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Resource rent tax statement

May 26th, 2010

I’ve been busy for the last few days, working on a statement by a group of economists in support of the principle of a resource rent tax to replace existing royalties. The statement calls for informed debate about the proposal and takes no position on particular design issues, such as the choice between the existing system used for the Petroleum Resource Rent Tax (40 per cent on returns above about 11 per cent) and the government’s proposed Resource Super Profits Tax (40 per cent on returns above the bond rate, with a corresponding offset for returns below the bond rate).

My own view is that the RSPT design would be more efficient, but the losers under this design (those who can confidently expect high profits) have been very vocal, while the potential gainers (smaller miners undertaking riskier projects) have not given the government any support. Add to that the fact that the PRRT design is long-established (making scare campaigns a little bit harder) and simpler and there is a strong political case for a compromise along these lines. The most important thing is that the government cannot and should not back down on the basic principle of a resource rent tax.

Here’s the Press Release and Letter.

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  1. Alice
    May 26th, 2010 at 10:39 | #1

    Impressive expertise in the list of signatories. It would be nice to think that both the Government and the opposition would act / could act together responsibly on this, instead of politically, but the Coalition, as is usual on any appropriate economic policies, are engaged in conducting inappropriate scare campaigns.

  2. Tony G
    May 26th, 2010 at 10:49 | #2

    Typical of economists to back increasing the size of a Tax and Spend Government.

    Anyway, economists are wrong more times than they are right, so obviously this great big new super tax is wrong.

    Why Do We Have Economists?

    “economics is a dog’s breakfast of theoretical ideas and alleged causal relationships that are at all times unproven and in dispute.

    Read more: http://www.nationalpost.com/opinion/columnists/story.html?id=655fd957-7e38-4186-a7d6-3963c7c792b6#ixzz0ozZJUQPf

  3. jquiggin
    May 26th, 2010 at 10:54 | #3

    At least you and Corcoran are consistent in your advocacy of ignorance, Tony. You should stick to reading the National Post, in case reality intrudes.

  4. Tony G
    May 26th, 2010 at 11:03 | #4

    Speaking of ‘reality’, isn’t ‘it’ the antipodean of economics?

  5. Alice
    May 26th, 2010 at 11:05 | #5

    As for the idea being pushed by the Coalition and Mining companies that the rent resource tax will “frighten away” miners and their investments to other countries – this would not appear to be the case at all.

    Today BHP and Xlstrata and 11 other major mining companies have offered 4.85 billion for the nations biggest coal railroad network

    “The group is committed to expanding the network to support growth and has arranged an acquisition loan of A$1.35 billion and A$2.05 billion for capital spending, Nick Greiner, Chairman of the Queensland Coal Industry Rail Group, said in an e-mailed statement.

    The 13 miners including Rio Tinto Group and Peabody Energy Corp. want to boost exports from Australia, the largest coal exporter, to feed demand for steel mills in Asia and higher prices. The bid is an alternative to Queensland State Premier Anna Bligh’s plan for an initial public offering this year of the non-passenger assets, which includes coal tracks and trains.”

    The title is ” BHP Group Offers A$4.85 Billion for Railroad Assets (Update1) ” – found on http://www.bloomberg.com (link unable to be posted).

    Hardly the sign of Mining companies “scared to invest” is it? They are putting their bid on the table for the railway because it reflects where their true intentions are – “ie want to boost exports”.

    The Coalitions (and the Mining firms) arguments against the tax are clearly completely false.

  6. Jim Birch
    May 26th, 2010 at 11:27 | #6

    @Tony G

    Typical of economists to back increasing the size of a Tax and Spend Government.

    Isn’t this tax roughly revenue neutral?

    Anyway, economists are wrong more times than they are right, so obviously this great big new super tax is wrong.

    At least they understand logic.

  7. May 26th, 2010 at 11:33 | #7

    I argue against this tax but I am also buying BHP shares. “Why?” you may ask.
    Rudd has a long history of folding when the pressure gets high. I also think that, if he does not back down, he may lose enough seats in Queensland, SA and WA to lose government.
    As I have said before, though, this tax does not seriously affect the existing mines. It will, though, greatly reduce exploration.
    BHP could well be making the same bet. It is also very difficult to know if the railway would have been worth more before the tax was announced.

  8. Ernestine Gross
    May 26th, 2010 at 11:38 | #8

    I was surprised to see no Professors of Economics from The University of Sydney and UNSW on the list. The former still provides a list of staff. I noticed that senior staff specialise in areas that are not obviously related to the topic. I assume this is the reason for not getting a contribution from that university.

    UNSW has changed a lot. There is now only a faculty of business. Incredible, if I may say. I could not find a staff list quickly.

    I found the following public discussion paper.


    There surely is a need for your posted statement.

  9. May 26th, 2010 at 11:45 | #9

    This tax is nowhere near roughly revenue neutral. The Feds, after rebating the royalties, are booking about $9bn of revenue a year from it.

  10. Alice
    May 26th, 2010 at 11:52 | #10

    @Andrew Reynolds
    Andrew…in reply to you (and knowing full well you have libertarian views) I note the following comment by Dan at Catallyx

    “But on certain libertarian views it is only the *work* which should not be taxed. The natural resources themselves are not produced by anyone’s work. Therefore there is no reason not to tax them. Indeed, equal-share libertarianism would see all natural resources as inherited equally by all citizens. The tax on them is then simply a way of giving people what is rightfully theirs.”

    Including myself and my grandchildren Andy.
    The sad reality is also Andy, that taxes are being raised now and will need to be raised further, in many nations budgets and Australia will have to do likewise, as a result of the now global financial crisis. The Mining industry has enjoyed lower taxes than the majority of industries in Australia for some time now.

    Excuse the pun but its time they pulled their weight.

  11. Ernestine Gross
    May 26th, 2010 at 11:56 | #11

    @Tony G

    Maybe home-economics is more to your liking:


    Its practical, cash accounting is sufficient, and you can consume your own output. This might please everybody.

  12. May 26th, 2010 at 12:03 | #12

    As I have said time and again, I am not opposed to the principle of a Brown tax. If properly done it should have many of the benefits that are mooted for it. I even praised it (in principle) elsewhere on this blog.
    This one, though, is wrong for many reasons, including the level, the threshold rate and the retrospective effect.
    I have no problems with companies, or anyone else, paying their fair share of tax. Paying more than double the level that anyone else is paying, though, seems pretty damn extreme and must (IMHO) lead to reduced investment and effectively, little further development.
    BTW – you are confusing left-libertarianism with right-libertarianism. Understandable for one that does not understand what libertarianism is, but you may want to actually study what they are first.

  13. May 26th, 2010 at 12:25 | #13

    Andrew Reynolds at 9: What is your source for $9 billion a year? At http://www.abc.net.au/news/stories/2010/05/25/2908894.htm in an article called “Factbox: the new mining tax”, the ABC says: “The Federal Government expects to make about $12 billion in the four years after the tax is introduced.” Now, I know the ABC can make mistakes, but in this instance I am more inclined to accept their figures than yours, which could be inflated because of your position on this issue.

  14. Fran Barlow
    May 26th, 2010 at 12:52 | #14

    @Andrew Reynolds

    The Feds, after rebating the royalties, are booking about $9bn of revenue a year from it.

    So that’s a good thing right?

  15. May 26th, 2010 at 13:19 | #15

    There are a number of sources for the $9bn figure – the first one I googled was from Westpac, but perhaps the Budget papers may be more convincing. Look at the “Memo – Net impact of RSPT” line at the 10th line of the table.
    The $12bn figure comes from adding the $3bn expected in the first few months of operation in 2012-13 to the full year’s revenue in 2013-14. Obviously, the more relevant figure to evaluate the tax is the full year, not the partial.
    Far be it from me to accuse you of trolling on the issue.

  16. smiths
    May 26th, 2010 at 13:39 | #16

    i think the left and labor in general should acknowledge that the way this has been introduced is atrocious,
    i consider it to be one of the stupidest things labor has done,
    i think the idea that anything above 6% is a ‘super’ profit is offensive to all people,
    i think the timing could not have been worse with china stumbling, the euro creaking and the domestic housing market again looking dicey,
    people on the right and in big business are irrationally anti-labour, this has provided them with two decades of legitimate material to use against labour,
    rudd is a reckless moron and has done a great disservice to the genuine reality that big business gets off too lightly

  17. May 26th, 2010 at 13:52 | #17

    This statement supporting the resource rent tax is curious in its intent. It supports taxing profits rather than the existing production-based royalties as most economists would. But its other contentions that the mining industry will not contract conflict with this view.

    The claim that depletable resources are ‘different’ to other industries suggests there is a market failure associated with their production. Perhaps the implied notion is that they are costless to explore for, prove up produce and exploit – it’s hard to say for sure what they think because they don’t say. Hotelling in 1931 taught that in the absence of distortions competitive extractive industries drive a competitive equilibrium. It would be good to know what the distortion is here that warrants special treatment but for goodness sake don’t tell us it stems from the fact that the firms extract depletable resources. Is it that rights to explore are not auctioned? Be clear.

    From the correct claim that a profits tax is better than production based royalties our economists jump to the view that there is no reason to expect that the mining sector will contract when a profits-based tax “replaces” a royalty-based tax. The word replaces here is ambiguous since it suggests revenue neutrality but the current government proposal is anything but that. My understanding is that the current government tax is designed to yield huge revenues for government net. In no sense is it a “replacement”.

    In the final part of the statement the economists recognise that the resource tax will reduce “the profitability of mining companies and the value of the exploration and mining rights “ they hold. It is hard to tally this obvious recognition with their earlier claim that there “is no reason to expect a net contraction in mining over the longer term”. In fact you cannot reconcile these statements – they are simply inconsistent.

  18. Fran Barlow
    May 26th, 2010 at 13:58 | #18

    @Andrew Reynolds

    Fran, Far be it from me to accuse you of trolling on the issue.

    Yes indeed. You’d never do that, which is just as well, because I wasn’t.

    Personally, were I devising the tax, the operation of the tax would predict significantly more than the $9billion.

    For a start, there would be no super profits threshhold and we wouldn’t even call it a super profits tax. It might be called the Progressive Resource Tax and it would apply from the first 0.1% of profit.

    That 0.1% might only be taxed at 10% but by the time the profits were up around 25%, the state’s share would be at least 50%. There would also be a windfall profits increment — descrtibing short term upward price anomalies from which the vendopr profited and which had little to do with the business plan of the miner — civil unrest in a source company, blockage of a shipping way etc … Profits from a price spike (defined as an upward movement in excess of 5% in any seven day period) would be taxed at 90% until the price returned to within 5% of the pre-price spike position.

  19. May 26th, 2010 at 14:08 | #19

    You may as well call that idea the “Vast Profits to Accountancy Firms Tax” and be done with it. The VPAFT would be incredibly difficult to administer and highly unpredictable in in its effects – except that the only real incentive would be to leave the stuff in the ground and mine it in Canada, Brazil or Africa.
    The net loss to Federal Government revenues would be (IMHO) huge.
    Would you make it a Brown tax so that if there was downside disruption (say a big strike) the government could fund up to 90% of the cost?

  20. fred
    May 26th, 2010 at 14:11 | #20

    Sometimes,not always of course but more often than not actually [shame about the pro nuke stuff] you make very very good sense.

  21. Ernestine Gross
    May 26th, 2010 at 14:12 | #21

    hc suggests that the super normal profit tax is calculated on profits above 6%. I understand that the super normal profit rate of 40% cuts in for profits greater than the (Australian) bond rate. If the bond rate happens to move to 12% then this is the cut-off rate. Similarly, if the Australian (Commonwealth) bond rate falls to say 4% then this is the cut off mark. Please clarify.

    There may be a problem calculating a mining company’s profit rate. Assuming it is an accounting rate of return, defined on equity, then companies have some room to influence this rate of return via capital structure decisions and asset valuations.
    Please clarify.

    hc writes: “From the correct claim that a profits tax is better than production based royalties our economists jump to the view that there is no reason to expect that the mining sector will contract when a profits-based tax “replaces” a royalty-based tax. The word replaces here is ambiguous since it suggests revenue neutrality but the current government proposal is anything but that. ”

    I can’t see why the term ‘replace’ would suggest revenue neutrality. I understand it means the existing laws on royalty payments are replaced with new laws on super normal profit tax.

  22. jquiggin
    May 26th, 2010 at 14:20 | #22

    The proposed tax isn’t neutral in its effects on the mining sector. But a large proportion of the proceeds goes to reducing the general rate of company tax and to better tax treatment of savings. So, the package as a whole is close to revenue neutral.

  23. smiths
    May 26th, 2010 at 14:23 | #23

    in short form,
    robbing peter to pay paul

  24. Ernestine Gross
    May 26th, 2010 at 14:26 | #24

    @Andrew Reynolds

    Your comment that Fran’s proposal would be incredibly difficult to administer and benefit primarily the accountancy firms while making life for the Treasury very difficult, is a fair and constructive comment, IMHO.

    It seems to me one of the difficulties with the super normal profit tax is exactly its intent to be fair in the sense of not squashing the small, often local ,mining companies and not penalising large corporations during times when even the big end of the industry is facing slumps in commodity prices.

  25. May 26th, 2010 at 14:33 | #25

    I answered JohnL’s question as asked.
    I would argue that a reduction of 2% in the general rate of company tax is unlikely to make any real difference to decision to invest in Australia or not. A difference of approx. 30% in mining is likely to make a difference to the mining industry.
    I do not often agree with smiths, but in this case I think he is substantially right. I would extend his metaphor, though – this tax is robbing a large amount from peter to give a pittance to paul. It is bound to hurt peter a lot more than paul is advantaged. In the medium term peter is likely to simply give up and leave. This will result in the tax being substantially revenue negative – something I would normally be in favour of, but this is cutting off your nose to spite your face.

  26. May 26th, 2010 at 14:33 | #26

    John, I agree it is not neutral in terms of its impact on the mining sector. But the statement goes on to claim “There is no reason to expect a net contraction in mining in the longer term as a result of replacing royalties with the proposed resource rent tax”. This is coupled with the apparently contradictory claim “The RSPT will reduce the profitability of mining companies and the value of the exploration and mining rights allocated to them”.

    This inconsistency is not innocent since it involves dismissing all the criticism of the RSPT with a statement which seems on the face of it wrong.

  27. Uncle Milton
    May 26th, 2010 at 14:36 | #27

    As I understand, the government is not saying that the bond rate marks the cut off point between normal profits and super profits. The government does acknowledge that there is risk in mining and that investors are entitled to expect returns above the bond rate. I don’t think they’ve said how much above, but let’s say it’s 15%, comprising a risk free rate (= bond rate) of 6% and a risk premium of 9%. .

    However, once allowance is made for the rebate of losses (which is not a normal feature of tax design) then taxing profits above the bond rate still gives a return to shareholders of 15%. In effect, by chopping both the top 40% and bottom 40% off the distribution of profits and losses, then the expected profit is unchanged compared to a system which does not take off the top 40% but does not rebate the bottom 40% either.

    “robbing peter to pay paul”

    This is the essence of revenue neutral tax reform. It’s exactly what the GST (“A New Tax System”) was all about. GST in, wholesale sales tax out, income tax down.

  28. Uncle Milton
    May 26th, 2010 at 14:40 | #28


    Harry, if all it’s doing is taxing rents, then it’s a transfer from the mining companies to the government that will have no effect on any production or investment decisions.

  29. May 26th, 2010 at 14:47 | #29

    Uncle Milton, That is incorrect if the tax reduces the return to exploring for and proving up mineral deposits. These activities are undertaken because a large reward is seen as possible. Most mineral prospects do not end up as commercial mines. Moreover John acknowledges this point by saying that the RSPT will reduce rthe value of exploration.

    Forget about taxing rents in the manner of Henry George. The theory was wrong when propounded since George failed to account for investments in land quality. The same is true with respect to slapping large taxes on mining profitws – they too will only be neutral for projects already in operation at their optimal long-run scale.

  30. smiths
    May 26th, 2010 at 14:52 | #30

    the government significantly aids exploration now with SA’s PACE program being seen as the most advanced,
    vast sections of government are employed in sourcing the best info for miners to use at taxpayer expense with the returns assumed to be worth it,
    no-one in the mining industry seriously thinks that exploration would be damaged by this tax,
    maybe it would be fairer to drop the tax but simultaneously stop providing vast government resources and expertise effectively free of charge to the industry

  31. Fran Barlow
    May 26th, 2010 at 15:01 | #31

    @Andrew Reynolds

    You may as well call that idea the “Vast Profits to Accountancy Firms Tax” and be done with it.

    What do you have against accountants? They are surely no less deserving than mining companies.

    More seriously though, this stuff could be done through a fairly simply piece of software and entry of the relevant data, in something close to real time. No accountancy firms needed.

    the only real incentive would be to leave the stuff in the ground and mine it in Canada, Brazil or Africa.

    I name you Clive Palmer and invite you to exercise your ticket to the Bahamas. Nobody in their right mind is going to pass up profits on this scale just because they can’t earn as much as if they could gang rape the country rather than paying a fair price for services rendered.

    Surely the real problem here is that if the Feds introduce a tax like this and the mining morlochs don’t leave for browner pastures, that other states like Brazil, South Africa and Canda may decide to use us as a precedent. Let’s face it, if Total can do a deal with Chavez, the three stooges, Albanese, Twiggy and Clive can cut one with Rudd.

  32. Uncle Milton
    May 26th, 2010 at 15:02 | #32


    Harry, I said the tax will have no effects if all it is doing is taxing rents. You said it won’t be taxing rents; it will be taxing the required return to exploration. There is no contradiction. And we need to bear in mind that the tax will be replacing royalties. So it comes down to whether replacing one distorting tax (royalties) with another tax, which might or might not be distorting, is net efficient for the resource sector. And then there is the net effect of the whole tax reform package, taking into account the cut in the company tax, etc.

  33. may
    May 26th, 2010 at 15:08 | #33

    smiths :in short form,robbing peter to pay paul


    using rent to pay the rates?

  34. May 26th, 2010 at 15:15 | #34

    Uncle Milton, That argument is avoiding the point. A tax on rents will affect the demand for exploration since exploration is undertaken to secure rents. That is what is being denied in the statement by the economists when they say the tax will not “contract” the mining industry.

    Replacing one distorting tax with another does not inevitably lead to a better outcome. It won’t if the new distorting tax is large enough to choke off the development of new mining projects and that is what the debate is about.

    The statement by the economists is not proposing that an empirical study be undertaken to find out if the new tax regime causes less costs than the old one. They are asserting it does on the basis of theory that is, at best, unconvincing.

  35. May 26th, 2010 at 15:28 | #35

    Nice try mincing the words, the letter actually says “… the proposed resource rent tax” not “a profits-based tax” as you say. There is no ambigous implications as you suggest.
    Surely with your obvious attention to detail you can see the difference between a resource industry and most other industries? One is sustainable and builds an asset while the other is unsustainable and simply takes an existing asset.

  36. Uncle Milton
    May 26th, 2010 at 15:33 | #36


    Harry, I agree it is an empirical question about the overall impact on the economy. But the rhetoric from the most vocal opponents of the RSPT is that it will obviously wreck the economy.

  37. May 26th, 2010 at 15:45 | #37

    I have nothing against accountants – if you knew my history you would know that. I do, however, know that tax accountants are a genuine expense to a business and complex tax laws just increase the expense. Given my knowledge of accounting I can tell you that many of the elements of the sort of tax you are talking about there would be heavily subject to accounting estimates and therefore complex to administer. Your faith in accounting software is mis-placed. They are great at doing what they are designed to do, but administration of this sort of highly complex tax with multiple and shifting rates is not one of them.
    On the question of companies moving – it is not a matter of “gang rap[ing]” anyone. It is a simple matter of return on investment. If the returns in Australia are being taxed at an effective (near) 60% and returns in (for example) Canada are taxed at an effective (approx.) 30% then the choice is very, very clear. The law simply requires the company directors to explore outside Australia, provided the prospectiveness of the territory is even close. It is not even a matter of choice. If Canada is silly enough to tax at 60% (unlikely given their comments on the RSPT), the exploration activity will move to Africa.
    Even thinking a little bit about directors’ duties should make that one simple to work out.

  38. Fran Barlow
    May 26th, 2010 at 15:45 | #38

    I find this interesting:

    Norway’s petroleum tax system approximates a rent?based tax. Though based on its company income tax system, it utilises an uplift on expenditure to exempt the normal return and reimburses the tax value of exploration expenditure for companies in a loss position. Norway imposes a total tax rate on petroleum resource rents of 78 per cent, consisting of a 50 per cent rent?based tax rate and a company income tax of 28 per cent, with no deduction at the company tax level for the rent?based tax paid.

  39. smiths
    May 26th, 2010 at 15:56 | #39

    fran, you are not allowed to mention the N word, or their massive sovereign wealth fund, or thier genuine attempts at an equitable society
    very un-australian of you

  40. Fran Barlow
    May 26th, 2010 at 15:59 | #40

    @Andrew Reynolds

    if you knew my history you would know that.

    I knew that when I made the comment. Irony …

    If the returns in Australia are being taxed at an effective (near) 60% and returns in (for example) Canada are taxed at an effective (approx.) 30% then the choice is very, very clear.

    Well that is the claim but as we know, this is bogus. In effect, mining companies are paying between 13% and 17%. Yet even if they were paying more (and it’s hard to see how they could be given the position in 2001 when they were paying seven times as much proportionately and didn’t upsticks and leave) ceteris paribus applies. Where else can they get the same rate of after tax profit per unit of risk and hold it? What about the cost of starting again with new equipment? What about the interruption to supply? Shipping cost to market? Relative currency values?

    If you are talking about new start-ups the same basic considerations apply.

    Even thinking a little bit about directors’ duties should make that one simple to work out.

    Oh, I am aware they have a fiduciary duty to stamp their feet and carry on, especially if it succeeeds in discouraging rival mining start-ups. But we don’t have to treat them any more seriously than those soccer players who dive in front of goal to milk a penalty.

    I’d just love someone from the government to say: “you know, we’ve thought it over and we think we might need to revise the proposed tax: 60% and we will be starting with a low entry rate at 0%. That actually sounds fairer.”

    That would make my day. I’d be rushing to see the looks on the faces of the various corporate sleazebags and their Liberal playthings after that announcement.

  41. May 26th, 2010 at 16:02 | #41

    Andrew Reynolds at 15: The Budget papers do show what you said. It does seem as if the ABC fact sheet was wrong.

  42. May 26th, 2010 at 16:07 | #42

    Care to list the differences in the experience there? I can start. There is only one company extracting oil from Norway – the largely government owned StatOil, so the vast majority of the profits really goes to the government. StatOil can borrow at the government bond rate to fund its activities. The oil industry dwarfs all others in Norway, which has no other substantial natural resources. The oil is likely to run out there in the not too distant future. StatOil is controlled by the government

    Since the Norwegian State, acting through the Minister of Petroleum and Energy, has in excess of two-thirds of the shares in the company, it has sole power to amend our articles of association. In addition, as a majority shareholder, the Norwegian State has the power to control any decision at general meetings of our shareholders that requires a majority vote, including the election of the majority of the corporate assembly, which has the power to elect our board of directors and approve the dividend proposal by the board of directors.

    A few differences – I can find more if you like. This example is not relevant to Australia.

  43. May 26th, 2010 at 16:09 | #43

    Thanks, JohnL – I think in this case the ABC was simply mistaken. It is an easy mistake to make.

  44. Ernestine Gross
    May 26th, 2010 at 16:11 | #44

    It seems to me there is some lack of detailed information. Does anyone know the formulae for calculating the proposed tax?

  45. Freelander
    May 26th, 2010 at 16:15 | #45

    @Andrew Reynolds

    Argue? You’re against it but ignorance doesn’t constitute an argument. You don’t even understand it.

  46. Fran Barlow
    May 26th, 2010 at 16:16 | #46

    @Andrew Reynolds

    Fair enough Andrew. So what you’re saying is that the state should take over the exploitation of mineral resources?

    Maybe if we jack the taxes up enough, they will leave and then the state can simply resume them, licencing operators to work them for a government statutory authority. That sounds fair to me.

  47. May 26th, 2010 at 16:17 | #47

    I think EY’s paper is one of the simplest. Even so, it runs to several pages.

  48. Freelander
    May 26th, 2010 at 16:30 | #48

    Most familiar with neoclassical analysis of the issue would understand that the tax as originally proposed is essentially sound.

    The so-called tax is not really a tax but a method of getting at least some of the value for those resources which are owned by all Australians without impacting on the incentives to explore and extract. These resources are owned by all Australians as a result of federation and the vertical fiscal imbalance which is rectified through the Commonwealth Grants Commission which takes revenue raising capacity of states into account when doing its balancing. This balancing process effectively makes any resources nominally owned by a state owned by all. That and the little matter of all citizens in Australia being citizens of Australia not of any particular state.

    As JQ said at the outset, for any policy, however desirable in pure form, there are always imperfections when put into practice. These matters do provide plenty of scope for debate.

    Nonsense about the tax ruining the country and killing the industry are well outside the scope of intelligent debate. This type of nonsense is as sensible as belief in flat-earth theories, the moon landing hoax, creationism or the global climate change conspiracy hoax. Which, of course, means that between now and the election we will be hearing no end of nonsense. Not only because idiots are thick on the ground (and everywhere else) but because there is a lot of money to be gained by the mining lobby if the ordinary voter swallows such rubbish.

  49. May 26th, 2010 at 16:35 | #49

    Have you worked out what a Brown tax is yet?

  50. jquiggin
    May 26th, 2010 at 16:55 | #50

    Harry, are you claiming there are no rents to tax? If so, then presumably the mining industry could relocate anywhere in the world where taxes were suitably low (say, in Ireland[1]). Do you really believe that?

    fn1. At least until they jack the rate up to the EU average to pay for the bailout

  51. Freelander
    May 26th, 2010 at 17:36 | #51

    I will enjoy watching miners attempt to extract Australian resources from another ‘low tax’ country. Maybe we will have to put down underground steel barriers to stop them, similar to the ones between Egypt and Gaza.

    And if they believe the pickings will be better elsewhere, if there are other countries that are giving their resources away for free, I doubt there will be any room left at those troughs for a bunch of recently disgruntled Australian miners to elbow their way in.

  52. May 26th, 2010 at 17:46 | #52

    Freelander, So, a 30% corporate tax rate is “free” is it?
    Your maths gets more and more rubbery.

  53. May 26th, 2010 at 18:03 | #53


    What I am saying is that the claims made in the letter are inconsistent and avoid the key issues in this discussion by making these inconsistent claims. The letter is endorsing the government’s tax while recognising that it will have negative impacts on the mineral sector (it will reduce the value of exploration investments) but nonetheless asserting that in the long-run it will not “contract” the industry. Of course the opposition to the RSPT is based on the point that it will have the disincentive effects that the letter acknowledges exist but which the letter denies will have bad effects on the industry.

    You cannot claim this without evidence. The current system distorts activity and so does the new proposal particularly as the tax is so large. All the letter is doing is guessing that this substitution improves things and asserting this guess as fact.

    What the introduction of the tax is saying that if a decent mining project makes it to the development phase (a rare event) and makes a lot of money the Government will take it away from you – it will expropriate a significant fraction of the gains. Of course this sovereign risk will damage exploration and development activity. Indeed even if the RSPT is eventually defeated some damage in terms of miner expectations has been done.

  54. Ernestine Gross
    May 26th, 2010 at 18:05 | #54

    Andrew Reynolds :Ernestine,I think EY’s paper is one of the simplest. Even so, it runs to several pages.

    The referenced paper answers my questions. Thank you.

    I don’t see a need to change my understanding of the proposed super profit resource tax. IMHO, EY’s conclusions as to the consequences are at most one of a large possible number of hypothesis.

    The super profit resource tax affects only the distribution of profits but not the profitability of a mining project. Furthermore, if JQ is right in saying that the proposed tax is close to (govt) revenue neutral, then it is the timing of the profits available for distribution that is most affected. Given the explanation of the policy, one can expect a modest net increase in tax revenue when averaged over a period of time that makes sense in terms of human planning horizons.

  55. Ernestine Gross
    May 26th, 2010 at 18:09 | #55


    Is your income affected if 40% goes automatically to your family? If not then your argument in 3, p 2, about ‘the value of a mining project’ is simply wrong. A distinction is to be drawn between profitability and the distribution of profits.

  56. Donald Oats
    May 26th, 2010 at 18:18 | #56

    Tax ‘em ’til their eyes bleed!! :-)

    Alice: exactly!.

    BTW, does anyone remember the cavalier decision causing the wholesale destruction of a bunch of small businesses and nearly the town itself, by this Australian mining companyBHP – suddenly pulling out. Mining companies – meaning the board and highest level managers, don’t cry a river about workers or small business if it suits them to suddenly change their minds, then pack up and leave after everyone else has committed capital to their businesses, believing the mining company rhetoric of making a go of a mining project. IIRC, the Canadian company did eventually buy out BHP, and it had nothing to do with the current Resource tax proposal.

  57. Donald Oats
    May 26th, 2010 at 18:42 | #57

    @Donald Oats
    Sorry. Last line should say “Super Tax proposal”, not “Resource tax proposal”.

    Normal transmission now resumed…

  58. May 26th, 2010 at 19:26 | #58

    The Central Flaw in the Henry Review, Para 4 :
    There is however, a fundamental flaw in the reasoning of the Review, which undermines its whole approach to the appropriate balance between the four tax bases defined above. That flaw is the assumption that the primary goal of economic policy should be to promote economic growth, as measured by GDP (along with other objectives such as equity and sustainability).

    I find John’s support of the principle of a resource rent tax to replace existing royalties, as being at odds with his comments about the Henry Review as being flawed.

    The RSPT is a more progressive, ‘economically efficient’ set-up. while royalties are more regressive. But do we want a more progressive system that gets the resources out of the ground faster, growth for GDP’s sake? Shouldn’t we be moving to higher ‘new resource’ prices, to improve the viability of recycle & to fund the move to renewable energy resources.

    I realise move forward on this is limited by the international willingness to move forward (See COP15). But I see the move from royalties to this RSPT system that favours ‘smaller miners undertaking riskier projects’ as being a step backward.

  59. Freelander
    May 26th, 2010 at 20:15 | #59


    It is certainly not ‘logical’ to conclude that if some says that a primary goal of promoting economic growth, as measured by GDP, is flawed then a policy that just happens to increase economic growth as measured by GDP is a policy that the person therefore has to be against.

    That is as silly as saying that if someone says it is not a good idea to have a policy of eating anything if it is green (because some believe if it is green it will necessarily be nutritious and safe to eat) and then to suggest that because the person eats spinach this is ‘at odds with their comments’.

  60. Alice
    May 26th, 2010 at 21:27 | #60

    Well said Freelander…
    I would also like to say that my mildly Rudd hating partner (Doug Anthony’s party descendent – some things are excusable from country folks) in fact thinks this tax is a good idea and also thinks its time there was some redistribution from extremely profitable industries to other industries that make up the mix in this country.

    He will be ejected by the far lunatic right soon from his own traditional party and will be joining Malcolm Fraser.

    He said “I hope the Government actually makes a move on the banks next. I bet the banks are worried about this”

    It would be nice to think so. I only have one suggestion for Rudd – dont do a “back down Barnaby” on this and do do a “fool no-body watered down media concession for the Mining firms.”

  61. Freelander
    May 26th, 2010 at 22:43 | #61


    Maybe so, but it is not really redistribution, or at least it is stopping an inequitable redistribution of money from the extraction and sale of public resources. The ‘tax’ which is really just a charge, part charge for our resources, is simply stopping them from taking what is not theirs for free, that is, them redistributing the what the public owns into their own pockets. As it is they will get sixty per cent. If they were to engage in rational debate they would concentrate on the use of six per cent for where it cuts in, but given that it only takes 40 per cent the six per cent issue hardly matters. The miners are still getting a great deal.

    This retrospectivity argument is total nonsense as well. As far as I am aware there is no intention to charge them for super profits they have already made. By retrospectivity they mean that they have already counted all the money they thought they would get in future if the government continued to let them away with getting the resources for almost nothing.
    If the retrospectivity argument had any validity then government would never be able to impose a new tax on anything because the new tax would have implications for existing investments. Business is perfectly happy for any reduction in business taxes and does not offer to compensate the tax payer for the benefits a cut in taxes bestows on existing investments. So if they are silly enough to have expected that government would never start charging more for resources that the public owns, then more fool them.

    The nonsense about sovereign risk, states right and the variety of other furphies that have been floated by mining interests is staggering. Clearly they have no shame. That Abbott and his cronies have joined them is not surprising. We knew they have no shame.

  62. May 26th, 2010 at 23:10 | #62

    Bad luck, Alice. It looks like the government is getting ready to back down. Swan sent Tanner to front the 7.30 Report on the RSPT tonight. Sending a more junior minister seems to be the pattern once they are about to back flip – they have had a lot of practice.

  63. Michael of Summer Hill
    May 26th, 2010 at 23:49 | #63

    Andrew Reynolds, I don’t know why the government should back down if as one of the government’s key advisors on the resources super profits tax says Treasury and the mining sector’s analysis of their tax rates for mining companies are both correct for reasons ‘‘The Treasury analysis … says if you measure the income of the sector … according to economic concepts and look at the actual amount (of) tax paid and treat royalties not as a tax (but) as an input cost, then you end up with a relatively low tax rate,’’ and furthermore ‘‘The reason for that is that the mining industry is relatively capital intensive and is able to benefit from the depreciation.’’

  64. Freelander
    May 27th, 2010 at 02:42 | #64

    @Andrew Reynolds

    Hobo two, surely time for you to bed down in the park? Wednesday’s papers tend to have a few more pages so you might be a bit warmer tonight. Not as warm as when you can bed down with the weekenders though.

    But anyway, what ever made you think that Tanner is a ‘junior’ minister? You never know, the government could throw the mining dogs a bone, but I can’t really see them caving in which would be political suicide.

  65. Freelander
    May 27th, 2010 at 02:48 | #65

    @Michael of Summer Hill

    Quite right. The only correct way to treat the so-called tax is as an input cost. They ought to put the tax up on the sector as well to bring it into line with other industries. There is no reason to be subsidising mining with ‘tax expenditures’.

  66. Alice
    May 27th, 2010 at 07:28 | #66

    You say
    “The nonsense about sovereign risk, states right and the variety of other furphies that have been floated by mining interests is staggering. Clearly they have no shame. That Abbott and his cronies have joined them is not surprising. We knew they have no shame.”

    Not only do they have no shame. They obviously have very deep pockets that they can manage a media spin campaign. The minerals council has a website “urging” Aussies to help them fight “the attack on mining”. The TV ads will start soon and as well they have insisted their employees “phone” and otherwise badger the media and their local MPs.

    The miners not only have no shame. They have no ethics and no sense of moral responsibility to the country that has allowed them to make super profits.

  67. gregh
    May 27th, 2010 at 07:56 | #67


    The current campaign reminds me of the media attacks on Whitlam in 75 – eg the Reader’s Digest ad on TV showing rats in the streets with abandoned cars and rubbish everywhere. Only readers Digest TV ad I ever saw.

  68. Freelander
    May 27th, 2010 at 08:34 | #68

    Maybe mining will hire some T-baggers and ship them into Australia as well, so we can have a full blown ‘grass roots movement’ in support of their tax revolt!

  69. Alice
    May 27th, 2010 at 08:39 | #69

    Agree – lies lies more lies and damn tax avoiders Freelander…

  70. Ernestine Gross
    May 27th, 2010 at 08:54 | #70


    “The only correct way to treat the so-called tax is as an input cost”.

    Subject to the condition that the input cost is a function of the commercial (market) prices of physical assets, operating input prices (eg wages, fuel, repair costs), output prices of minerals, and depreciation allowances (as proxies for the second hand market prices of the physical assets), and the long term Aussie bond rate, I’d agree with you. It also corresponds to the content of the Ernst&Young (EY) circular referenced by Andrew Reynolds, although they use accounting terminology.

    According to EY, the calculation of the SPRT input cost is done before financing costs. Again this supports your terminology. It is a clear distinction to the calculation of income tax.

    Setting aside EY’s conclusions about the impact on the SPRT, I’d say they do raise a few questions which I can see are of practical importance for the mining company management, for their accountants and individual investors. While these matters need to be cleared up, they are not obviously different from questions arising from any taxation laws.

    Instead of ad campaigns, pro or anti, I would prefer to get some short ABC programs where the technical aspects are explained to the public at large at least on the level of the EY circular. It should become clear very quickly why there is a purpose for discussions between the government and the mining industry regarding the details of implementation as distinct from disucssions about the SPRT per se.

  71. May 27th, 2010 at 09:37 | #71

    It would have to be on SBS – perhaps dressed up as an Hungarian drama with some nudity in it. Technical tax matters are way too boring for the ABC as it is currently constituted.
    That said, though, it looks like it may have to be a series. Swan is getting ready to announce “major changes”. Let’s see if they can get is closer to a good tax this time.
    You may not have noticed, but Tanner is junior to Swan. Perhaps not in intellect, but the Finance Minister is junior to the Treasurer.
    That aside, have you got your story straight on what a Brown tax is? It does look like you have learnt a little. Perhaps with some further reading you could work out that that the Australian taxpayer would have had to pay BHP $1bn or so when they closed Ravensthorpe.

  72. James
    May 27th, 2010 at 09:53 | #72

    Now, a reply from the “I’m with Stupid” team! Economists ridiculed over backing for tax. Includes quotes like:
    “I think economists are put here to make weather forecasters look good” – Ian Macfarlane.
    “Mining companies… are paying more than their fare share of tax” – Tony Abbott.
    “I make passionate love to mining company supermarket checkout chicks” (or something) – Barnaby Joyce.

  73. Ernestine Gross
    May 27th, 2010 at 09:57 | #73


    Setting aside some details which matter primarily in a dynamic context, you have to admit that the SPRT input tax is very clever in so far as it is as ‘market oriented’ as one may get (ie the SPRT is a function of market variables other than managerial decisions about the capital structyure.) Surely,

    As for the article in the Australian which you referenced, I am not impressed. It is again a shadow boxing thing, which, as you know, I don’t like.

    On theoretical grounds, I do hope the Government adhers to using the 10 year Government bond rate as the “SPRT allowance” (using E&Y’s terminology). There is a coupon rate and a yield. The latter varies daily and the former depends on the issue. I understand that the numerical value of the ’10-year government bond rate’ is to be determined each year. I imagine they are going to take some weighted average of the yield. Again this variable is linked to market conditions, namely the financial market. It is neat. It fits into the conceptual framework of the CAPM and therefore is comprehensible for investors in financial securities.

    I am really glad JQ put this topic up because I might have missed the sheer pleasure of observing a clever policy measure in detail.

    Also, thanks again for the EY circular. It was helpful.

    PS: Not wise to pick on the Hungarians if you are in the banking sector(!), I’d say.

  74. gregh
    May 27th, 2010 at 09:58 | #74

    Andrew Reynolds :
    It would have to be on SBS – perhaps dressed up as an Hungarian drama with some nudity in it.

    What a boorish ocker comment

  75. James
    May 27th, 2010 at 10:15 | #75

    hc :
    Forget about taxing rents in the manner of Henry George. The theory was wrong when propounded since George failed to account for investments in land quality. The same is true with respect to slapping large taxes on mining profits – they too will only be neutral for projects already in operation at their optimal long-run scale.

    Bollocks. Georgists will tell you ad nauseum that they only want to tax the unimproved land value and that taxing improvements is counterproductive.
    On your other points, I thought the proposed tax gave rebates for exploration expenses.

  76. May 27th, 2010 at 11:47 | #76

    Before addressing the substantial point, which article in “The Australian” did I reference? The only one I can see on this page is from the ABC.

    I have, several times, said that I have no fundamental objection to this tax. Ideally, it would be a close to revenue neutral replacement for royalties and I am sure the Feds could deal with the relevant transfers to the States – or perhaps the States themselves could implement it. I am confident that even if it were mildly revenue accretive the mining companies would be out there applauding as it is, theoretically, a better tax – even if you are paying some more.
    The issue I have always had with this tax is that the level is such that it will act as a substantial, and perhaps overwhelming, disincentive to invest in Australia.
    As a general statement, I would prefer to have much less tax than we do, but I try not to make the best the enemy of the good. This is a better tax structure than a royalty. At the levels indicated, though, it really sucks – particularly as it will just act not as a replacement for any old taxes (as the GST did), but simply as a brand new, big, impost.
    I was trying, perhaps inappropriately, to indicate how boring this would be as television. Perhaps you missed the satire, both on the tax and on SBS. I may put [warning: satire] before my next one.

  77. Ernestine Gross
    May 27th, 2010 at 12:30 | #77


    You are right, you did not reference an article by the Australian but a page from the ABC. My apologies for my error.

    The remainder of your post pertains to the impact of the changes of the rules of the game. I don’t have all relevant information to comment beside saying that, on theoretical grounds (minimum wealth constraint) there is an issue with the observed growing income inequalities (‘two or three speed economy’ type argument as well as intergenerational ‘our non-renewable resources’) and I understand that the new rules of the game work in the right direction. That is, the new rules of the game reduce the growing income (and wealth) inequalities within a market oriented framework. I can also say that the reduction in ‘international competitiveness’ (re tax) put forward by hc and possibly others, is not convincing. Otherwise, I do trust that the economists who signed the letter have done their homework and that the Treasury considers more relevant information than any single corporation or industry body.

  78. James
    May 27th, 2010 at 14:41 | #78

    Not just the size of mining industry profits but also the proportion of industry revenue that goes to profit has more than doubled over the last 10 years. If the government were to take 40% of those expanded profits they would still be above the return on revenue that they enjoyed prior to 2001. Since we had a thriving mining industry in 2001, the argument that the new tax is an overwhelming disincentive to investment seems shaky, as if profits at the old level were so disappointing, we wouldn’t have a mining industry.

  79. jquiggin
    May 27th, 2010 at 15:48 | #79

    Harry, the question is not whether the RRT is an ideal lump-sum tax (we all agree no such thing exists), but whether it is an improvement on the existing royalties system. I assume that you agree that it is. The writers of the letter, supported by economic modelling, believe that it is enough of an improvement that it can deliver both more revenue and less distortion than the existing system. If you disagree, you need to show why, not just point to the fact of imperfect neutrality*.

    * Note that Ben Smith, who made the point about non-neutrality very effectively decades ago was happy to sign the letter.

  80. May 27th, 2010 at 15:52 | #80

    You seem to imagine a world where the mining companies have a choice – either to mine in Australia or not to mine at all. Under those circumstances I would agree that, provided we left them anything at all, they would continue to mine – if perhaps in limited amounts and only cherry-picking the best high grade deposits.
    Fortunately or unfortunately we do not live in that world. If mining companies face an EMTR of around 60% here they are likely to shift their exploration activities to a country that does not tax them that heavily and also has good mining potential. There are several of them, including Canada, the US, Brazil, the Phillipines and much of Africa. The governments of any of them would be happy to have the additional capital spent in finding and developing their resources.
    As I have said before, while the existing mines would continue to operate, the investment in them and in finding and developing their replacements would simply stop.
    The outcome of this is (IMHO) very simple to work out. We would end up with exhausted mines, no or very limited production and no, or very small, tax revenue.
    To address your specific point – in 2001 (and at many times before) the mining companies faced low commodity prices, so it did not matter where they mined they received the (largely) same revenue wherever they mined. They did reduce their investment in exploration as a result, but it was widespread.
    A tax at this level, though, provides a strong disincentive to invest in Australia and in Australia only. The logical outcome (indeed the legal requirement) would be to shift investment elsewhere.
    Again, as I have said before, it is not even a choice for a mining company. If the Board of Directors believes that the best returns for the company will be to shift investment out of Australia then they must shift. They have no real choice but to do it. The Corporations law requires them to do it.
    That is the crazy thing here – the government seems to be ignoring their own law.

  81. Jason
    May 27th, 2010 at 16:19 | #81

    A couple of questions for John (et al) on the detail of the design, in particular, the risk free rate your letter supports. I am taking the side of the miners in these questions, in part to see whether you accept there is some truth in the miner’s rhetoric on the long term bond rate being insufficient and that bankers putting a hold on lending to poor old Twiggy:

    First, you say “uplifting undeducted capital and losses by anything above ‘a risk free rate’ would create potential distortions.” You did not say the government bond rate (as the govt has), but you say a risk free rate. Is it unlikely that these RSPT credits will have the same charateristics as a government bond even if they are ‘risk free’ (eg, not traded in a deep, liquid market). If not, I assume you mean the risk free rate for an asset with the same characteristics as an RSPT credit (ie, potentially tied up in an investment until it fails/succeeds or traded on some secondary, not always liquid, market). Therefore, a premium on the government bond rate to reflect the difference in characteristics (eg, liquidity, but others) would be appropriate. Agree? Problem is, we don’t know the characteristics of the market in which these credits will be traded, Ken Henry says ‘trust me’ it will be jsut like bonds. Should bankers putting up billions of dollars trust this?

    Second, is it true that RSPT credits/allowances could ever really be considered ‘risk free’, ie, as risk free as AAA rated Government bonds? Is the probability that the Government of Australia will default on its borrowings the same as the probability a future Government not honouring RSPT credits. Would you regard RSPT credits as having the same assuredness as AAA rated Government bonds (and I am talking the real world here where people are really having to raise billions of dollars)? I know a Govt admiting to a soveriegn risk is almost impossible, by defintion, but Govt’s change, there is real risk there isn’t there (god only knows what Abbott would do). Should the Govt quietly add some basis poitns to compensate for this risk (probabilities are not hard to work out but they don’t need to make it public)?

  82. James
    May 27th, 2010 at 16:29 | #82

    I think it rather more likely that, as Ross Gittens argues, offshore investment sites are likely to raise their taxes as well to capture the rents from this alleged flow of investment. India and Brazil are already talking about doing so. Particularly given that many countries are facing an (ideological) fiscal crisis.
    “I would agree that, provided we left them anything at all, they would continue to mine – if perhaps in limited amounts and only cherry-picking the best high grade deposits.” – again this does not describe the actual state of mining in 2001 or other periods of lower prices and is therefore unrealistic.
    It’s my understanding that the cost of exploration is rebatable under the proposed tax regime, as are the various start-up costs, and indeed any losses the mine makes until it is up and running at a profitable rate are subsidised; so why should this tax discourage exploration?
    But let’s hypothesise that those miners or the banks which loan to them which are free to move capital internationally (so excluding the smaller players) abandon their suspected reserves in Australia (most of which are mapped to at least some extent already) and move offshore. What would be the result? First, the price of prospects and exploration leases in Australia would drop, due to less competition and companies liquidating their existing unexploited holdings; second, until the companies can bring these alleged new resources in Brazil into production or at least map them, the price of commodities will rise as markets factor in that the supply of resources from Australia is going to drop. In other words, the Australian mining market suddenly becomes more attractive to other entrants. Smaller local companies or new entrants will expand accordingly into the market opportunity. This is theory-of-rent stuff; landlords (or mining companies) don’t control the supply of the commodity.

  83. Freelander
    May 27th, 2010 at 16:32 | #83

    @Andrew Reynolds

    Hobo two, you seem to assume those running various mining entities are complete fools.

    True, they are playing that part well with their ridiculous claims about the ‘sky is falling’ damage that would result from the proposed tax. But although, greedy, ignorant and unscrupulous they maybe, complete idiots they are not. But they are really banking on fools like yourself believing their nonsense.

    Way more than enough will still be left in the trough to allow them to get more than their snout’s full. Don’t worry about the risk of no longer hearing the melodious sounds of their gleeful squeals as they gorge themselves silly on publicly owned resources. The patter of little, and big, trotters around Australia’s resource trough will continue to be heard for many years to come. Along with their regular threats to dine elsewhere, because nothing will sate their gnawing hunger (or so they will continue to claim).

  84. James
    May 27th, 2010 at 16:42 | #84

    What’s with this Hobo one, Hobo two stuff? Are you two auditioning for the roles of Vladimir and Estragon?

  85. May 27th, 2010 at 16:45 | #85

    jquiggin :
    Harry, the question is not whether the RRT is an ideal lump-sum tax (we all agree no such thing exists), but whether it is an improvement on the existing royalties system. I assume that you agree that it is. The writers of the letter, supported by economic modelling, believe that it is enough of an improvement that it can deliver both more revenue and less distortion than the existing system. If you disagree, you need to show why, not just point to the fact of imperfect neutrality*.
    * Note that Ben Smith, who made the point about non-neutrality very effectively decades ago was happy to sign the letter.

    I most certainly would not agree that no such thing as an ideal lump-sum tax exists; I’m with Frank Ramsey on this. Rather, I would agree that it only exists as an ideal, that ascertaining the amount in reality is an intractable problem, rather like the advice on the right amount to tighten a nut as being until you strip the thread, then back half a turn, or the perfect roulette system (bet red when it’s about to come up red, and similarly for black). Simple continuity arguments provide an existence proof for such an amount, even though they do not help with finding it in practice.

    In the same way, I see a royalty system as being better in (ideal) theory than the proposed tax, and the material question about the latter as being whether it can in fact deliver a better approximation to those ideal levels in practice. However, as the problem still seems intractable, I remain sceptical as to whether it would actually be an improvement after all. The current debate does nothing to persuade me otherwise, and if anything reinforces my scepticism; the burden of proof does not lie with the doubters, as asserted by “[i]f you disagree, you need to show why, not just point to the fact of imperfect neutrality”.

  86. May 27th, 2010 at 16:53 | #86

    I prefer to not trust Australia’s future to a gamble that all other potential investment targets will also hike taxes up. The Canadian provincial governments, for example, have made no bones about their glee at this move.
    In relation to the situation in 2001, I did not work for a mining company at that stage, nor do I now. I did work for exploration companies through getting my undergrad degree, though – and the effects of low prices are that simple. Exploration is the first thing to go. While mining itself tends to continue as long as it produces some profit, the exploration simply stops. I see no reason why this situation would be any different. Indeed, it would be worse as this is country specific, not general.
    I would also add that exploration is a rather unique activity. Most of it is unsuccessful. The actual exploration that goes into finding a given resource will be rebated but, AFAICS, the exploration that is not successful (i.e. most of it) is not rebated. The whole exploration industry relies on a few good strikes out of a lot of dross.
    This tax serves to depress profits out of any final mine, thus reducing the value of all exploration, most of which will not be rebated. Reduced value will simply mean reduced exploration, particularly if the exploration budget can be spent elsewhere.
    While it is also true that the price of leases here would drop, the leases themselves are not expensive and do not constitute a major cost in relation to the exploration or development budget. This component of the cost can be safely ignored.
    In any case, it is not only the large ones that can move overseas. Many of the WA junior explorers, including former clients of mine, have extensive exploration budgets committed overseas. Most are (in ASX terms at least) tiny. Any or all of them could shut down exploration here fairly quickly, relinquish the leases and walk away, spending the budget elsewhere. In fact, as I have said before, the law probably requires them to do so.

  87. Freelander
    May 27th, 2010 at 16:59 | #87


    I think most practical economists would have to agree with you on this issue, and to disagree with the proposition that because the tax does not constitute a perfect non-distorting pure tax it is therefore bad policy. To reject the proposal on those grounds is simply to allow ‘the perfect to be the enemy of the good’. I applaud those economist who had the gumption to sign that letter.

    If the mining lobby is ultimately successful in making the government back down, or in precipitating a change of government, their threat to democracy will have been successful and we will be a significant way down the path the Americans blazed long ago.

  88. May 27th, 2010 at 17:07 | #88

    One correction to the above – the EY document (linked previously) says that exploration will be rebated, but only when the project is abandoned, which may be years after much of the actual expenditure.
    The effects will be interesting. The incentive then (if you explore at all) will be to drill quickly and, if nothing is found, abandon it once you are reasonably sure the ground is sterile to get the rebate as soon as possible.
    A small thing, but I will be fascinated to see the cheques going to the exploration companies for this. I still doubt that there will be much, if any, exploration out of this.

  89. Jason
    May 27th, 2010 at 17:17 | #89

    Andrew, no such incentive is intended or would exist in a perfect implementation of the tax. The idea is that you will be able to carry forward 40% of your expenditure at the government bond rate so if you want to ‘get your rebate’ before abandoning the project you simply need to find someone else willing to buy that future refund off you. It is ‘backed by the government’ so therefore meant to be easy to trade.

  90. Freelander
    May 27th, 2010 at 17:18 | #90

    “Reduced value will simply mean reduced exploration…” Dandy (aka H2), the tax is on super profits. That is, the tax is on profits beyond those required to motivate action. Suggesting that they won’t explore is a bit like saying that you have to pay more than the price asked for a good to buy the good. No only that, but the miners are getting to retain 60 per cent of those super profits which were not required anyway to motivate action. By getting rid of a fixed royalty system, marginal projects which would not be worthwhile with the cost of a royalty included, will now become viable. So some projects have the prospect of happening which would not have happened under the old regime. We would all love money for nothing and we would all be happy to get money for nothing anywhere it is on offer. They will have to make do from now on with 60 per cent of the money for nothing they were getting previously. If some other country is offering money for nothing you can be sure they will be lined up there and remain in line for their handout here.

    I always thought people like you were not in favour of supporting the bludging class? Or are you not opposed to bludging, per se, just any help for the disadvantaged?

  91. Ernestine Gross
    May 27th, 2010 at 17:23 | #91

    Say the 10 year Aussie bond rate is 6%p.a. Any company can offer 6%*.72 = 8.3333% p.a.(because interest payments are an expense for income tax purpose). Suppose there is no bank who would lend the proverbial “poor old Twiggy” money for less than say 10%. May I suggest there is the possibility of offering redeemable preference shares to super funds. At present (and for some time to come) 8.3% p.a. dividends on paper issued by a company that would get money from banks at 10% is not a bad proposition. I’d be very surprised if “poor old Twiggy” wouldn’t know that too.

  92. May 27th, 2010 at 17:37 | #92

    Provided the financier trusted the government not to change the rebate in any material way I would agree with you. Unfortunately, the very introduction of the tax indicates that they are happy to make such changes without effective consultation. I would imagine that in the next downturn (which will come) the government will be under some pretty hefty budgetary pressure to stop, or reduce, the payments that would be due under this structure to most, if not all, mining companies.
    You are again presuming that there is an attraction to increasing investment in Australia after this tax is implemented. As I think I have shown the superior returns that would be likely elsewhere make a nonsense of this. Increased taxes here will mean that investing here is relatively more expensive. Sure, there will be profits still to be made in mining here, but if there are more profits in other jurisdictions then the company is obligated to stop work here and continue elsewhere.

  93. Jason
    May 27th, 2010 at 17:38 | #93

    Freelander, I think you are being a bit too harsh with the ‘greedy, ignorant and unscrupulous’ tag. Whilst if correctly implemented this is a far more efficient tax than royalties, it is without any question a massive expropriation from mining company investors which the Government is pepetrating in the middle of a boom. Perhaps you are right with the ‘unscrupulous’ in terms of lobbying tactics but are they really more ‘unscrupulous’ than the Government? If the Government wanted to be fairer, this could have been done very differently.

  94. Jason
    May 27th, 2010 at 17:44 | #94

    @Andrew Reynolds
    I agree with you on that, note my comments above on sovereign risk. I think the reality is that because the Government are introducing this tax in the middle of a boom and imposing the tax on exising ‘super profitable’ miners there will be little if any risk the government will need to put its hands in its pockets for quite some time. Ie, there will be plenty of buyers of RPST credits from failed explorations. But who knows what would happen if China fell of a cliff….

  95. May 27th, 2010 at 18:06 | #95

    Once again PrQ thanks for your commentary on PM this evening. Most apt. I also caught your exchange with Steve Keen at The Drum. He seems to have taken a rather odd turn of late. In the past seems to have at worst put plausible arguments but on this matter, he seems to have been rather off-base. As you correctly pointed out, manufacturing and mining are scarcely comparable enterprises, at least in terms of the relationship between initial capital and recurrent investment.

  96. Freelander
    May 27th, 2010 at 18:43 | #96


    It isn’t expropriation at all, or at least not expropriation from the miners. If they were rational they would have known that they would not get to pocket what was never theirs into an endless future. As it is they are being allowed to pocket sixty per cent of what is not theirs. Great deal for them. But it doesn’t confer any property right to them. If government decides in future to only let them have say ten per cent rather than sixty per cent, they really have nothing to complain about. Not that that will stop them complaining.

    The tax isn’t retrospective. They got away with $90billion super profit last year and they get to keep that. Have you ever heard them say thanks for that?

  97. Michael of Summer Hill
    May 27th, 2010 at 19:06 | #97

    Update, Update, Update, Treasury Secretary, Ken Henry, has poured cold water on the rabble within the Shadow Cabinet and mining executives who continue to make ‘false claims’ that the RSPT would increase ‘sovereign risk’. In response Dr Henry said, ‘I don’t understand why there should be any perceived increase in sovereign risk at all, but even if there were it could only be a small fraction of that … quite considerable reduction in project risk due to government’s commitment to underwrite 40 per cent of expenditure’.

  98. Alice
    May 27th, 2010 at 19:29 | #98

    Oh please spare me…since Greece we have heard nothing but fear and loathing in Las Vegas (alias Wall Street) about “sovereign risks.”

    You know far be it from me to throw the cat among the pidgeons but I personally wouldnt mind seeing Greece and a few other “sovereigns” just plain out default. We had to bail thye financial institutions out with our taxes and now they are still screaming about “sovereign risk” which is the phrase of the month.

    I wouldnt mind if global financial firms learned the meaning of taking your own risks instead of pushing it down to the humble taxpayers and taking none….thats risk shifting – thats what they do. Might do some of them good to bear their own “sovereign risks”. The reason we now have “sovereign risks” is because large financial empires got out of the GFC risk free…courtesy of you and I.

    Sovereign risk? Too bad.

  99. Michael of Summer Hill
    May 27th, 2010 at 19:30 | #99

    Update, Update, Update, latest reports indicate Australia’s powerful $1 trillion pension fund industry is not sitting pat whilst the rabble within the Shadow Cabinet and mining executives distort the facts about the new Resources Rent Tax. The latest outburst from Industry Super Network chief executive, David Whiteley, urging miners to tone down their ‘overtly political’ rhetoric, which is responsible for the resources industry sudden slump in share prices and fund values. Whiteley goes on to say, ‘What we’re having on almost every morning now and every day are increasingly hyperbolic statements being made by the Minerals Council and the mining sector itself about the potential effects of the tax’. Could not have said it any better.

  100. Ernestine Gross
    May 27th, 2010 at 19:53 | #100

    Andrew Reynolds @42, p2

    My suggestion of issuing redeemable preference shares pertains to an alleged financing problem of existing and planned mining projects. Specifically

    “It was worrying to hear Twiggy Forrest report to Alan Kohler on Inside Business that most of Fortescue’s bankers had withdrawn from its outstanding projects. Perhaps these bankers have just iced their finance until they get better visibility on the results of the industry’s lobbying process. But Twiggy seems to be genuinely of the view that the RSPT will have a profoundly adverse impact on Fortescue’s ability to carry out both current and new investments.”
    Source: Christopher Joye, http://www.abc.net.au/unleashed/stories/s2910009.htm

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