I discover, that while I’m on the other side of the world, the Age and SMH have published a column they asked me to write on the new resource rent tax. They’ve published it, but edited and garbled various bits of it. Anyway, for better or worse, here’s the original.
It’s strange. The Opposition’s most successful attempts to paint the government as economically irresponsible have arisen when the Government has most closely followed the advice of its premier economic advisor – the Treasury and its Secretary, Ken Henry who are hardly paragons of economic irresponsibility.
Tossing over 50 billion dollars into our pockets and rushed infrastructure spending seemed somehow to offend commonsense. In such dire straights shouldn’t we be suffering to make things better? Not if you understand economics.
Likewise, won’t the so-called super profits tax on surging mining profits kill the goose that laid the golden egg, the industry that saved us from the downturn? Not if you understand economics.
The real question on tax is not ‘are there problems with this tax?’ – there always are – but ‘can this tax, with its problems, help us reduce other taxes with more problems?’
Taxing rents on fixed factors of production – like mineral wealth that can be mined for supernormal profits – minimises disincentives to invest because the remaining profits are sufficient to underpin investment incentives.
You might have heard the line about how ‘super profits’ can’t be defined as anything earned above the interest governments pay on their borrowing – currently around 5½ percent. Quite so. But that’s a complete misunderstanding of the new policy.
In fact the policy seeks to put the miner in the same position it would be in if it had agreed to all Australians (though their national government) becoming 40 percent joint venturers in the project – taking 40 percent of any subsequent net profits and bearing 40 percent of the net costs throughout.
In principle this kind of taxation would allow firms to reclaim 40 percent of its costs from government as it built a mine. That’s quite unlike company or personal income taxation where the taxman only assists in funding costs by allowing them to be deducted from eventual profits that eventually emerge in a project.
So ironically you’ve understood the new policy when you realise it’s not really a tax at all. It’s rent on the minerals (that’s why it’s tax deductible). But the terms on the government offers our minerals to mining companies is cleverly calibrated to the fact that not even the company knows just how much the minerals will be worth over the course of a project. So the rent on the minerals is the Government’s 40 percent ‘silent partnership’ in the project.
At least in theory the new arrangements it need never stop a single mine going ahead. If a project is viable, 60 percent of the same project is viable. In reality where multinationals are timing a global portfolio of projects around the world the new arrangements could lead them to queue a few offshore projects ahead of Australian onesours. Still they’ll only be delayed not stopped. Against that, the new arrangements plus lower company tax will also encourage more marginal mines to go ahead. A pretty good outcome given the torrent of new tax revenue these changes bring on.
The public remains oblivious to most of this. The Opposition can take some credit for this – the government its share of the blame. Spinning it as a ‘super profits’ tax seemed like a good idea at the time, but it helped frame the alarmists claim that we were killing the goose.
Had the Government been less frenetic it could have been more strategic. Earlier decisions and earlier release of the Henry Report could have paved the way for better explanation and consultation – for the announced arrangements require substantial tweaks.
Not only will transitional issues need to be carefully considered, but the tax has been formulated to defer the government’s contribution to 40% of the costs until a project is profitable. The threshold of profits above the long term bond rate is there not as a definition of super profits – which would be risible – but to reimburse the project for the funding costs of carrying the government’s contribution as debt onto its balance sheet.
Henry has recently argued that because the promise to bear 40% of the costs comes from the government, it’s as good as a government bond and so the financial markets should fund it at the bond rate. Fiddlesticks. The government should stump up the cash rather than persevering with an artificial – and costly – scheme to push debt off its balance sheet.
For the rest, however self-serving, the miners’ arguments contain vital information we ignore at our peril. If we use their feedback to make the right changes, the new ‘tax’ can join the Pantheon of Australia’s leading edge policy innovations – along with HECS, the Child Support Agency, compulsory super, Centrelink and our family payments system (the best targeted in the world) – the very mechanism that enabled Australia’s cash splash to be got out the door faster and more effectively than in any other country in the world.