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.
John Quiggin 
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.
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
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.
Speaking of ‘reality’, isn’t ‘it’ the antipodean of economics?
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.
@Tony G
Isn’t this tax roughly revenue neutral?
At least they understand logic.
Alice,
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.
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.
http://knowledge.asb.unsw.edu.au/article.cfm;jsessionid=f03076bdaddfdd63b21068392a4f29497368?articleid=1139
There surely is a need for your posted statement.
Jim,
This tax is nowhere near roughly revenue neutral. The Feds, after rebating the royalties, are booking about $9bn of revenue a year from it.
@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.
@Tony G
Maybe home-economics is more to your liking:
http://www.nationalpost.com/life/story.html?id=3069073
Its practical, cash accounting is sufficient, and you can consume your own output. This might please everybody.
Alice,
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.
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.
@Andrew Reynolds
So that’s a good thing right?
JohnL,
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.
.
Fran,
Far be it from me to accuse you of trolling on the issue.
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
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.
@Andrew Reynolds
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.
Fran,
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?
Fran
Sometimes,not always of course but more often than not actually [shame about the pro nuke stuff] you make very very good sense.
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.
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.
in short form,
robbing peter to pay paul
@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.
PrQ,
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.
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.
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.
@hc
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.
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.
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
@Andrew Reynolds
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.
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.
@hc
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.
or
using rent to pay the rates?
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.
@hc
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.
@hc
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.
Fran,
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.
I find this interesting:
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
@Andrew Reynolds
I knew that when I made the comment. Irony …
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.
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.
Andrew Reynolds at 15: The Budget papers do show what you said. It does seem as if the ABC fact sheet was wrong.
Fran,
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
A few differences – I can find more if you like. This example is not relevant to Australia.
Thanks, JohnL – I think in this case the ABC was simply mistaken. It is an easy mistake to make.
It seems to me there is some lack of detailed information. Does anyone know the formulae for calculating the proposed tax?
@Andrew Reynolds
Argue? You’re against it but ignorance doesn’t constitute an argument. You don’t even understand it.
@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.
Ernestine,
I think EY’s paper is one of the simplest. Even so, it runs to several pages.
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.
Freelander,
Have you worked out what a Brown tax is yet?
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