)
The policy of the government should be aimed to shifting the aggregate supply curve to the right, using tax policy, regulation/deregulation practices and investments. Overall, the goal of the government is to balance the unemployment rate close to its natural level and at the same time keep the acceptable level of inflation.

References
Dennis-Escoffier, S. & Fortin, K.A. (2007). Taxation for Decision Makers. Cengage Learning.
Layton, A. & Robinson, T. & Tucker, I.B. (2009). Economics For Today. Cengage Learning.
Mankiw, G.N. (2008). Principles of Macroeconomics. Cengage Learning.
Manne, R. (2011). Making Trouble: Essays Against the New Australian Complacency. Black Inc.
Mayer, D.A. & Fox, M.E. (2010). The Everything Economics Book: From Theory to Practice, Your Complete Guide to Understanding Economics Today. Adams Media.
World Bank. (2011). Global Development Horizons 2011. World Bank Publications.

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