The reporting of the resource rent tax plan has been poor, and last night’s ABC television coverage was a good example. In his ‘Finance’ segment of the News, Alan Kohler revealed that share prices for mining companies have fallen, as if this wasn’t exactly what one would expect; and as if, by ‘wiping out wealth’, the policy has already had a negative affect on the economy. The strangest bit was at the end, when Kohler noted — with that meaningful twinkle of his eye that he affects when he’s reporting some fact whose significance speaks for itself, at least to the cognoscenti (so thank goodness he doesn’t have to explain it) — that the reduction in shareholder value was about equal to all the revenue the tax will raise ‘in the first few years’.
What was his point? That the fall in stock value cancels out the gain in revenue? In any case, the loss to shareholders is actually less than the capitalised value of all the additional tax the government will appropriate over the foreseeable future, so it could have been worse for them. (To be fair, Kohler gives generous praise to the Review in ‘The Drum’ today; but he’s more interested in the 136.25 recommendations the Government is ignoring than he is in the resource tax.)
After the News The 7.30 Report got stuck into it too, following the standard approach, which is to line up a couple of the tax’s critics from the mining industry, the Opposition or the Murdoch press, against a couple of its defenders from the government or the review committee. The critics of the tax tell us how it will decimate the industry and thereby impoverish the rest of us; the advocates declare that it’s time the industry paid its way. At the end of the day it’s all reduced to a matter of opinion, a divisive policy, a bit of politics, and off we go, talking about ‘how it will play with the electorate’, which is about all the ABC current affairs team really like to talk about. This profound analysis by The Australian’s George Megalogenis sums it up:
Everything involves a very, very clear political message, which is: I’m going to take a bit of money off these people who don’t vote, in this case miners, and I’m going to give this money to, and I’m gonna take the money and give it to some other people who do vote.
You’d never guess that there actually exists a set of widely agreed criteria for comparing competing tax rules and regimes, and that facts and figures can be obtained to assist in applying these criteria. I wonder if the ABC employs even one senior reporter who has an economics degree with a standard public finance unit in it. Have any of them have actually read the relevant chapter of the Henry Review? If they had, they’d at least be able to explain the basics:
Source: The Henry Review
1. Rent taxes can be presumed more efficient, because they appropriate surplus income that arises from ownership of a resource that’s unique or fixed in supply. Since the income doesn’t correspond to a cost of production, taxing it doesn’t affect economic decisions and distort the allocation of resources. This is standard economic reasoning, notwithstanding the odd nincompoop who thinks the idea came from Marx.
2. Under ideal conditions, the rights to the resource would be auctioned to the highest bidder. But because of economic risks, and ucertainties about future government policies, the government is likely to raise more money from a rent tax. In fact tax is a misnomer, as the Review notes, because it’s really the sale of a publically owned asset. Royalties should not strictly be counted as tax revenue at all.
3. Apart from the Petroleum Resource Rent Tax, current mining royalties are collected mostly by the states. They are calculated on volumes rather than profits, which is universally recognised as inefficient because it takes no account of the costs or market prices of the commodities. Such charges may indeed discourage extraction at the margin — which is exactly what the mining industry is illogically complaining that the proposed rent tax would do. In fact the Henry proposal is to apply a 40% tax to profits over and above a prescribed rate of return, equal to the ‘long-term Australian government bond rate’.
4. The proposed 40% tax rate, together with the 25% company tax rate that currently applies to mining profits, would imply a 55% overall tax on rental income (the income tax is applied after the rent tax is deducted). This would leave a significant portion to the mining companies, providing incentive to optimise their extraction. A 100% tax rate would obviously take away firms’ incentive to improve their efficiency.
5. Tax collected from mining profits has more than tripled in absolute terms in the course of the minerals boom of the last decade, as the diagram shows. But as a proportion of profits it has fallen by about three quarters. Had the proportion been maintained, royalties would be earning the states — according to my eyeball calculation — about twenty billion more than at present, although the revenue projection for the current proposal is apparently only $9 billion. In any case, the Federal Government would be in a much better position to impose a resource tax on multinational mining companies than individual states. And, regardless of who collects it, that amount would reduce the stress on budgets at all levels of government.
6. An alternative is to save the revenue. This would have the effect of reducing net capital inflows whether or not the government establishes an explicit ‘sovereign wealth fund’, as discussed in the Review. In principle, if the flow is large enough, it should reduce pressure on the Australian dollar and in turn the urgency experienced in some quarters to expel Western Australia from the Union. In practice $9 billion dollars is about equal to the statistical noise in the current account balance, so I can’t see it making that much difference.
All this amounts to a pretty good prima facie case for the resource rent tax. If our economic reporters did a bit more homework, they’d place the burden squarely on the critics to prove otherwise, rather than just invite them to fulminate and threaten.