Tuesday, June 29, 2010

Ben Smith: What the government should do with its mining tax


Keep it.

And make explicit and compulsory its 40 per cent contributions to the mine's cost.

Ben Smith is brilliant, and knows the ground better than perhaps anyone.

The paper he delivered to last week's tax conference is below.

And below that (over the fold as they say), one choice extract about "sovereign risk"

Ben Smith on the RSPT



"Sovereign risk arises from the concern that a future government will take actions that reduce investment returns below what was expected given the policies in place at the time they were undertaken. The greater the perceived probability of this occurring, the more investors will discount potential favourable outcomes and the less likely they are to supply finance for projects.

The mining industry is, by its nature, a prime target for these kinds of actions. It undertakes investments that are risky and many of these will fail or be only barely profitable, but the visible result is the projects that are successful and that may earn very high profits. It is tempting for governments to raid those profits, especially in countries where the capacity to raise revenue by other means is limited and where political and social stability is weak.

In countries with more stable processes of policy formation and a much broader revenue base, the more likely reason for policy action to expropriate mining profits is a perception that the existing regime has not served well as a means of returning to the community an adequate share of the value of the resources being exploited. Other things equal, the countries posing the greatest sovereign risk concerns are those that initially promise the most generous tax regimes. Mining companies then need to consider how long they are likely to be able to exploit that situation before life becomes more difficult.

In the current case, there are two questions.

First, will the retroactive application of the RSPT to existing projects make investors more likely to fear similar actions in the future? Secondly, does the structure of the RSPT itself make it more or less likely that investors will fear future action that reduces after-tax profitability? These are, of course, questions to which nobody knows the answer. Reports of what suppliers of finance are alleged to have said don‟t provide reliable information even if they are true. Markets are known to over-react to news and to take some time to digest its true consequences. Given the mining industry‟s strong and vociferous reaction to the RSPT proposal and its essentially false representation of the effects on new mining investment, it would be surprising if there were not some short-term alarm in financial markets. In the longer-term, a calmer appraisal of the situation will determine people‟s risk perceptions.

Of the two questions posed in the last paragraph, the first is probably the less important. The current Australian government has demonstrated that it is prepared to act to secure rents that it sees as the property of “the Australian people”. If one had previously held the na├»ve belief that no Australian government would ever do such a thing, presumably one would now think it more likely than before that some future Australian government might also do so. The more important question, though, is how likely is it that a future Australian government would feel justified in acting in this way? If the perception is that the new tax provides a more reasonable sharing of the benefits of Australia‟s resource wealth between mining companies and the community than the existing regime, arguably the risk is reduced rather than increased.

This is not to say that a future government might not be tempted to increase the RSPT tax rate, say to 50 per cent. With a pure Brown Tax, this would mean that it was taking 50 per cent of the returns from projects to which it had contributed only 40 per cent of the cost. The best protection against this (as with the Goods and Services Tax, but with much better reason) is to make it relatively difficult to change the legislation determining the tax rate."



Related Posts

. Three of the best things written about the Resource Super Profits Tax

. Wednesday Column: No way back, no way out - the miners don't want a deal

. Who wins? Who loses? This is worth reading


4 comments:

leonandcelia said...

Thanks so much Peter for putting this paper on your blog. At last I have read something that explains both sides and a lot of the implications of the RSPT in detail in plain English. It is so frustrating trying to be well informed on this very important issue when most of what one reads is full of unintelligible jargon (no doubt economists trying to impress).

Rationalist said...

Yes, because academics know how the real world works.

It will be significantly amended yielding a significantly lower burden and it will be passed with tentative support from the industry. Back to business as usual.

Anonymous said...

I had the pleasure of learning from Ben Smith in several courses of my undergraduate economics degree at the ANU - including resource economics.

Ever since the Government announced its plans for an RSPT, I've not understood what all the fuss is about, and the reason for that is Ben Smith.

Fantastic paper. Fantastic communicator.

Peter Martin said...

Here, here!

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