Some thoughts on Resource Rent Tax (updated)

I’m going to be in the Budget lockup tomorrow, so I probably won’t be posting much after this. So, rather than polish it up, I’m going to bang out some thoughts on the Resource Rent Tax proposal, the main element of the Henry Review adopted by the government. The shorter version: the Tax is a good idea, and the criticisms we have seen are what you would expect from rent-seekers seeking to protect their rents.

The central arguments in favor of the RRT proposal are intertwined, and I’ll try to put them together in coherent way

* The basic efficiency argument: Since mineral deposits yield super-normal profits to those who have the right to exploit them, a tax on those profits will not lead to less investment – the profit will still be enough to induce investment

* The economic equity argument. Compared to almost any other tax we could impose, the burden of the RRT falls least on low-income Australians and most on high-income investors, many of whom are foreigners

* The legal equity argument. In Australia, mineral resources are, and always have been, owned by the state, representing all Australians, and not by individuals. So we should seek to maximize the return on our own assets.

* The political economy argument. Ever since I can remember, and probably before that, mining companies have been threatening to pack their bags and go overseas. They’ve made these threats when they were upset about tax policy, about environmental restrictions, about Aboriginal land rights, about union wage demands and work practices and when they were in a bad mood for no particular reason. But, even though lots of Australian industries have disappeared, or contracted drastically for a range of reasons, the miners are still here. The reason is obvious. They can leave, but they can’t take the minerals with them. It’s precisely this immobility that underlies the case for RRT

In practice, no tax works exactly in the way the textbooks suggest. A tax designed to fall on super-profits is bound to fall, to some extent, on ordinary returns to such activities as exploration and the development of mineral resources. But this does not significantly weaken the case for the RRT, for a number of reasons.

* Timing. In the ideal case, it does not matter when a rent tax is introduced. But given that there will be some tax on ordinary profits, it makes sense to introduce the tax at a time when profits are buoyant. It’s hard to imagine a better time than now.

* Macroeconomic arguments. The standard analysis implicitly assumes stable full employment. But, in reality, the economy fluctuates, and periods of high profitability in mining tend to be associated with booms in the economy as a whole. Under these conditions, an RRT is strongly countercyclical, since it raises a lot of revenue in booms and much less in recessions. And to the extent that it does affect activity in the mining sector, the countercyclical effect is enhanced. If the RRT constrains mining activity in boom times, more minerals will be available when conditions are not so strong, and ther are less super profits to be taxed.

There is, finally, a purely political argument for the government to stick with the RRT as announced. Having caved in on a range of issues, and most notably on the ETS where the mining lobby was prominent among the opponents, the government has to show some spine here.

232 thoughts on “Some thoughts on Resource Rent Tax (updated)

  1. Update, Update, Update, according to the latest reports the head of the OECD stated that Australia’s planned new 40 percent tax on mining profits is ‘justified’ and unlikely to adversely affect investment in the long term. That is correct ‘justified’.

  2. Let’s have another look at that, Freelander – you are claiming that a cashflow with volatility is less risky than one without volatility.
    This sounds like something that someone tried to convince me of during a party years ago. You must have thought it made perfect sense to you while you were drunk.
    I know – let’s ask someone who may actually give a straight answer (she has admitted error before) and that you might actually give some space to.
    Alice, do you agree with Freelander that a volatile cashflow is less risky than a non-volatile one, under the circumstances above or, indeed, any possible circumstances?

  3. @Andrew Reynolds
    Andy – I have more horrible things to worry about right now. See my post on weekend reflections…and if you think I dont want to see some pay higher taxes including the industries that profit most from what we have underground here…and if you think I dont want to see those profits ploughed back in “here” rather than some tax free haven in the global economy courtesy of neoliberal “save the universe” crap that is saving no-one and damaging everything…then think again Andy. I dont give a damn about propping up the share price of miners…like you do.

  4. @Andrew Reynolds

    That’s not what I am claiming at all. You really do have a habit of putting words in people’s mouths. You don’t seem to be able to read very well given your habitual errors when attempting to paraphrase what people say. And clearly you don’t understand risk if you think security two is more risky than security one. Clearly also you are not an economist with a solid understanding of finance theory. Though clearly you are not an economist at all.

    The proper understanding of risk ranks security two as less risky than security one for the obvious reason already provided. If you want to look it up it is in some work by Stiglitz.

  5. @Freelander
    Im telling you so you listen Andy – if it means I gut the words in your mouth – then good. Im not here to answer this trivial question or that you may ask me (on the mining tax – spare me – these guys have been getting away with billions tax free) – but I am here to comment on what I see that is so hopelessly upside down and wrong with economic policy and the way it has been playing out in the real world Andy – this isnt a matter of tribes or politics or schools like “libertarianism” or “social democracy” or “left or right” – its about the fact that what policies we have been following (in the name of private sector or economic rationalism or efficiency or privatisation or fiscal restraint at all times) – have not been working. Its as plain as the nose on my face. We cannot and do not provide the help to the poor we were capable of proving 30 years ago with a much smaller tax base and population.

    Why not Andy? (dont answer – I know why not – the greedy have been seeking tax concessions for three decades now and they have them at the expense of the poor).

    Well Andy – Im sorry of I stop your own words at the mouth – but this direction is nothing but wrong…all wrong. Do you, like me, want a healthy economy? You cannot ignore the poor, the needy and the paying of tax and regulation for fairness that is so essential.

    I dont know what it is you want me to answer Andy?. There are better people than me to answer your trivial questions and hopefully my larger questions.

    It would be nice if it happened in my lifetime and things changed but I dont hold much hope…with people like you asking me such silly “little” questions just to score a debating point (what good is that?).

  6. Hey, I dont understand the tax implication on superannuation returns. Many people are saying that the tax will lower the dividends or returns on portfolios that are heavily invested in mining companies, so thats bad. But not many have come forth and given an explicit reason why this isnt a major problem at all. So, is the tax bad for superannuation growth?

  7. The tax will lower the returns on mining stocks of course because at the moment mining stocks are getting our money. However, the majority owners of these stocks by a long way are not Australians. Because we will get money a large part of which went overseas this will mean we will be better off because this tax revenue will not have to be raised from us by other means which will leave more money in our pockets which we can spend as we like including by putting more into super. So yes. Returns from mining shares will go down a little bit but the tax take from us directly will go down a lot more compared with what it otherwise would be. Anyway, it ought to be recognised that those who have by far proportionately more mining shares are those who are wealthy. They will bear proportionately more of any impact on dividends. Seems fair to me.

  8. @Alice

    Yes. Dandy is a sad specimen. His regular appearances are simply to attempt to show everyone how clever and knowledgeable he is, and to ‘beat’ others with his ‘logical’ arguments. Apparently in the literature someone like him, with NPD, does this because they are seeking ‘narcissistic supply’. To be happy, or at least to feel less bad about themselves, people with NPD are always trying to show how wonderful they are and attempting to have others tell them so. They desire a constant supply of reassurance, of others telling them they are wonderful. (Bit like a drug addict.) Very sad. Apparently, so far they haven’t found a way of treating it. The literature says it is incurable.

    Interestingly, that is what Brendan Nelson accused Malcolm Turnbull of suffering from, not that it wouldn’t be a common complaint amongst politicians. I imagine you have run into a few examples of those with NPD. We all have.

  9. @Martin
    Martin – I have a small problem with people who suggest the RRT will lower share prices of miners and thus damage superannuation growth. As we have recently seen with the global financial crisis (and the tech wreck) and other bubbles – what is far more damaging is bubble inflated prices in the stock market…and how easily a single correction or volatile swing can wipe out the value of the shares…mining or otherwise. Relatively speaking the RRT becomes a chicken little argument.

  10. “Twiggy” will lose money which is why he is squealing so loudly.

    Are we moving to a dollar democracy where those with a lot of money can buy whole page ads in papers to make sure they can keep their snouts in the public trough? Where they can buy a political party to advocate on their behalf?

    With his snout buried deep in the trough, how does the man keep his figure? The “Twiggy” label must be ironic.

  11. Update, Update, Update, is Twiggy really fair dinkum. A close examination of FMG’s share price over the last 30 days show prices were in decline long before Labor put out the new Resources Rent Tax. And yes Twiggy has reasons to be concerned about the new tax especially the dent in his own personal wealth. But let’s not have anymore bulldust.

  12. @Freelander
    In one or two years Twiggy became like Andy Groves…one of the richest men in Australia without so much as turning a clod of earth. Now he squealing like a stuck pig over the RRT.
    How ungrateful of him. He became the richest man in Australia not because of mining but because he talked his way through the bubble in shares to its zenith when people would pile in whether they knew about it not (given the super fund managers did it for them).

    Even now – who exactly is Twiggy apart from a wealthy “bubble king”. His Fortescue shares are only in the$3 to $$4 range and doesnt he spend a lot of time in court fighting for access to or over railways owned by BHP? (or RIO). He could go bust much more easily than BHP or RIO. Thats why he is squealing.

  13. Freelander,
    Security two has the more volatile cashflows, yet you are claiming that it is less risky. I have not misunderstood, you have just got it wrong. More volatile cashflows means more risk. It is that simple, yet you have missed it.
    Embarrassing – and then you go on to insult and patronise.
    It is not only Twiggy that is pointing out how this will damage Australia (and, incidentally, the medium term tax revenues of the government). BHP is pointing it out too.
    I do oppose higher taxes, but I am not in favour of destroying industries to achieve that. The sad thing is that you are generally in favour of higher taxes, but the end result of this will be lower tax receipts once the current mines are exhausted, as there will be little exploration conducted to find the new ones.
    On the superannuation point – the shares have already dropped by more than the tax is likely to raise in the near term. So – we lose on the super but gain less on the tax. Great outcome you are supporting there.

  14. I’m interested in the ‘risk’ argument because it seems to me to indicate that risk is poorly defined (in economics/business) or at least has multiple definitions. Obviously security two is less predictable than security one for any particular time frame. So if risk = predictability then it is more risky. But risk should be more than predictablity otherwise why introduce the term ‘risk’.
    If risk has something to do with predictability of return on investment then security two is still more risky – which is silly as the returns are better and never fall below those of security one. that is, you can’t predict the returns on two as well as the returns on one but you can predict they will be >= those for one with a probability of 1.
    Can freelander and andrew reynolds please make clear what they mean by ”risk”

  15. actually I see that Andrew Reynolds has equated cash flow volatility with risk – which seems extremely simplistic.

  16. @gregh

    Exactly right. How can you say security two is ‘more risky’ when you always get as much as security one and sometimes get more. Clearly if you have security two and whenever it gave you more than security one you threw away the extra it would have identical properties to security one. One of the many problems with so-called and self described experts in financial markets is that they don’t really have a proper understanding of risk, amongst many other things.

  17. @Andrew Reynolds
    You are too late Andy – many industries in Australia have been destroyed already by the great neoliberalism and lowering taxes (and giving subsidies) to the largest industries. You must know Andy that on average mining pays 13 cents in the dollar in taxes, far less than many other businesses (most other businesses) pay in this country.

    Why should they be favoured over the great majority of employers? You must surely have noticed the most recent news that gas explorers and mining firms have been damaging the environments (including but not limited to damaging the water tables), running over people’s private property rights in QLD with barely any regulation over their activities.

    Of course we would expect the mining anti RRT media machine to crank up now Andy. The mining media machine is intrusive even when they werent facing the RRT. Thats because they have the profits to also be a powerful lobbying force, whereas the average business doesnt. That doesnt mean we have to listen to their arguments and nor should they have more importance than any other industry, including the great weight of small businesses who dont have spare lobbying money.

    As many QLDers are now saying about their government – why should we have to tolerate the bully boy tactics of mining in our towns, on our private property and the damage to the enironments of these towns, for a few jobs.

    Ill tell you why Andy – because they also donate hefty wads of their supernormal profits to political parties. If thats what you mean by the multiplier effects of mining – well it seems its onlya two sub sector injection – from mining to political parties and back to mining.

    It would be nice if the majority of Australians got some benefit out of this little circular flow but they dont.

    For a libertarian you are a sell out Andy.

  18. gregh,
    In the presumptions at the start of this discussion, Freelander effectively excluded all other sources of risk other than cashflow risk. I have therefore answered the question as asked – a courtesy that Freelander routinely either ignores or rudely responds with “blah blah blah”, as above.
    IMHO it makes him look like an idiot. in this case appearances may not be deceiving.

  19. @Andrew Reynolds
    Andy says re RRT

    “You act as if super is a given Andy. Thats what gets people into trouble. You sound like a BT ad. “If you are on a salary of $40,000 and you put an extra $30 a week into your super when you are thirty – you will retire with a million dollars”

    After fees and commissions and govt taxes and a stock market wipe out or two – they will have buckleys of getting that. You know it, I know it and so do thousands of police and nurses and ordinary workers who were sold super in the 1980s with trailing commissions and who are now retring with insufficient super having duly contributed all their working lives.

    You can fool some of the people Andy, but not all and the truth outs in the end.

    Better the RRT is taken now and injected into infrastructure to create real jobs and real income now than spent by super fund managers blowing up share prices to way beyond the true value of the underlying production and making some like Twiggy obscenely rich and rich enough to cart it off to a tax haven….

  20. Sorry the above quote is not Andy’s – its mine

    This was what Andy said and what my above post refers to..

    “So – we lose on the super but gain less on the tax. Great outcome you are supporting there.”

  21. @Alice

    Agreed. It is an absolute disgrace that the mining bullies are going to bombard us with advertising from now till the election with the sole intent of throwing out the current government so they can steal our resources. What kind of a country will Australia have become if they are successful? What kind of country will we have if the government crumbles and rewards them by backtracking? I would crank the tax up to 50 per cent to teach them a lesson. The idea that they will pack up and go overseas because they are only getting 60 per cent for nothing, or even 50 per cent for nothing is absurd. Commodity prices are currently high, and although there will be volatility, they can be expected to be on average high for quite sometime, with both China and India growing rapidly and their growth dragging in all sorts of primary resources. These greedy people running mining are not going to walk away from money for nothing. They haven’t in the past and they won’t start now.

    Is Australia going to become like the US with vested interests owning the politicians to the extent that nothing can stand in the way of their greed. Good examples of how corporations owning politicians is the lack of regulation of banking that led to the GFC and the lack of environmental legislation that has seen the US do nothing about climate change or to ensure the oil industry doesn’t pose a risk to the environment. In the end Exxon got away with what it did in Alaska without paying anywhere near the full costs of the damages it cased. The only real reason BHP is getting a hard time at the moment is because it is a ‘foreign’ company. Haliburton doesn’t seem to be criticised at all even though, so it has been claimed, they were the subcontractee that had the ‘accident’. But the $75 million cap for damages, talk about a ‘sweetheart deal’. The industry certainly spent its money well to get that cap.

  22. @Andrew Reynolds

    Dandy, you are so right and so clever, we are all amazed at your insight. There you have had your narcissistic supply. Is it enough? Oh, I forgot it can never be enough. Sorry.

  23. Andrew Reynolds :

    IMHO it makes him look like an idiot. in this case appearances may not be deceiving.

    Given that you are losing to “an idiot”, what does that make you?

  24. Imagine two hobos who have no real expectation except for continuing their hobo life living in a park, begging, and gather used newspapers to keep warm at night. Let’s call them, wolog, Dandy one and Dandy two.

    Let’s say someone comes along and offers to give Dandy two a ticket that has a 50 per cent chance of wining and providing the owner with $1 million and nothing otherwise. Would Dandy two say “Well, I am tempted to take the ticket. But my financial advisor tells me that to put this ticket in my portfolio would substantial increase my risk (compared with Dandy one), so I will have to refuse.”

    Let’s say the generous person says “But after I give it to you, you could throw it away if you choose (and you would still be the same as Dandy one). So where’s the additional risk?” Dandy two says “My financial advisor says that’s no good. The moment the ticket hits my hand I am involved in substantially more risk and there is no way around it.”

    Hobo two then retreats back to the park. Happy that having had ‘excellent’ financial advice, they have avoided what would have been the mistake of their life.

  25. Losing to someone that claims that a volatile cashflow represents less risk and then, when it is pointed out that this is wrong responds “blah blah blah” as an argument does not constitute losing, Freelander.
    As for your last attempt at an argument, Freelander, I have been absolutely clear that security two is the more valuable, despite the risk. I have pointed that out many times. So far, you have failed to understand (AFAICS) what that means.
    Maybe one day you will be capable of being an adult. Until then, short pants only.
    I am not so much worried about the super returns – you well know my position on compulsory super. Deliberately reducing them, though, is very different to reducing them by error.
    The point I was making, however, was that to over tax the industry and have most, if not all, exploration conducted overseas means that there will be many less mines in the future – meaning less of your beloved tax revenue to fund all that infrastructure and those “real jobs” in the future.
    Mining is not tricky, Alice – you find stuff and dig it out of the ground. If you do not look, you will not find. No finding, no mining. This tax will simply penalise the finding.

  26. @Andrew Reynolds

    What do you predict Australia will be like at the end of the mining bubble?
    The mining industry has crowded out other forms of investment in this country and placed higher wage and inflationary pressures on every other form of investment to the point where this country knows nothing else.
    It seems obvious to me that the Government’s actions of investing in the NBN, infastructure, promoting personal savings, boosting super, education, renewable energy and a reallocation of the tax burden is more than the usual one term policies we’ve become used to, for once an Australian government is looking 10 years into the future and is actually making an effort to address the issues.
    For Australia to remain prosperous post mining boom we are going to need other export industries and this budget’s measures is a good start towards that objective.
    To those in the media do us all a favour and stop airing one liners from vested interests, does anyone seriously take public comments from guys like Twiggy or Tony Abbot as anything other than spin based on self interest?

  27. We will have a lot of people with strong employment experience, accustomed to working flexibly in many sites and capable of taking on a number of roles in any organisation. The government will be well cashed up, provided the money is not wasted in the interim.
    Our industry and services will be accustomed to operating in tough environments and be capable of taking on the best of the world as a result.
    Being experienced and flexible, Australians will be capable of either working here, if the pay is enough to keep them, or overseas, where they will be more than capable of taking on many roles anywhere.
    There is more, do you want me to go on?

  28. No, Hobo two. I think we want you to go overseas if you imagine they are crying out for you. Please. Silence their calls. Maybe they are calling at a high frequency? We don’t hear them.

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