MRRT

April 30th, 2013

I appeared at a Senate inquiry into the Minerals Resource Rent Tax yesterday. Given the virtual certainty that the tax will be abolished after the election, I tried to focus on the future. Here’s my opening statement

The mining boom has already reached or passed its peak, and most Australians have seen little or no benefit as a result. Employment in the mining sector peaked in 2012 at a little over 2 per cent of the workforce. Mining-related activities, particularly construction have generated more jobs, but are also at or near their peak. Employment gains in mining have been offset by the adverse effects on other industries of the sustained overvaluation of the Australian dollar.

Income flows from mining have been dominated by profits, mostly accruing to overseas corporations, and to a handful of wealthy Australians, whose gains have primarily been the result of successful speculation, rather than any contribution to the discovery of mineral resources or their efficient extraction.

In these circumstances, the only way in which most Australians could have hoped to benefit from the boom was through the achievement of an adequate return on minerals owned by the public. The most efficient way to secure such returns would have been through the adoption of a general resource rent tax similar to that applied to petroleum resources. Such a tax was proposed in the Henry Review, and announced in the 2010-11 Budget as the RSPT. Following successful protests by the industry, a watered-down version of the tax, referred to as the MRRT, was introduced.

Revenue from this tax has fallen well short of expectations, both because of the concessions made to mollify mining companies and because the boom had already peaked by the time it was introduced.

In addition to the MRRT, state governments secured revenue through royalty payments, normally set at a fixed rate. Rates were increased somewhat as commodity prices rose, and further increases, motivated by the design of the MRRT, have taken place recently. Nevertheless, royalties have not provided a return sufficient to substantially improve the welfare of the people of the states concerned, let alone that of the Australian public as a whole.

My main concern in appearing here is to urge that we should be better prepared next time we experience a commodity boom. I would urge a comprehensive review of the taxation and royalty regime applicable to the mining sector, building on the work of the Henry Review. In the meantime, I support retention of the existing MRRT, inadequate as it is.

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  1. Paul Norton
    April 30th, 2013 at 07:13 | #1

    John, what’s your view on this claim by Sinclair Davidson?

  2. hc
    April 30th, 2013 at 08:00 | #2

    Strong claims here. The Treasury claim that only 30% of the income gains due to the mining boom went overseas but that moderate income gains occurred to Australian residents in both mining and non-mining states:

    http://archive.treasury.gov.au/documents/1421/HTML/docshell.asp?URL=02%20The%20resources%20boom%20and%20the%20two%20speed%20economy.htm

    I agree with your point re need for a comprehensive reform of mining taxes – this was handled poorly by Labor as were so many reforms. Poorly explained and a disastrous cave-in that created another awkward precedent. Needed to get the States on side and explain policies better.

  3. Hermit
    April 30th, 2013 at 08:00 | #3

    Time for the LNP and ALP to make pledges never to increase the GST. Then see who is the first to break that promise.

  4. Ikonoclast
    April 30th, 2013 at 08:00 | #4

    Well, the simple empirical fact is that substantial and indeed near boom levels of mining are still occuring in Australia despite this tax regime. This proves irrefutably that the effective tax rate is not too high. Indeed, it could still be too low although more analysis would be needed to conclude that.

    Given that all finite resources on planet earth are inevitably running out, there need be no hurry to mine out Australia’s minerals quickly. Everything we leave in the ground for another year becomes more and more valuable due its increasing scarcity and the higher demand created by economic and population growth. The only people in a hurry are the mining billioniares who want more money right now. Though why the first billion is not enough for them I do not know.

    The above reasoning does not apply to coal which we should be leaving in the ground now (due to AGW) and would then become a stranded asset. But there is little to no danger that other minerals will become stranded assets. Indeed, there is little danger that even coal will become a stranded asset since tragically we seem determined to burn it all and wreck our climate. Then all our farms, all our cities and even all our people will become stranded assets.

  5. Brad
    April 30th, 2013 at 08:09 | #5

    Hi John,

    I agree with all of this. But I wonder what your opinion is of the view that employing 2% of the workforce is benefit enough for Australia, with the flow-on effects through the economy. Especially since boosting employment is the aim of govt stimulus spending, which you are in favour of.

  6. Troy Prideaux
    April 30th, 2013 at 09:06 | #6

    @Brad
    For my 2c – overall, probably, a positive thing. We need income from somewhere if we wish to continue a high standard of living. However, low unemployment rates have promoted dangerous levels of complacency. Yup, it has hurt trade exposed exports – especially manufacturing and we have seen record levels of job turnover and low levels of job security throughout much of the economy.
    Also, a friend posted this in a recent discussion regarding these issues on another totally unrelated forum:
    “Our company has been doing well out of China’s need for iron ore and coal over the last 5 or 8 years and I’m afraid to say that I’ve been party to the massive growth of the FIFO culture that seems to be prevalent in modern Australian society. I have been fearful of what impact this will have on the country when the music stops – far too often have I run into 22 year old “Project Managers” working for Rio or BHP making big decisions on little or no understanding of the problems at hand and then getting away with it because the big machine can absorb the losses created by stupidity.

    The problem is that when (note: not if) the mining and resources sector suffers its inevitable correction, and the signs are there now, we will sit with a huge workforce that is either under educated or who’s education is mining-biased. Why go to university if you can make $150k p.a. on the mines? This does not bode well for a post-boom Australia where a whole generation of workers are used to high income, low responsibility and zero need for innovation. Their eventual return to the mainstream economy will be hard and this is likely to further mess up the manufacturing industry, amongst others.”

  7. hc
    April 30th, 2013 at 09:12 | #7

    Sheenan and Gregory (2012) on the mining boom:

    “A major economic impact on Australia of the rise of Asia has been through the resources sector. Australia is experiencing the biggest and most sustained resources boom in its history, and over the past decade has sustained economic growth well in advance of its developed country comparators. The mining boom is yet to run its full course but, at this stage, the lift in Australian income levels, compared to Australian OECD Europe and US relativities of a decade ago is probably of the order of 25 per cent”. (my bold)
    Most Australians have seen little or no benefit from the mining boom?

  8. rog
    April 30th, 2013 at 09:19 | #8

    @Brad Those flow through benefits tend to be localised whereas RBA kept interest rates high for everybody, incl non mining sector, as a result of mining activity. The high commodity prices helped mining owners but kept $A high impacting on non mining sector dependent on exports.

    Due to high $A company profits down resulting in reduced govt revenue. Relatively high interest rates influenced both $A (up) and inflation (down) and reduced non mining growth resulting in a drop in CGT.

  9. rog
    April 30th, 2013 at 09:22 | #9

    @Troy Prideaux A lot of small businesses are finding it next to impossible to find and keep tradesmen when the miners offer such attractive packages. Difficult also for finding apprentices.

  10. crocodile
    April 30th, 2013 at 12:16 | #10

    @Paul Norton
    I’m not exactly an expert but reading Sinc’s paper he seems to count the royalty payments as tax to the state government. I have a problem with this as I see it as payment for the minerals that are being mined. Not really much different to purchasing stock. I wish I could count all my stock purchases as tax.

  11. Troy Prideaux
    April 30th, 2013 at 12:26 | #11

    Hermit :
    Time for the LNP and ALP to make pledges never to increase the GST. Then see who is the first to break that promise.

    Correct me if I’m wrong, but the key players are telling us that any increase in GST would pretty much go directly to the states (not Canberra) as the current system stands?

  12. rog
  13. Paul Norton
    April 30th, 2013 at 12:57 | #13

    Thanks crocodile. In Australia, mineral resources do belong to the state(s) after all.

  14. John Quiggin
    April 30th, 2013 at 13:29 | #14

    @hc Looking at the Treasury paper, it seems entirely lacking in causal links. In effect, everything that’s happened in the economy in the last decade is treated as “the mining boom”. I’d suggest “not having a financial crisis and recession” is actually a pretty big deal.

  15. John Quiggin
    April 30th, 2013 at 13:31 | #15

    The combination of vertical fiscal imbalance and horizontal fiscal equalization mean, in effect, that all tax revenue goes into the same pot, and is shared around by a combination of negotation and Cwlth dictation.

  16. crocodile
    April 30th, 2013 at 13:48 | #16

    @Paul Norton
    They certainly do and as such should be purchased from the vendor just like any other stock item. Sinc on page 11 of his document goes to great pains to let us all know that royalties are not taxes but goes on to include them anyway. Then again, look who commissioned his report.

    Just one other thing. The states own the stuff in the ground, so I’m not keen on the feds muscling in and pinching some of the cake either.

  17. crocodile
    April 30th, 2013 at 13:51 | #17

    @rog
    Good Rog, but could you possibly show us a similar paper depicting the amount of foreign assets that Australians also own.

  18. April 30th, 2013 at 14:06 | #18

    Ikonoclast :
    … Given that all finite resources on planet earth are inevitably running out, there need be no hurry to mine out Australia’s minerals quickly. Everything we leave in the ground for another year becomes more and more valuable due its increasing scarcity and the higher demand created by economic and population growth…

    That isn’t true in general:-

    - Complex workings, with upper, played out seams, incur continuing overheads for pumping, maintenance of old shafts, etc. regardless of how much and how fast the newer levels are being worked to pay for it all, right up until the mine is abandoned (which may also present close down costs). Those should usually be worked as fast as possible, to minimise cumulative costs over the life of the mine.

    - Open cast workings do approximate to that, but even they may have some overheads of that sort, particularly but not only from pumping.

    - The reasoning of “leave in the ground” does still apply, but mainly to starting completely new workings; it does not apply anything like so much to going concerns. Unfortunately, the standard free market is basically applying an inappropriate “greedy algorithm”, so the incentives are to open new workings that at first don’t have much in the way of worked out shafts etc. to maintain, in preference to rushing through the working out of established mines with their increased overheads. Some decades ago, this showed up in Denmark preferentially importing coal for power stations from newer mines in Poland rather than older ones in Britain.

  19. rog
    April 30th, 2013 at 14:31 | #19

    @crocodile The greens doc does go into tax and profits eg

    However in its May 2011 Independent Experts Report on the merger between the major coal players Gloucester Coal and Donaldson, Deloitte stated that:

    “We have considered at a high level the indicative potential impact of MRRT on our assessed fair market value of the Proposed Merged Entity. Based on this indicative analysis, the [proposed MRRT tax] is not likely to have any material impact on the value of the Proposed Merged Entity” (Deloitte, 2011)

    Considering this is an excerpt from a 220 page analysis that values two of Australia’s largest coal players, this is a damning statement on the likely revenue-raising abilities of the MRTT.

  20. rog
    April 30th, 2013 at 14:42 | #20

    As both presentations use ATO et al data you would have to scrutinise their workings. The Greens state

    In 2010 the after tax profit margin being made by mining companies was 31%. The profit margin has been rising rapidly and was 26% in 2008-09. To put this in context, the Australian industry average profit margin was 8% in 2008-09

    So it’s not like with like.

  21. crocodile
    April 30th, 2013 at 15:16 | #21

    Rog, not quite what I meant. It’s more simple than that. It may be true that foreigners own a greater percentage of local companies than ever before. It is also true the Australians own a greater percentage of foreign companies than ever before. In the end it probably evens out so it doesn’t matter that much.

  22. Troy Prideaux
    April 30th, 2013 at 15:18 | #22

    @rog
    However, I think it’s reasonable to expect that ventures that require high levels of capital and risk deserve more reward. That’s often a requirement for the financiers of such projects to part with their precious spondulas (well, with their investor’s spondulas).
    The profit margin of many of these operations appears to be dwindling over the last couple of years, so maybe the horse has bolted anyway.

  23. Ikonoclast
    April 30th, 2013 at 15:58 | #23

    @P.M.Lawrence

    Good points. However, the general concern about high MRRT is the concern of chasing away new investment for new projects ie. new workings. In that case, my reasoning is valid. That stuff which we have in the ground unworked becomes more valuable every year it’s left there as sources elsewhere are exhausted. Fossil fuels would be a key exception if they are banned or phased out. They would become stranded assets. Then after being written off they would be economically irrelevant.

    I have made the point before that the fear of fossil fuels becoming stranded assets provides a perverse incentive (from a climate change point of view) to mine them out quickly.

  24. rog
    April 30th, 2013 at 16:09 | #24

    @crocodile Maybe but are foreign owned companies paying market prices for the raw materials? After complaining about the MRRT the states quickly upped the royalties. Hasn’t stopped the miners digging stuff out of the ground.

  25. Troy Prideaux
    April 30th, 2013 at 16:25 | #25

    Ikonoclast :
    @P.M.Lawrence
    Good points. However, the general concern about high MRRT is the concern of chasing away new investment for new projects ie. new workings. In that case, my reasoning is valid. That stuff which we have in the ground unworked becomes more valuable every year it’s left there as sources elsewhere are exhausted.

    I’m not so sure about it becoming more valuable. Depends what it is and how much is available elsewhere in the world (especially untapped reserves). I’m under the impression there’s plenty of iron ore in the ground (in out backa whoop-whoop deserts), so bugger it, dig it up and sell it whilst the prices are good. I’m all for leaving the earth a better place for future generations, but I’m also all for trade surpluses as opposed to deficits so I can enjoy a higher quality of life (call me greedy) if there’s no serious environmental impact from it. Obviously there’s also a balance to consider.
    However, there are apples and there are pears – China is rich with precious rare earth elements (which the whole world wants), but actually legislates against their export which sounds like a reasonable policy for them (that closely aligns to your principles).

  26. Jim Rose
    April 30th, 2013 at 16:48 | #26

    What on earth is an overvalued dollar? A pretence to knowledge

  27. Sam
    April 30th, 2013 at 17:46 | #27

    John Quiggin :
    The combination of vertical fiscal imbalance and horizontal fiscal equalization mean, in effect, that all tax revenue goes into the same pot, and is shared around by a combination of negotation and Cwlth dictation.

    This is almost true. As horizontal fiscal equalization only redistributes assessed revenue in excess of an equal per capita share (based on a hypothetical standard tax policy) away from a state, revenue raised from extra effort (higher than average tax rates, lower than average thresholds) is retained by the state making that effort.

    This is actually a good counter to the argument that HFE encourages the states to compete away their tax bases. In fact, the incentive of the redistribution is to raise your tax rate on your weakest tax bases (resources taxes in Victoria for example) to distort the average policy to increase the amount redistributed. Similarly, for tax bases which represent a better than average fiscal capacity for a state, that state should raise their tax rate to the average to ensure their actual revenue is as close to their assessed revenue as possible, so they are not penalised (subject to redistribution) for revenue they never raise.

    Also, any tax not included in the CGC assessments is not redistributed.

  28. John Quiggin
    April 30th, 2013 at 19:48 | #28

    @Jim Rose

    An exchange rate way above PPP, if you must bow before the altar of the Efficient Markets Hypothesis.

  29. Jim Rose
    April 30th, 2013 at 20:06 | #29

    @John Quiggin a PPP calculation and $4 will get you a cup of coffee.

  30. John Quiggin
    May 1st, 2013 at 14:21 | #30

    @Jim You’re over your comment quota, and it will be reduced if used for snark

  31. John Quiggin
    May 1st, 2013 at 14:27 | #31

    Paul Norton :
    John, what’s your view on this claim by Sinclair Davidson?

    As far I can see, the way he calculates things “ratio of tax paid to taxable income” the answer should be 30 per cent for all companies. He subtracts tax deductions from profit to derive taxable income, but presumably excludes some adjustments that allow companies to pay less than the 30 per cent on their taxable income (in the personal context, the equivalent procedure would be to look at income net of tax deductions, but to treat rebates differently). I don’t think this is at all informative.

    The issue that concerns most of us is that the ratio of tax paid to profits is low, because mining companies benefit from larger deductions than others. Some of this may be legitimate, but not all of it in my view.

  32. PW
    May 1st, 2013 at 18:21 | #32

    The new name for GST tax is ‘levy’.

  33. rog
    May 1st, 2013 at 19:09 | #33

    @John Quiggin I’m not sure that general public are aware that tax deductions that they give to foreign companies are converted to profit and exported?

  34. May 9th, 2013 at 10:37 | #34

    John,

    Nice piece.

    Do you know if anyone has done the sums on what the revenue would have been if the original RSPT had been implemented?

    Cheers
    Lindy

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