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.
John Quiggin 
@Alice
Garnaut has come out in favour of the tax because he is an economist and he understands that the tax will not have any of the dire impacts the greedy mining magnates claim.
Given that he is a professor of economics, and has not already shredded his reputation by having been purchased wholesale by vested interests, he must be unwilling to shred his reputation now by telling ‘porkies for profit’.
Some ‘consultants’ have already ‘entered’ the debate. But, mind you, their stock and trade is ‘porkies for profit’.
By the way, if there is anyone out there willing to pay, I am quite willing to start telling ‘porkies for profit’. But I warn you, I don’t come cheap.
If Garnaut has now come out against the tax that is news to me. This morning he was all for it. If he has now reversed himself, then someone has ‘made him an offer he couldn’t refuse’.
By the way, the government wouldn’t be subsidizing the mining companies (for poor decisions) at all. The federal government simply intends to rebate the money that the companies pay to the states in the form of royalties.
All a bit complex for some, and it is, after all, past bed time.
@Freelander
Oh I knew it Freelander…its my stupid descendent of Doug Anthony’s tribe partner having a joke (the Garnaut bit)….Ill get him when he wakes up tomorrow. He can go fetch the coffees.
So, Freelander – are you seriously claiming that none of the mines of Australia will ever operate at a profit margin of less than the government bond rate again? That’s what would be needed for your handwaving to be true. And you are claiming I am the one that has some problems understanding risk management? Odd, at best. Fail.
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Alice,
So the 30,000 jobs that FMG claims they will not be going ahead with represents 60% of the current industry, does it? That bit fails the basic “does it make sense” test.
Another fail.
Thats what happens when you miss the news! Dont ask your politically divergent other half for an update. I must admit I did think Kristina keneally and David Campbell a very odd match but nothing in State Labor would surprise me anymore.
@Andrew Reynolds
Hello Andy – add 30,000 to the current 50,000 and you still have a drop in the ocean compared with employment by small business across Australia. Look Andy – Im a wake up to you. You make your money in the financial sector. You want the bubble IN the stock prices and you dont care how it happens.
@Andrew Reynolds
Of course, I am not claiming that, Dandy.
How about attempting a bit of post-primary school thinking before you burst into print? You will then, if you are lucky, understand the correctness of what I have told you.
Oops Freelander – look up “Brown Tax” as conceived by Cary Brown. I think “the Australian” might keep the words fairly simple.
Yet another egregious error. Fail again.
Bed time for you, perhaps.
@Alice
“that Garnaut has come out in support of the mining companies against the tax”
http://www.lglgold.com/asp/index.asp?pgid=10633
No, Alice – yet again you mis-understand. Have a think about what I said and you might. I will not hold out much hope, though.
Another fail.
Dandy is particularly delusional this evening. “Vertical fiscal imbalance” would be sufficient to put a non-member of the ignoratti on the right path, but apparently not.
As for Jarrah’s link, this is not news. Garnaut has been in the position for some time. Nevertheless, he was for the tax this morning. If he is now against it he has reversed himself.
As, I have already posted, I am open for offers in the ‘porkies for profit’ business.
Clearly, either Dandy and some others on this blog like doing ‘porkies for profit’ for free. Or, more likely, they are ignorant of what is true and what is not.
Alice – I will spell it outsimply for you.
The fact that FMG can cancel two projects costing 30,000 jobs in total indicates that your presumption (without evidence) that 50,000 people work in mining is a gross underestimate.
In fact, let’s go to the ABS.
Hmm – latest stats show 172,000 employed directly in mining – you are only wrong by a factor of about 3 1/2 – better than normal.
Of course, that does not include all the construction, transport, electricity, water, wholesale, retail, accommodation, food, administration, rental, government (yes, even government) and many, many other sectors that are indirectly supported by the industry that earns us 35% or more of our export earnings.
No – just 50,000 isn’t it? Or will you admit an error? Unlikely, but you may increase your credibility by doing so.
Freelander,
Have you done the reading on a Brown Tax yet and understood your error?
@Jarrah
Thanks Jarrah…hmm interesting…why is Garnaut now on the board of a few very large mining companies? Dont tell me he has sold out and is now peddling delay ???
Is everyone for sale to the highest bidder? Thats the trouble with this profession and its so called “experts.”
http://www.theaustralian.com.au/business/mining-energy/super-profit-tax-needs-more-analysis-says-lihir-gold-chairman/story-e6frg9df-1225869162779
Freelander…Australia has the worst case of VFI and it hasnt beem rectified even though politicians have known about it for decades and decades….Andy, I would likely neither recognise or be able to explain the term. Fail Andy.
@Andrew Reynolds
So are you still suggesting more are employed in mining than in small business across Australia Andy? You? A libertarian lover of small communities and small business and lots of competition. Oh give me a break Andy. I know hypocrisy when I see it..you support no tax on mining and atre willing to sacrifice tax cuts for small business. Yeah – they dont have shares you can flog.
No, Alice, I am not suggesting that. I am showing you that you made an error. Do you see that, or do you maintain that there are only 50,000 in the mining industry?
@Andrew Reynolds
“no Alice I am not suggesting that (there are far far more employed in small business across Australia). My error matters little except that Twiggy’s jobs dont even exist yet you have included them in your count along with every other indirect form pf employment associated with “mining”. Now tell me Andy, have you added every other “indirect” form of employment associated with small business as well?
Im ahead by miles Andy. So why do you support the mining tax except to flog mining shares to some stock market suckers?
Alice,
Thanks for the admission of error – however covered up.
To answer your question on why I care – it is because I happen to care about the industry that employs, directly or indirectly, an awful lot of Western Australians.
Why, BTW, are you claiming this tax will help small business? If you are about to respond that it is because the company tax rate falls from 30% to 28% (a small improvement) have you noticed that the overwhelming majority of small businesses in Australia are not incorporated and would therefore not benefit at all?
That many of those small businesses (particularly in WA) are reliant on the mining industry?
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Have you managed to stop reading the ALP talking points and actually started looking at the real world?
Thought not.
@Alice
Interesting. Henry Ergas is a very clever chap.
However, I never believe a word he says until and unless I have thoroughly checked that word elsewhere. Henry is an excellent consultant and he does not come cheap at all. That said, plenty are willing to pay his price.
Given his price is high and he is good at what he does, those paying his price are almost invariably from the big end of town.
He has, at times, worked for Telstra. And he has argued their case very well.
You know, Telstra, that hard done by telco that gives customers excellent service at the very best price, also looks after its employees, but is constantly abused by the ACCC, government, its competitors, and those very same customers and employees.
Yes. That Telstra. (Maybe you don’t recognise it from the description.)
Still open to offers.
@Andrew Reynolds
Andy – I managed to stop listening to neo liberals about ten years ago (no actually 19 years ago)…I dont vote ALP or Liberal Andy, contrary to your clumsy attempts to box me in…the wealthy amongts us have not been paying enough tax Andy, or like the miners are other large industries they shovel if offshore to a tax haven about as fast as they load iron ore.
Not good enough and its time the party ended. Even Bill Gates daddy says the rich arent paying enough tax. Back to the deficit Andy – even MU agrees with me on RRT and so, now, do a whole host of countries. Just for once Australia could be a leader with a sensible idea and not be a sheep to really faulty market fundamentalist ideas Andy. You are a hypocrite and a deliberate misleader – lots of small businesses are companies Andy and you know it – pty ltd. The tax cut is not just for “publicly listed companies.”
You arent thinking about Western Australians at all. You are thinking about Twiggy Forrest’s share price…which by the way plunged today probably thanks to his own stand in the media (serves him right)…but hey its only a small fish at $3 plus a bit and there is something about Twiggy Forrest that reminds me of Eddy Groves. I dont know why.
Is there also a case for cooling the mining boom on the ‘crowding out’ argument? Do we actually need a reduced value of the AUD? Also what percentage of the rents end up in the Sydney real estate market?
The value of the dollar is linked to commodity prices due to the big influence the ‘health’ of our mining sector has on Australia’s international trade. The Aussie dollar is higher than it would otherwise be because we are blessed with these resources. The high dollar means imports are cheap and tends to price local labour out of competing with foreign labour in producing internationally traded goods. Some of the bounty from the resources boom is having an impact on Sydney because, amongst other reasons, new housing starts are down because the resources that are being sucked in to support the resources boom are very much similar to those that are used in the construction industry.
Update, Update Update, can anyone out there decipher the following; ‘Rudd cannot afford to give in on his tax, but it seems the country cannot afford for him not to’. Tell me I am wrong and that the author is not giving the thumbs up to Rudd’s Resources Rent Tax.
Alice,
Yet again you miss the point and do not answer the question. Let’s keep it even simpler as to why this one is, in the medium term, simply going to cost jobs and, ultimately, a lot of tax revenue – as the tax revenue seems to be a huge fixation for you.
I hope it will demonstrate to you why this new tax is not going to fix any “Dutch Disease” we may be suffering now, but will cause all sorts of problems later.
.
Think of a mining company. It has an exploration budget of, say $10m. With this it has to go out and find some good prospective ground, hire geologists, field assistants and others (including drilling crews and much else, but I said I would keep it simple for you). Having reviewed a lot of ground that could be either pegged or bought, there are two prospects that may give a healthy return (I choose two again to keep it simple – the analysis works just as well with more).
Both of them are in countries with a stable institutional framework, good legal and court systems, long established mining histories and trained workforces. As far as the ground goes, a similar amount is known about them. The tax rates on company profits are similar in both.
It is therefore expected that, if a strike is made of a sufficient size, it will be able to be profitably mined.
One of the countries then imposes a doubling of taxes on mining profits not only on new mines, but also on existing mines. The existing mines are OK, as the tax is structured to only reduce the amount of profits made, not eliminate it.
Now, if you are still paying attention, I will not ask you which one they should invest in, but a different question. If you can answer this honestly then you may be able to understand exactly how bad this tax is. It will also cover why Twiggy and friends have reacted the way they have.
To which one does Australian law require them to choose to commit their exploration budget? Remember, this is a legal requirement, not a question of preference. I will give you the answer later if you cannot (or will not) answer it.
Oh, and to answer the question on Garnaut – I would largely agree with him. He is in favour of a Brown tax on mining in principle (he could hardly be otherwise, as he at least partially wrote the book on it), but he thinks the way this one is structured sucks.
Read his lecture on the subject.
You might actually learn something.
Blah, Blah, Blah, surely it must be time for your bed?
Dear me – I hadn’t thought you would be that easy to beat, Freelander. Disappointing.
While I am a very strong supporter of the Resource Rent Tax (aka RSPT) principle, I wonder if one possible variation on the mooted arrangements might not involve the Commonwealth agreeing to make a grant to the states equivalent to the applicable royalty payments (rather than a rebate to the companies) allowing the Feds to roll the entire collection (outside of company tax) into the RSPT system. The Minerals Council claims to favour the principle of a profits-related tax but was claiming that having four sets of books was a problem.
I’d make the tax sharply progressive of course and on a smooth curve and I’d have it max out well above the 40% so as to allow those near the base of profitability to pay only modestly — which would allow us to get around arguments about where it cut in. It would begin cutting in at $1, albeit at a very concessional rate. If the companies prefer a mineral-by-mineral method and they can really hypothecate costs accurately, then I would have no problem with this. For multi-mineral mines — like Olympic Dam — this might be an option they would choose.
@Andrew Reynolds
Dream on. You talk nonsense. Your becoming more and more incoherent. The vertical fiscal imbalance and the arrangements through the Commonwealth Grants Commission mean that there are no ‘risk management’ requirements. The payments to states through the CGC take into account states revenue raising and revenue raising capacity, including their ability to raise revenue through royalties. When the Commonwealth repays the company for having paid the state a royalty. The Commonwealth payment to the companies is simply equivalent to having paid the state directly. The cost to the company is negated. That is, the company is back to its original non royalty payment position. The Commonwealth has simply paid the state indirectly rather than a payment through the CGC. The Commonwealth payments are less volatile because there are no overall adjustments for the royalties volatility. QED Where’s the risk management problem? All in your imagination. Lack of sleep has you engaging in not lucid waking dreaming.
I do admit. It is a little bit complicated. And you have to have some understanding of the working of government. That is you have to know a thing or two, which, of course, excludes you.
Freelander,
Done your study on a Brown tax as yet? Once you have understood that, you have a chance of understanding what you are attempting to talk about. Until then, you are just plain wrong.
Fran,
As I have said before, the mining companies would be (AFAICS) strongly in favour of a Brown tax as an alternative to royalties as they are a better way of taxing such enterprises. It does tend to de-risk them.
This current one, though, is just silly. If you whack a high rate of tax on the profits then all that will happen is that exploration will not be conducted here and the industry will eventually die out, no matter what is left in the ground as there will be plenty of other countries that are more than happy to take the investment that would have been spent here.
Again, if it is pitched at a level that replaces current royalties it will not have a large effect – it would probably actually increase the industry here as the government is taking on a reasonable amount of the risk of the projects. Even if it is a small amount bigger than the current arrangements it is likely to prove popular.
In the short term a high tax will bring on more revenue – but at the cost of greatly reducing exploration here.
As I pointed out to Alice earlier, this is not even a difficult choice for the mining companies – it is a matter of the statutory duties of the Board to take this course.
If you are happy with the idea that the mining industry is kept big now but is greatly reduced in the future I could understand your position. If this is not your intended effect then I would encourage you to reconsider.
Q: What happens when miners threaten to move their rent seeking offshore?
A: Destination countries wise up and raise taxes as well.
@Andrew Reynolds
Specvious as it assumes (without showing it) that ceteris paribus applies. In the brief time we have been discussing what will happen in 2012, the Australian dollar has dropped from $US0.90+ to sub $0.82. People are discussing whether world commodity prices will hold if European demand collapses and China eases off its demand for coal, iron, copper etc. And every ore body is partly about volume and partly about costs of recovery. Olympic Dam is a multi ore body and anyone who thinks they would walk away from this is simply deluded. They are haggling.
Personally, if I thought that the proposed arrangements would somewhat slow extraction rates (particularly of coal), I’d be even more supportive than I am now. I can’t see how it would do this though the fact that the special pleading from the extractive crowd is getting a hearing is scandalous. What’s even more bizarre is that the uncertainty caused by the fact that their special pleading is getting a hearing is itself adduced as a reason for giving in. So by talking down their own position, they get a benefit, aided of course by their bouyght and paid for coalition flunkeys.
Really, the government should just declare what they are going to do and tell them that if they don’t like it, they’d better pack their kit and leave, forfeiting their local mining claims. Of course, as the CPRS nonsense showed, the government are not much less sympathetic to them than the opposition, so that’s not going to happen.
Fran,
Nowhere have I even made the argument that companies would walk away from existing mines. That would be silly with a Brown tax. I have been very careful to apply this to exploration. I have even made it explicit that I am looking at the medium term.
If you could please re-look at my comments and actually answer the points made I would appreciate it.
@Andrew Reynolds
There is no need to ‘study’ anything. Any decent economist knows that a tax on pure profit is not distortionary in the neoclassical model. The idea is not exactly complicated and has been around for a very long time.
I have had a think about Ergas spiel, and as usual, a very small kernel of truth coated with remarkably dense layers of nonsense. Now Henry is a cut above the trite when it comes to nonsense, which is why his nonsense does not come cheap and makes an interesting read. Unlike certain youngsters who stay up past their bedtime and engage in endless and gratuitous banalethons.
I see your NPD is not showing much improvement. Telling adults to ‘re-look at my comments’. Very cheeky, but also funny in a sad way. Well you do serve a possibly useful function. You are always here for people in need of a hearty laugh. But I am conflicted about whether laughing at the disabled is, indeed, good for one.
Freelander,
The thing is that a Brown Tax is not a “pure” profit tax as you seem to think of one. The only laugh here is on someone that can make comments that get it completely wrong, like this one at #3 above:
Done the reading on a Brown tax yet and understood how you are wrong here? At least Alice has the ability to admit error. So far, you have not even had the honesty to admit that you were wrong.
The patronising you are attempting to do is just pathetic when it is your error that is apparent.
@Andrew Reynolds
There you are again putting words in people’s mouths, finding errors where none exist, and presuming to ‘teach’ people things. You really need to rein in your NPD. Set you heights a little lower. Strive for adequacy. You probably won’t reach it. But who knows? You might.
If you read the JQ post at the beginning of this thread you might recognise that the imperfections in applying any neoclassically inspired policy, including an attempt to tax pure profits, are well recognised by economists.
As for “Any decent economist knows that a tax on pure profit is not distortionary in the neoclassical model.” This happens to be a perfectly correct statement, so there is no mistake to admit (outside of your over-active imagination).
Why are you battling so hard for recognition that you should know is never going to happen? Hope springs eternal they say?
The nature of your NPD has been explained to you. And sadly, professional opinion is that for those with NPD as it is incurable there is little hope. But you are only bringing more pain on yourself with your fanciful pretensions. Imagining you can find errors in your betters. And teach everyone a thing or two.
And please, have some pity on us as well. We cannot help but feel your pain too. We are, after all, only human.
As an amusement, here is a question for you which I imagine you get wrong.
There are two securities.
The first security pays $100 on the first of every month, and the second security pays $100 if the market didn’t do well but if the market does well pays $200, again the payment on the first of each month (and say the chance of a good or a bad month is fifty-fifty.
According to you and your deep understanding of ‘risk management’ and all the statistics and maths and associated theory, which of these two securities is the more risky? Security one or security two?
I doubt you will be brave enough to answer this but if you try hard you may find someone who might tell you the answer. I don’t expect a quick reply because it might take you a day or two to find someone to provide it for you.
@Freelander
Freelander…just a while back Andy was barracking for de-regulation of all forms in all its glory…at least here he isn discussing the relative merits of a Brown Tax as opposed to “royalties”…..as they say Rome wasnt built in a day. Andy shows a distinct distaste for the “R” word.
Andy have you read the paper today?
Historic bill passed by Obama for financial reform…
“Wall Street brought to its proper role as the economy’s servant, not its master”. See the rest
http://www.guardian.co.uk/commentisfree/cifamerica/2010/may/21/obama-financial-reform-bill-wall-street
I hope after financial “Re- Regulation” Andy, you still have your job in banking….and now lets see the captains of the mining industry in Australia and their friends….get out of the political propaganda media business and back to minding their own business, which is mining, not managing the fiscal budgets of Government.
Other countries will soon be raising their taxes as well…
I think he is busy at the moment. Vigorously trying to find someone to tell him the answer to a simple question.
@Andrew Reynolds
Andy…there is a delicious irony in all of this…..look what happened to the tobacco industry when it spent years (no decades) campaigning that tobacco wasnt harmful…
Its a bit like mining and the AGW debate isnt it
You know that taxes can be crippling over time…..given enough “out there” start to see dirty production as a health problem.
It might pay Miners to “shut up” and pay the tax.
@Freelander
That could take him quite a while Freelander…….
Freelander,
I know you will not answer the simple question (as Alice also has not) as you appear not to understand it.
To answer your question, though, and ignoring credit risk as you seem to have, security two is the more risky but also the more valuable as security one has a standard deviation of zero and a mean payout of $100, while security two has a standard deviation of just over 50 and a mean payout of $150.
If you want more than that, my consultancy rates are probably beyond your budget.
How about answering any of my questions rather than shovelling more abuse?
.
Alice,
Obama’s bill is (IMHO) just going to make the next crash more likely, as just about every bill before it has done, by making the system even more subject to regulatory whim.
If you think money is tobacco then you have been smoking something.
Andy – “If you think money is tobacco then you have been smoking something.”
Andy – was that you reported running up and down George St at 3am looking for someone to answer Freelander’s simple question?.
You are now delusional and urgently need to get some sleep.
Re Obama’s bill…its a step in the right direction but no-one will be any “appier” till the glass is replaced in glass steagall Andy.
Alice,
Was that you that does not know that this world has several time zones and not all of them are centred on the eastern seaboard of Australia?
Now, can you answer a question or will this end up like many of our discussions with you just resorting to abuse as you obviously fail to make a cogent argument?
@Andrew Reynolds
I suspected it Andy – and you have confirmed it. You have been fattened up for too long by Wall street and couldnt run down George st!!
Now help pick up the pieces and put glass back in Glass Steagall and the R back in the Rent Resource Tax and do your bit to help Uncle Sam Andy!
@Andrew Reynolds
“security two is the more risky”
As I thought you got it wrong.
Following what must have been your unsuccessful search for someone to tell you the answer.
A moments thought should tell you that security two cannot be more risky than security one.
If you have security two and when you receive a payment of $200 you throw away $100 every time then security two is identical to security one. Therefore security two cannot be more risky because of this. In fact because you get $100 more, sometimes, security two is less risky.
Very strange to think that something that pays the same as security one but on occasion pays an extra $100 is more risky. Very silly ‘risk management’. If there are people of your ilk working in finance (and from what I have read and been told there are many), no wonder it all went bung.
I now you won’t believe this because of your lack of capacity for independent thought but that nevertheless does not stop it from being true.
You just got another paddling. Time for your afternoon lap.
“In fact because you get $100 more, sometimes, security two is less risky.”
You are confusing risk and return. They are usually correlated, but not the same.
Neither security is riskier than the other, on the face of it. However, security two is more volatile than the other. If stable returns are required, only then is security two riskier. There is no situation where security two can be less risky.
Very good Freelander – another fail. No less ignominious than your usual ones. The cashflows from security two are more risky than those from security one. As I said, security two is the more valuable, but the more risky.
You (well I should say I, as you seem to be unable to work this out properly) would pay more for security two than you would for security one, accepting that in some periods the security would pay out less and, in others, more than security one.
You really have no idea about finance at all, do you?
Got an answer to any of my questions yet? I thought not.