Wednesday, April 28, 2010

Wednesday column: We'll still be mining

Don't believe everything you read in the paper. Particularly not headlines like this in Monday's Australian: "Mining tax will kill industry". It is not only wrong, it's also incredibly familiar.

Right up until 1991 gold mining was completely exempt from tax, the only industry with such special status. Hawke squibbed on taxing it in the 1985 tax summit and commissioned an inquiry. As the day of its report grew nearer the campaign against it reached a crescendo. John Brumby, back then not a premier but the federal member for Bendigo lobbied to keep it exempt from tax. A front group, the Australian Gold Mining Industry Council claimed taxing it would "stifle the growth of the industry, destroy jobs and slash export earnings". I conducted repeated radio interviews with its spokesman in which he claimed so in ever more strident terms.

At the time Australia's gold exports amounted to $1 billion per year. They now exceed $1 billion per month.

Looking back in a speech in January Treasury boss Ken Henry said he found it hard to believe that such claims had been made.

"The Australian gold tax exemption lasted nearly 70 years, despite its having absolutely no support in tax theory," he said. "Tax reform is always difficult - even the things that are most obvious. That’s probably because it almost always confronts sectional interest. And, as the gold tax episode illustrates, reform can be especially difficult when those sectional interests can be dressed up as a concern for exports and jobs."

Which brings us to Ken Henry's Tax Review and the claim the resource rent tax the government is about to introduce "will kill" the industry.

By design it can't kill anything... If you think of it as a tax, it is the kind you would want. It doesn't kick in until profit rises above above a hurdle to become super-normal. At present the hurdle for the existing offshore petroleum resource rent tax is around 8 per cent. If a resource company's profits are only normal or if it is not making profits it will not pay the resource rent tax at all.

Australia's biggest-ever resource development, the gigantic Gorgon gas field off Western Australia got the go ahead in August even though its owners knew full well they would be subject to the 40 per cent offshore resource rent tax.

But its not really right to think of it as a tax. It's more of a profit-sharing arrangement. At the moment within Australia the states don't share profits with mining companies, they charge them for resources. The charges are levied at more than 40 different rates, usually applied to the value or volume of what is mined, and range from a low of 3.5 per cent for uranium mines in South Australia to a high of 10 per cent for coal mines in Queensland. They are charged whether or not the mine turns a profit and are increased whenever the state needs more money. Queensland has just upped its charges. Western Australia is likely to do the same.

If those charges were replaced with a nationwide resource rent tax as the Henry Review recommends Australia would sacrifice income while the mining companies are doing the hard work for it of developing the resources, and in return would share the booty when those companies have more than got their money back.

Even if as is possible when the government announces its response to the Henry Review on Sunday the resource rent tax is charged on top of existing state royalties the same will be true of the Commonwealth - it would share in the super-normal booty only after it became super-normal.

Would companies that had been considering setting up in Australia instead mine first in Brazil or South Africa? Maybe, but that mightn't be such a bad thing. It might slow down the development of mines in Australia , delaying new mines until other fields were exhausted and resource prices higher. Australia would still have its resources, but the benefit it got from extracting them would come later and at a higher price.

Given the resources boom in prospect this wiser stewardship of Australia's resources would ease some of the immense pressures in store. Reserve Bank board member Roger Corbett, chairman of Fairfax Media, publisher of The Age, has expressed concern about a "bipolar" economy in which the north and the west expand while the South East contracts, making economic management frighteningly difficult. A slower more gradual boom might do us no harm.

And we would make money along the way. The Treasury believes that if a 40 per cent resource rent tax had been in place in the last financial year we would have raised an extra $8 billion, enough to fund our universities all over again. That's a good return for somewhat slower mining growth.

But back to thinking of it as a tax. The ideal tax is levied on something which is bolted down, as the advocates of a land tax are forever telling us. That's one the four principles that has guided the Henry Review. The others are that the tax system should be simple, that it shouldn't needlessly distort decision making and that it should at least nod in the direction of fairness.

Capital is far from bolted down. That's why the review has decided to tax it lightly, cutting the tax rate on savings and recommending a small cut in the rate of company tax. Labour is for practical purposes bolted down. Australians aren't going to leave the country in big numbers whatever the tax on wages, and nor are men going to withdraw their labour, although women are more sensitive to taxes. That's why while paying special attention to the costs of raising children, the review hasn't recommended a cut in income tax rates.

Minerals are about the most bolted down thing we have. Companies that want to extract our resources have no choice but to pay our taxes, even if they delay doing so until other mines become expensive. They are even digging up our gold, two decades after an impost that was going to stifle mining growth, destroy jobs and slash export earnings.

Published in today's SMH and Age

Related Posts

. We own the minerals, lets get a share of the profits from selling them

. The Henry Review is imminent

. The Henry Tax Review: not quite as leaked