MRRT

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.

34 thoughts on “MRRT

  1. 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.

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

  3. 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.

  4. 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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