Monday, May 31, 2010

"The person who will dig out our last iron ore has probably already been born"

The truly shocking table is from Budget Statement 4:

Here's Shane Wright in today's West Australian:

"The person who will dig out the last shovel load of iron ore from WA has probably already been born. Based on the best available research, and relying on current levels of production, there is estimated to be 70 years worth of iron ore in the ground across the country.

It’s better than gold — about 30 years — and copper — about a decade — but short of the 90 years worth of black coal or the 130 years of zinc thought to be hiding in the soil.

Of course, technology and price rises should mean we will find more iron ore, but on the other side of the equation demand will also increase.

You can’t start an iron ore or coal farm and grow more of the stuff. Once it’s gone, it’s gone for ever.

That is what sets mining apart from every other industry and one of the reasons why resources rent taxes are much better than the system of royalty payments...

As the Minerals Council of Australia recognises, taxing a resource at a flat rate is one of the worst ways to tax these commodities.

That’s because the royalty hits before you even start production, which encourages the development of high-value minerals at the expense of others and hits hard those mines at the tail end of their existence. Royalties don’t care if iron ore prices are at $20 a tonne or $120 a tonne, and therein lies the problem with them.

The Henry review, in a comparison of all types of taxes, found royalties were the worst type of tax in the country.

For all Colin Barnett’s complaints about the resources super profits tax, his plans to increase royalty rates are also a substantial danger to the mining industry. Maybe not to a BHP or Rio Tinto, because of the huge revenue flows these two are generating, but to anyone else in the mining game.

Mr Barnett wants to push up royalties because he recognises that royalty rates have not kept pace with the accelerating demand for the commodities.

He has to look after the long-term finances of the State, and by signalling a royalty increase the Premier is effectively admitting WA has been giving away its non-renewable resources to private companies far too cheaply.

When the iron ore runs out, BHP, Rio, FMG and others will head off to other parts of the globe in search of resources.

The Premier is doing the right thing by the taxpayers of WA by seeking to increase the payments for commodities that can never be recovered. However, the royalties system is a terrible way to do it because of the wider economic damage it causes.

That’s the whole reason behind moving from royalties to a system that taxes profits, and grabs a constant share of those profits.

Unfortunately, the Rudd Government has seemingly stuffed up this whole issue from the very beginning.

Some of the Government’s arguments have been disingenuous to the point of outright lying.
Just the name of the tax — the resources super profits tax — is a piece of political spin and nothing else.

It’s all about tapping anger in urban parts of the country over the Government’s claims that miners don’t pay their fair share of tax.

Really, this is an onshore minerals rent tax and nothing more.

The Henry review suggested excluding certain low value minerals such as peat, talc, lime and sand, largely because any financial benefits would be outweighed by the administration costs and the fact these minerals don’t generate very large profits. Instead, the Government brought them under the super profits umbrella, with no explanation.

It has welched on a confrontation with the States over royalties.

Even with all the evidence that royalties are a bad way to tax non-renewable resources, the Government went with a second best option of leaving the States to collect royalties and then rebate them back to the companies involved.

In the selling of the whole change, Ken Henry was not rolled out until a fortnight after the report was made public. The person best placed to explain the tax was held in reserve, while other members of his panel were not asked to front the cameras to explain how the tax would work.

And attempts to explain how the rent tax would work made the plot lines TV’s Lost seem simple by comparison.

Mr Rudd failed to sell the ETS and his ham-fisted efforts at the RSPT have been no better.
Apart from Dr Henry and a few tax experts, no one seems to be able to explain, without a power point presentation why the tax kicks in at such a low level.

The fact this tax does not operate anywhere else in the world is also of little comfort.
As Ross Garnaut, one of the fathers of rent taxes in this country who is also the chairman of gold miner Lihir Gold, explained recently, making the theoretical case is one thing. He argued that unless every element of the theoretical argument could be borne out, then the best option would be the introduction of the petroleum resource rent tax to the onshore mineral sector and one other minor change.

I think he has it about right, and it’s an option that should be pursued by the Government.
The PRRT is understood, its arrangements have not changed since it was introduced more than 20 years ago. A key element of any tax system is that it should not change over time.

The fact oil and gas are still being taken from Bass Strait is a testament to the success of the PRRT. Under the previous system of excises, BHP and Esso, the two firms behind Bass Strait, would have wound up production almost two decades ago.

The main selling point of the RSPT over the petroleum tax — the Government taking 40 per cent of the risk in a project — is simply not valued by the companies. That is a major problem.

Of course, the Government is no orphan being disingenuous in their argument. Mining companies claim that royalties are a tax, but on their annual accounts they are accounted as a business cost and so are tax deductible. The royalty is a fee for digging up the dirt — without some sort of fee, the owners (us) would be giving away a non-renewable resource that is worth money for free.

The RSPT replaces the royalty to become the fee, and so rises and falls with the movement in price. That is what sets it apart from a royalty, and why it is a much better tax.

None of this, however, detracts from the main point — the RSPT will collect a lot more tax from a few key mining companies. Taking $10 billion or so a year from their bottom lines must have an impact on the operation of the sector right now.

Some projects seem likely to be delayed for many years to come, although eventually the value of WA’s commodities will demand their exploitation.

Maybe the person destined to be the last to dig iron ore out of WA has a little more time up their sleeve."

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Saturday, May 29, 2010

Peter's post: Continued... Published in today's SMH and Age Graphic: From here Related Posts

Friday, May 28, 2010

Peter's post: Continued... Published in today's SMH and Age Graphic: From here Related Posts

Who wins? Who loses? This is worth reading

Paul Frijters, the impressive economist, concludes...

Who are the winners of this tax? They include:

. Mine workers and mining communities. The long-run level of activity should go up, and the pressure on their wages and employment relations should go down.

. The general business community. Non-mining activities are taxed less because mining profits are taxed more, meaning that in general, businesses win out

. The general public, simply because they can expect to benefit from reduced taxation and receive parts of the services bought by this tax.

. The economic system, because this kind of tax is very dependable (minerals can’t run away to foreign countries and hence the tax can’t be avoided), making the public finances sounder and more reliable.

Who are the expected losers of this tax? They include:

. Shareholders in mining activities in Australia. When they bought their mining shares, the shareholders expected to receive a certain flow of profits, and that profit stream is now taxed more, making shares in mining less valuable. These losers include domestic shareholders and foreign shareholders, such as major Chinese interests in Australian firms and foreign shareholders in mining companies operating in Australia. To a certain extent, the RPT means Australia is grabbing in the coffers of foreigners to the benefit of its own population.

. Shareholders in mining activities outside Australia. Many countries are facing the problem of how to tax economic activities without reducing the level of economic activity, and Rent taxes are recognised as being pretty close to the economic textbook ideal as to how to do it. Hence other countries will no doubt follow suit if Australia pulls it off. This makes international mining companies understandably nervous.

. Other holders of fixed assets within Australia. This tax of course establishes the principle that assets that cannot run away might witness an increase in the taxation of the income generated by those assets. There are quite a few other sources of rent that could in principle be treated similarly, making owners of fixed assets justifiably nervous. Land, in particular, would be a prime long-term target for tax increases.

Frijters continues:

The specter that land-owners might be taxed on the basis of the value of that land (as an imputation of its profitability) will undoubtedly make owners of prime real estate nervous, and no amount of protestations on the part of the current government that it will not introduce such a tax will entirely allay the fears of those who see an analogy between taxing what is beneath the surface (minerals) and taxing the surface itself. And it would be quite possible that the Liberals introduce such a land-tax in their next government. Hence all those super-rich that make their money off fixed assets rather than their skills can all justifiably feel they have something to lose from the introduction of this tax.

In short, many of the expected losers of this tax are foreign or super-rich, whilst the expected beneficiaries include the vast majority of the Australian population and the business community.

If the tax indeed goes ahead as hypothesised above, the political question will be whether the few losers will manage to fool the many winners into believing that it is in the interest of the many (including workers in the mining industry!) to protect the few.

I consider Rudd exceptionally lucky with the current avalanche of misinformation and self-interested commentary coming from the rich mining companies. It is not often in economics that a proposed new tax is so obviously a fight between the interests of the few and the interests of the whole, making it easy for economists to be fairly united on where they stand. The more fuss is made about it, the more it can become a defining issue for current politicians and the more satisfaction they can take from the experience.

I fervently hope this debate drags on for a long time and becomes a debate about what kind of society Australia wishes to be: one that is run in the interest of the whole, where small groups of super-rich cannot sway public opinion, or one where any change that has a couple of well-funded losers can be stopped by disinformation and fear mongering.

The full post is at Core Economics.

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This will make you want to watch the news -- Soooo much

To quote one YouTube commenter: This should be Australia's national anthem.

And guess what? It's no longer the ABC's News theme. But given that the new one scarcely registers, they should bring it back.


The band is called Pendulum. They're from Perth.

MP3 here.


HT: Bella

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How bright is outlook? Amongst advanced economies, the best there is

Australia has received perhaps the ultimate economic accolade.

The International Monetary Fund says "among major advanced countries, Australia's growth potential over the medium term clearly stands out as the best".

The acclaim comes with a startling forecast. Australian exports to China, at present accounting for 1 in every 5 ships leaving the country will by the middle of this decade account for 1 in 3.

Just a decade ago China accounted for 1 in 20 bulk carriers leaving the country.

The IMF working paper came on the same day as the Bureau of Statistics reported extraordinary expected growth in mining investment with the sector expected to account for about half of all planned business investment in 2010-11.

China overtook Japan as Australia's biggest customer a year ago. The IMF report says by 2015 Australia will sell it twice as much as Japan.

The growing importance of China and also India which a decade ago took 2 per cent of our exports and will soon take 11 per cent will expose Australia to customers with an average economic growth rate of 6 per cent, the fastest on record.

The Fund says Australia's high immigration rate, boosted by our "relatively strong economic performance" will continue while New Zealand's falters, "with a stronger recovery in the Australian labour market likely attracting workers across the Tasman".

The IMF believes the prices Australia receives for exports will "remain elevated," an assessment at odds with Australia's Treasury which expects a retreat in Australia's terms of trade next year.

The Fund sides with Treasury Secretary Ken Henry who yesterday told parliament that a shortage of good workers rather than investment would be the biggest constraint on Australia's growth.

It believes that Australia's unemployment rate has a natural floor of 5 per cent below which inflation will accelerate. At 5.4 per cent Australia's labour market is close to that floor.

The analysis is consistent with that of the Paris-based OECD which Thursday forecast four to five more interest rate hikes for Australia in order to restrain inflation and house prices.

The investment intention survey was conducted throughout April and the first week of May meaning that most of the data was collected before the the government unveiled its proposed Resource Super Profits Tax.

If mining companies have decided to put projects on hold that decision would not be reflected in the ABS figures.

They show that the mining was the only major industry to cut its capital spending in each quarter last year, lifting it by 2.6 per cent in the first quarter of this year. It accounts for 45 per cent of all planned private investment in the coming financial year despite making up 8 per cent of the economy.

Investment by manufacturers slumped 15 per cent in the March quarter as government stimulus measures came to an end. For the first time in businesses wound back short-term investment plans.

"It is clear Australia will be riding on the back of the mining sector in the coming year," said CommSec economist Craig James. "Miners will spend twice what manufacturers will."

Seperately Moody’s Investor Service reported that despite fears that last year’s bumper crop of first home buyers would hit the wall as interest rates rose, the delinquency rate of 2009 mortgages was the lowest on record.

Just 1.34 per cent of prime mortgages were a month behind on payments compared to 15 per cent in the United States with 10 per cent seriously behind.

Published in today's SMH

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Henry: "Frankly there is more than enough investment in train in the mining sector...


The mining industry did not save Australia from recession as is widely believed, according to the head of the Treasury. And any investor who thinks the proposed new tax is causing stock market jitters deserves to do their dough.

In two hours of calm, defiant and at times barbed evidence to a Senate committee just ahead of leaving on an overseas holiday Treasury boss Ken Henry rubbished claims the mining industry was Australia's Saviour, poured scorn on suggestions that it was highly taxed and inferred that what its executives say in private they don't repeat in public.

Asked whether the government was planning to water down the proposed new tax in response to industry concerns he said he was aware of no such proposal.

Asked whether he still expected mining investment to boom as forecast in the budget he said he had seen nothing to make him change his mind.

Turning to the industry's role in the economy he said he had "lost count of the number of times" he had heard people say it saved Australia from recession.

"These statements are not supported by facts," he added.

"It is true that Australia avoided a recession... but the Australian mining industry actually experienced quite a deep recession. In the first six months of 2009 it shed 15 per cent of its workers. Mining investment collapsed, mining output collapsed."

"Had every industry behaved that way our unemployment rate would have climbed to 19 per cent."

As industry claim that Tax Office data showed it paid tax at around the rate of 30 per cent was "not very surprising and not very meaningful".

"Tax payable divided by taxable income will of course come close to the statutory rate."

"But the mining sector is a very significant beneficiary of very large concessions that cut its taxable income to a fraction of its total income."

"We could remove all those concessions and not change the industry's claimed tax rate but I am sure it would regard the removal as significant."

Claims by industry executives that they were shelving or putting on hold investments because of the proposed tax needed to be taken with a grain of salt.

"There are always questions about when specific investments will be undertaken."

"Recently the chief executive of one rather large company said to me, by the way this was before the announcement of the tax, that he had 30 or 40 years work in these projects on the table".

"Today to hear the same mining executive talk you would think that his expectations had been that all of these projects were going to be rolled out next year."

"Frankly there is more than enough investment in train in the mining sector. The limit is access to the labour and capital needed to undertake the projects."

"Some companies in the west have fly-in fly-out arrangements form eastern capital cities. That tells you there's a supply constraint."

Asked whether the proposed 40 per cent super profits tax rate would harm investment he said if the rate was 70 or 80 per cent it would make no difference. "In concept anything short of 100 per cent would make no difference."

"I don't want to make too much of this but other countries such as Norway have managed to attract substantial investment taking 95 per cent of the profits."

Asked whether the proposed tax had hurt share prices he said there was "a lot of volatility out there", but that "people who really believe that share price volatility is due to the tax stand to lose some money I would suggest."

Published in today's SMH and Age

COLEBATCH: Henry fends off (most of) his critics

KEN Henry made the most of his reluctant appearance before a Senate committee. He put down his critics, and gave a lucid explanation of his resource rent tax offset only by an own goal and one sharp senator getting through his defences.

The Treasury boss had it easy as Coalition senators virtually invited him to explain how the tax would work, why it was needed, and what were the flaws in the arguments against it.

He challenged the Minerals Council's claim that miners pay 41 per cent of their income in tax and royalties, rising to 58 per cent in the new scheme.

Yes, he said, on their taxable income but only because tax breaks for depreciation made their taxable income "a fraction of their economic income".

"It's not very meaningful," he said. "We could remove all the mining industry's tax concessions and not change its effective rate of tax calculated [that] way." Yet losing billions of dollars a year in tax breaks would be "of some significance".

And yes, under the new scheme, in theory a company could have to pay tax as high as 56.8 per cent of its taxable income. But it would do that only if its profits were "infinitely high". On Treasury estimates, only companies earning returns of more than 25 per cent a year would pay 50 per cent of their income in tax.

Henry said he knew of no decisions to change the tax, despite speculation that the government will lift the threshold for resource profits from 6 per cent to 11 per cent. But he hinted darkly that if it did, there could be other changes to claw back the revenue loss.

But he kicked one own goal, claiming that, far from the mining industry "saving Australia from recession", the truth was the reverse: mining had "quite a deep recession", yet Australia had none. Mining shed 15 per cent of its employees, he said.

Bunk. The seasonally adjusted jobs figures are not reliable at that level. They show that mining jobs rose 30 per cent in the last nine months of 2008, then shrank 15 per cent in six months, then rose another 15 per cent. How can anyone believe that when the national accounts show mining output in 2009 was basically flat, with at most a brief fall of 1.2 per cent?

Then, under persistent questioning from independent Nick Xenophon, Henry conceded that the optimistic modelling of the tax ignored the prospect that mi.ning projects could be deferred in response to the tax, to focus on the (very) long-term benefits. "Frankly, there is more than enough investment in train in the mining sector," he said.

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Thursday, May 27, 2010

Peter's post: Continued... Published in today's SMH and Age Graphic: From here Related Posts

A taste of Henry

More tomorrow.

Hansard will take a while to do the full transcript, which will be bloody brilliant.

"The proposition is that the non-renewable resources of the community belong to the Australian community at large and that the Australian community should regard the mining of those products as effectively balance sheet transactions. That is to say selling an asset.

As anybody would know, whenever you sell an asset it would be prudent to regard the selling of the asset as a balance sheet transaction and not something which can go on forever to finance recurrent spending

Whenever one sells an asset one will always be concerned about the price at which one sells it.

If it was your own asset you would be unlikely to give it away.

You'd take a very keen interest in the price that you got for the asset."

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How many more hikes?

Count your fingers

Australians are being told to brace for much higher interest rates with the OECD predicting at least four more hikes in the year ahead and most likely five.

The international organisation's Economic Outlook released overnight in Paris predicts the Reserve Bank will push up its cash rate from its present 4.5 per cent to 5.1 by December and then 5.7 per cent by next June.

Australia's cash rate at the time would be one of the world's highest, exceeded in the the OECD by only Turkey, Poland, Mexico and Iceland.

The predicition is sharply at odds with that of Australian financial markets which have priced in a tightening of only 0.25 per cent in the year ahead.

The 120 point hike if fully passed on would push up standard variable mortgage rated from their present average of 7.4 per cent to 8.6 per cent, adding an extra $238 to the monthly cost of servicing a typical $300,000 mortgage and $318 to the cost of servicing a $400,000 mortgage.

The total extra costs since rate began climbing from their lows last October would be $540 per month for a $300,000 loan and $720 for a $400,000 loan.

The increase would bring mortgage rates back to the high of 8.55 per cent reached when the Coalition left office but would leave them short of the peak of 9.6 per cent reached under Labor before the Reserve Bank began a series of cuts in response to the global financial crisis...

The Organisation for Economic Co-operation and Development identifies Australia and Poland as the only two of its 30 members to have avoided a recession during the crisis.

It is optimistic about a sharp rebound in Australia's economic growth saying its "dynamism does not seem to have slackened at the beginning of 2010".

"The business climate and business confidence are strong. Firms have significantly expanded their investment plans, particularly in the mining sector, where strong demand from Asian countries has led to marked improvement in the terms of trade and higher profits," the report says.

Although the report is silent on Australia's plan to tax so-called mining super profits it recommends new taxes on financial institutions across its 30 members big enough to collect "2 to 4 per cent of gross domestic product over the long term".

Ahead of the report's release OECD Secretary-General
Angel GurrĂ­a told the ABC the mining tax was one of "a number of preferred ways in which we like to see tax structures work," adding that "whenever there is a price spike it is legitimate for a sharing of that bonanza."

The report describes the increase in Australian real estate prices as "marked" and says it leaves Australia with the highest house prices relative to income of any member other than New Zealand.

It expects demand for Australian real estate to remain strong "bolstered by immigration".

"The current tightening of monetary and fiscal policy is welcome given the rebound in activity", it says warning that rising confidence and more favourable terms of trade might require "a more rapid tightening of monetary policy" than it has forecast.

It expects Australia's economy to grow by 3.2 per cent and 3.6 per cent this year and next, well above the average OECD forecasts of 2.7 and 2.8 per cent.

Published in today's SMH and Age


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Henry - here's what he said that I tweeted

Details later

Risk to retirement savings? "I think this tax will make investment less risky. Gov good for 40pc of losses" 

RT @hughriminton #Kenhenry, facing Barnaby explaining difference between ore mining+oil wells, deadpans: "It's amazing what one learns"

People who really believe share price volatility is due to the mining tax seem to lose some money I suggest

Other countries such as Norway have managed to attract substantial investment taking 95 per cent of the profits 

I am not aware of any decision to change the package. Q: It was in the paper. Henry - I don't reply on newspapers

Are you happy with response to Henry Review? "It's a first installment - a pretty big one"

An enormous amount said by execs about impact on investment, but we remain very confident of our budget investment forecast

Econtech has not probably not modeled the transition to the tax. That would be very difficult, truly monumental. 

Regional effects: I am pretty confident the modelling would show net benefits in the mining states.

Sounds counter intuitive but incidence of company tax falls on workers. That's why we recommended using RSPT to cut it.

If it was your own asset you wouldn't give it away

Selling minerals is a balance sheet transaction - it cannot go on forever to finance recurrent spending.

If all sectors lost jobs the way mining did we would have an unemployment rate of 17 pc

Mining industry did not save Australia from recession - it went into recession...

You will get an increase in mining investment cos of removal of royalties, lower co tax

An RSPT of 50 pc would have no different economic impact to an RSPT of 40 pc

To extent project possible in a world of no tax, would still be profitable with RSPT

I don't see any extra sovereign risk, in any case there's less project risk if govt underwrites 40% of costs

It was not the purpose of the RSPT to slow the minerals sector.

Henry sledges Minerals Council's tax "analysis"

You only get a rate of tax of 56.8 if the rate of return is infinitely large

Henry - extra super will come out of wages not profits, according to Treasury analysis

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Best show in town - Ken Henry live before the Senate 7.50 am

That's right, 7.50 am, for two hours.

It'll will be broadcast live here.

I'll be in the room.

Wednesday, May 26, 2010

Meanwhile, if you took Abbott at his word...

The spending cuts proposed by the Coalition in its reply to the budget pose a risk to the management of the economy and could endanger the working of the public service according to the head of the Department of Finance.

Appearing before a Senate estimates committee Department head David Tune was asked about the effect of a two-year freeze on public service recruitment along the lines proposed by the Opposition.

"It would have a major effect," he said. "There would be a reduced role in terms of advising government on its budget, there would be a reduced level of service to parliament and our
capacity to project manage construction would be affected."

The Finance Department loses 11 per cent of its employees each year... and relies on graduates to "renew our thinking and keep us rejuvenating".

"While the effect would not necessarily be immediate in year one or year two, losing an entire cadre of graduates would effect down the track," he said.

The department would give the highest priority to complying with its legal obligations , but would face problems if it was unable to replace senior economists and accountants as they left and may have to adopt lower service standards, something that would be "regrettable".

A related Coalition's proposal to cut a further $350 million cut in travel spending on top of cuts just negotiated would cause problems as those contracts can not yet be reopened.

The only way to do it would be to cut the number of flights 17 per cent, most probably "rationing" department by department.

Mr Tune said the department had been given just one week to cost the Building the Education Revolution school stimulus program.

It arrived at the costing in an "unscientific" way but would probably not have reached a different conclusion if it had had longer.

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You use Facebook?

Try to get out, if you can.

Here's Minister Conroy's extraordinary assessment at Senate estimates:

"Facebook has also shown a complete disregard for users’ privacy recently. Facebook,
I understand, was developed by Harvard University student, Mark Zuckerberg, who
after breaking up with his girlfriend developed a website of all the photos from the Harvard yearbook so that
he and his mates could rank the girls according to their looks — an auspicious start for Facebook. He was
encouraged to develop this further and Facebook, the social networking phenomenon, was born. Facebook has
been rolling out changes to its privacy laws over recent months and as one blogger recently put it:

Facebook has gone rogue. Facebook used to be a place to share photos and thoughts with friends and family, a useful
way to keep in touch. Then Facebook realised it owned the network and decided to turn your profile into your identity
online, figuring rightly that there is money and power in being the place where people define themselves.

These are all quotes from this blog.

In December last year Facebook reneged on its privacy promises and made much of your profile public by default,
including the city you live in, your name, your photo, the names of your friends and the causes you have signed on to.
Then it went further and linked all the things you said you liked to your public profile; your music preferences,
employment information, reading preference, schools—all made public.

Fourteen privacy groups have filed an unfair trade complaint against Facebook with the FTC. Facebook’s
founder, Mark Zuckerberg, says privacy is no longer a social norm. A leaked email from Mr Zuckerberg
recently referred to Facebook users — and I will have to censor this because we are in parliament — as dumb,
and then the next word begins with ‘f’, for giving him all their private information and not expecting him to
use it.

So, what would you prefer, Senator Wortley, a corporate giant who is answerable to no-one and motivated
solely by profit making the rules on the internet, or a democratically elected government with all the checks
and balances in place?"

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How much tax?

Ian McIlwraith has dug where the Treasury appears not to:

"IF THE Treasury analysis of corporate tax, released by Treasurer Wayne Swan and recommended by Prime Minister Kevin Rudd, is an example of the quality of that department's work generally - we're in deep trouble.

After a heated 48-hour exchange of statistical fire, in which two US academics became collateral damage because their research was used as a weapon it was never designed to be, Rudd and Swan's army retreated to what it thought was higher ground, firing off a soon-to-be-published piece of Treasury research.

Keeping in mind that it was Treasury head Ken Henry and his people who reviewed the entire tax system, out of which review the government is implementing a minuscule percentage of recommendations, and that the consultative committee on the resource tax is also headed by a Treasury official - a lot of Australia's economic future is being gambled on the know-how in that department.

Yet the paper released on Monday is both out of date and superficial....
It uses the Australian Tax Office's 2004-05 statistics on the cash it collected. To be fair to Treasury, the ATO's publication is always late because of the lagged effect in processing returns - but not that delayed. The ATO statistics for the year 2007-08 were released in March. That seems ample time for Treasury to have upgraded its work - or at least to have included 2005-06 and 2006-07 figures.

While Treasury printed its usual disclaimer, that the opinions are the authors' and not necessarily the department's, the questions provoked by the article are not so much about opinion as quality - and government judgment in seizing on more so-called empirical evidence that is demonstrably thin.

Why, in 2010, it seems remarkable to the researchers that, in spite of a single corporate tax of 30 per cent, average tax rates vary across different industries is a mystery. For decades governments have introduced policies that slanted in favour of whatever industry they felt needed encouragement or protection. Which has meant a company's capacity to claim a tax offset varies depending on their business.

Had Treasury used the most recent ATO statistics, they might have produced a more fascinating insight into a corporate tax system that has far more problems than miners not being charged enough to make money out of mineral resources that belong to everybody (and not just the states in which they reside).

According to the ATO, companies generated $2264.23 billion of income in that financial year, yet barely 12 per cent of that ($235.59 billion) stuck to the sides as ''taxable income''. Out of that, only $57.85 billion in tax was paid by companies, so their average rate of tax was 24.5 per cent. They should have paid more than $70 billion.

Mining's contribution was $8.07 billion in tax on $29.01 billion of taxable income - or 27.8 per cent. The percentage of total mining industry income regarded as taxable was 18 per cent, well above the average for all industries.

Australian Bureau of Statistics figures of gross operating profits that year have Australian companies earning $215.98 billion, of which the miners made $77.69 billion - which is 36 per cent.

There is an undeniable discrepancy between the mining industry's share of gross profits (36 per cent) and its share of total tax paid (28 per cent).

The real problem is that companies were able to claim $12.3 billion of taxable losses that year (of which the $1.7 billion claimed by miners was comparatively underweight). On that evidence, dropping the corporate rate to 28 per cent is a little like lowering your expectations after years of failing to clear the bar.

That says that the current tax regime is very inefficient in converting company income into tax receipts - something Henry's review was supposed to fix, and it is difficult to see why dropping the corporate tax rate to 28 per cent will fix it.

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Resource Tax: 22 leading economists speak out

"Although it is appropriate to debate modifications to the design of the proposed Resource Super Profits Tax, the current public criticism of the proposed tax has been dominated by misinformation"

Signatories include Fred Argy, former director of the Economic Planning Advisory Council, Allan Fels, Dean of the Australia and NZ School of Government and former head of the Australian Competition and Consumer Commission, Deborah Cobb-Clark, Director of the Melbourne Institute of Applied Economic and Social Research and fifteen professors of economics from leading Australian universities, including the the Australian National University, Melbourne University, the University of Queensland and the University of Western Australia.

Economists Statement

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What the experts think about the outlook for BHP and Rio?

BHP broker recommendations (Reuters, 25 May 2010)

Buy/Outperform: 13
Hold: 2
Sell/Underperform: 0

RIO broker recommendations (Reuters, 25 May 2010)

Buy/Outperform: 10
Hold: 2
Sell/Underperform: 0

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

Ben Smith was the consultant to the 1986 Gutman inquiry into the taxation of gold mining that recommended the exemption be removed, subsequently making Australia making billions.

John Freebairn of the economics faculty at Melbourne University has the most lateral tax mind in the business as well as the most human understanding.

Alan Mitchell, economics editor of the Australian Financial Review sees clearly where others see fog.

These pieces shows each at the top of their game:

Ben Smith

When the Government
announces a 40 per cent
resource super profits tax, which,
when combined with the company
tax, has the effect of increasing the
tax on mining profits to 57 per
cent, the natural reaction is to
think that the industry’ s
predictions about its impact may
well be correct.

ln fact, they are entirely false.

The most basic principle of
economics is that the incentives to
undertake activity are influenced
by the marginal effects of policy
measures. In this case, marginal
effects means tlteimpact onprofits
from new investments in
exploration and mining, including
extensions of existing mines, as ,
distinct from the impact 'on profits
from projects whose investment
cost is already sunk.

Consider the following analogy.

Suppose the Government
announced a one-off measure to
expropriate 5 per cent of the wealth
of every citizen as measured at
midnight last night and that,
starting tomorrow, the tax rate on
employment income would be
reduced to zero.

Of course, many people would
hate this package and there would
be much debate about the
desirability of the redistribution
involved, but it wouldnft stop
anyone turning up for work
tomorrow. On the contrary,
elimination of the tax on labour
income would create anincreased
incentive to 'seek employment.

That is pretty much the resource
super tax story. Its application to
the profits earned from existing
operations will expropriate a
significant chunk of wealth held-in
the form of mining shares. This will
affect almost everyone to some
extent, since superannuation funds
hold a-lot of mining shares, but it
will most adversely affect those
who, like mining industry
executives and directors, are both
wealthy and hold a relatively large
proportion of their wealth in
mining stocks.

A For new investments in
exploration and mining, however,
the resource super tax is not a tax
on super profits, because it is not in
any meaningful sense a "tax" at all.

In effect, the Federal
Government (and you, as the
taxpayer) will take a 40 per cent -
equity share in all new investment
and will receive 40 per cent of the
profits, just as any private joint
venture partner would do. Of
course, the mechanics of the
resource super tax are not as
simple and transparent as that.

The Government won't provide
its 40 per cent stake up-front, but
will guarantee to pavit out of its
share of the protits or, if the project
is not sufticiently profitable, by a
cash payment at the end of the
project’s life. Hence, the
Government will be borrowing the
cost of its 40 per cent share from
the "company, paying interest on
that loan at the long-term
government bond rate, and
guaranteeing that the debt will be
fully repaid by one means or
another. For every $100 of project
cost, the company will stillhave to
find $100 of initial funding.

However, only $60 of that will
actually be investment in a risky
venture, in exchange for which it
will get 60 per cent of the profits.
The other $40 will be a risldess loan
to the Government, on which it will
(appropriately) earn the riskless
rate of interest. So long as the
company can itself borrow $40
against the security of the
governments guarantee, at an
interest rate that is no higher than
the long-term government bond
rate, there is no "tax" involved.

So where does the 57 per cent tax
rate come from?.Well, if you
incorrectly think of the
Government’s 40 per cent share of
the profits as a "tax" and then add
on the company tax that will be
paid on the companys 60 per cent
share, you arrive at-that figure as
the "tax rate" on the total profit.

But this is a gross distortion.

Mining company dollars have
financed only 60 -per cent of the
project and that share of the profits
will be taxed 'only at the reduced
company tax rate' of 28 per cent.

But wait, there's more. Currently,
mining is subjept to state and
territory royalties, which tax the
profits earned by mining
investments and deter otherwise
worthwhile activity. Under the
resource super tax, the Federal
Government will reimburse
companies for any royalties paid,
with the result that the mining
industry dollars invested in
projects will have significantly
more favourable tax treatment
than at present.

The expropriation of shareholder
wealth resulting from the
application of resource super tax to
existing operations may cause
mining companies to kick and
scream, but don’t worry about
Whether they are going to turn up
for work tomorrow.

In fact, the only danger to future
exploration and mining activity is
the possibility that suppliers of
finance might believe the
industry’s rhetoric, but the market
is smarter than that and banks are
no doubt already figuring out ways
to squeeze a margin out of lending
against a cast-iron government

Ben Smith is a former head of the
School of Economics at the Australian
National University and was an associate
commissioner on the Industry
Commission's 1991 Inquiry into Mining
and Mineral Processing in Australia.

John Freebairn

The resource super profits tax (RSPT) is a less distorting and more efficient tax than the state-based royalties which it will replace. It results in different and subtle changes in the distribution of the tax burden across different mines and different phases of the commodity cycle. Any assessment of the RSPT needs to take place in the broader income tax context, including in particular corporate income tax.

Other taxes, including the GST and state payroll and stamp duties, will continue to apply.

It is useful to compare and contrast the corporate income tax and the proposed RSPT.

The corporate tax rate, now 30 per cent and to be reduced to 28 per cent from July 2014, is applied to a measure of gross receipts less the sum of any royalties and RSPT, depreciation, running expenses, interest and the nominal value of any losses carried forward. The RSPT at a rate of 40 per cent is to be applied to a measure of gross receipts less the sum of depreciation, running expenses, a normal rate of return on debt plus equity capital, and any losses carried forward scaled up by the normal rate of return. The normal rate of return is to be the 10-year government bond rate. Relative to corporate income tax, the RSPT allows a deduction for the normal rate of return on both debt and equity capital, and treats the two types of finance similarly. Losses carried forward are indexed; they are treated symmetrically with gains, thereby providing for neutrality of tax treatment of risky mining investments.

Under the proposed changes, mining companies will still pay a royalty at current rates to the state and territory governments, but the commonwealth will directly compensate them. In effect, the miners will no longer pay the royalty. This is a clumsy political expedient to avoid a fight with the states over federal-state financial relations.

The distribution of the RSPT will vary across mines. For any particular mineral or energy there is a range of mines ranked by low to high costs of production. The lowest-cost mines have rich deposits close to the surface and easy to mine, ready access to transport and other infrastructure, and low costs for environment and heritage protection. These mines earn very large returns above production costs. At the higher end of the cost scale are mines that barely cover production costs because of comparatively poorer deposits, more difficult and costly mining, longer distances from or more costly infrastructure, and incur significant costs to protect the environment and heritage values.

Under the RSPT, the low-cost mine will pay a relatively high tax burden, but the combined RSPT and corporate income tax burden will be at most 56.8 per cent on the above-normal profits or rents on the mining operation. By contrast, the marginal mine will earn very little to no rents, pay no RSPT and likely no corporate income tax.

Here lies the greater efficiency of the RSPT. Under the royalty system some mines at the higher end of the cost scale will be unprofitable, even though they can cover the social opportunity costs of plant and equipment and labour, and these investments will be deterred. But such investments and production would be viable under the RSPT.

Further, even though the shareholders of the low-cost mines receive less with the RSPT, as compared with the royalty system, it is still highly profitable, and the investment and production would take place. In fact, they continue to receive more than 40 per cent of the return over and above the opportunity cost of the funds in alternative investments in the economy. The RSPT could be much higher, close to 100 per cent, without deterring the investment.

Super resource rent returns are largely restricted to the natural resource industries, where the quality and associated production costs of different resource units vary. By contrast, most of the manufacturing and services industries are characterised by close to constant returns to scale production technologies. That is, the RSPT cannot be a precursor to similar taxes in most of the rest of the economy.

Second, the RSPT tax take will vary over the commodity cycle. Despite the optimism of some that China and India will drive a never-ending resources boom, just as night follows day, commodity booms are followed by commodity slumps. The royalty system imposes a similar cost burden on miners through the boom and slump times. The RSPT plus corporate income tax collected will rise with booms, when capacity to pay is greater, and fall in slumps, when capacity to pay is reduced. In effect, government, on behalf of the citizens who own the basic resources, becomes a shareholder in the mining industry.

Alan Mitchell

A tax on tobacco, says an apparently perplexed Tony Abbott, will reduce smoking, but a tax on mining is supposed to increase mining.

Of course, the whole nation is trying to get its head around this exotic animal that economists call a resource rent tax. But the answer to Abbott's puzzle is that, despite its name, the government's resource super profits tax is not a normal tax on mining.

Arguably it is not a tax at all, although that is what economists insist on calling it. It is a charge set by the owner of the mineral resources for the right to exploit those resources. It is no more a tax than the rent Westfield charges Woolworths. And like any such charge, it is tax deductible. It is pre-tax.

To get a sense of how it works, imagine you owned a strip of land and the title to the minerals under the ground. How much could you sell the mineral rights for?

If the land already had been explored so everyone knew what was there, the maximum price obviously would be related to the value of the minerals.

But it could not be the entire value. The mining company would have to cover its costs, including the cost of the capital supplied by its shareholders. It would have to make a normal profit, including a margin for risk related to future mineral prices, etc.
But, as the owner of the minerals, you might reasonably hope to get a price that approached the full value of the minerals less the miners' costs (including its normal profit). And if it were a competitive market, with miners trying to outbid each other, you probably would.

That is, you would be pocketing what economists call the expected economic rent of the project, which is the expected profit in excess of the costs of exploiting the resource, including a miner's normal rate of return on capital. And that is the profit in excess of the minimum rate of return needed to justify the miner's investment in the project.

Of course, if there had been no prior exploration and no one knew for sure the value of the deposit, you wouldn't get as much money. The miners would make their own assessment of the chances of finding something, and its likely value. They would subtract a bigger margin for risk from the price they were prepared to pay.

But, either way, the price extracted by you as the owner would not deter the miner from going ahead with the project, because it would still expect to make its required rate of return.

An upfront sale of the right to develop the mineral resource transfers all the risk and rewards to the miner. As the owner, you might prefer to maintain an interest in the development of the mineral resource as a silent partner – to share the risks and the profits.

In that case, the profits in excess of the miner's costs would be shared, as would the losses.

That is basically what the government has done on behalf of the community, which owns the nation's mineral resources. The resource rent "tax" reduces a miner's share of the expected net present value of the project (excluding costs and a normal profit) and the associated risk. This, among other things, should lower the miners' required risk premium. For risk-averse investors, this might increase the value of the project because the reduction of risk is worth more than the loss of expected earnings.

In the case of new projects, this new effective partnership arrangement should have no adverse effect on investment and output, and might increase it. Even with 40 per cent of the economic rent going to the resource owner, the miner is still earning a profit in excess of that required to justify the investment.

The government's resource super profits tax is intended to leave the "cut-off" point for new projects unchanged: no project that would have gone ahead without the tax should fail to go ahead with the tax.

With the resource rent tax in effect replacing state royalties, the new tax should increase the number of marginal projects that are developed.

For a number of existing projects, there is an element of retrospectivity and an argument for a transitional arrangement.

But, thanks to China and India, there has been a big, semi-permanent shift in the prices of Australia's minerals that was not contemplated when the existing state royalty arrangements were introduced. No mining company could have seriously expected to simply pocket the super profits while their partners and owners of the mineral resources sat silent.

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Tuesday, May 25, 2010

Mistrust anyone who produces a graph like this:

It's from the Minerals Council

This is how it should look:

Just saying.

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Electoral backlash? It's hard to see one

Labor has good reason not to fear an electoral assault from the mining industry.

A Herald analysis of the 13 Labor-held seats in mining regions shows all but 4 are held by massive margins.

Cunningham taking in Wollongong, Bulli and Helensburgh is held by an impressive 17 per cent.

Labor's weakest margin in NSW is in Charlton which labor's rising star Greg Combet holds by 12.9 per cent.

Only two seats in Queensland two in Western Australia are held by less than 3 per cent.

What's also notable is how few mining workers are actually employed in those seats. In most it is fewer than 2000. And not all of them are well-disposed toward their employers. In recent years Rio and BHP have been shedding staff. In the 1990s the Gordonstone mine in Queensland used security guards and dogs to lock-out sacked workers.

Published in today's SMH   Graphic: SMH

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Fortescue's letter to shareholders

...they have dropped on the Australian people a socialist style funding and tax device where the Government is now your silent partner...

Letter to Fortescue Shareholders

Fortunately one of the questions in the letter can be cleared up straight away:

"To make the point, imagine for a moment that your home loan was based on
you failing to make your mortgage repayments and the house being sold in a
mortgagee-in-possession auction. Do you think your banker would be happy
that someone would make good 40 per cent of the loss as a reason to lend you
the money - in return for taking 40 per cent of your income? The same income
they were relying on to allow you to repay the loan? Clearly the banker would
have stopped you buying the house because they rely on believable repayment
schedules, not bankruptcy events."

The answer is 'yes'.

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Five easy pieces - the Mining Super Profits Tax


"Yesterday, Rio Tinto boss Tom Albanese - the man who almost blew up the company and wanted to hand control to the Chinese government - claimed Australia posed a greater sovereign risk than any other country in which Rio operates. That's a rather bold claim, particularly given Rio "lost" a sizeable share of the giant Simandou mine in Guinea, in West Africa, a few years back when the government decided to simply resume it."


"The new arrangements need never stop a single mine going ahead. If a project is viable, 60 per cent of the same project is viable. With a global portfolio of projects, multinationals might put a few offshore projects ahead of ours but they will be delayed not stopped."

"Without the RSPT mining companies and their largely foreign shareholders would get virtually all the benefits of Australia’s superior resources while the bulk of Australians are either barely affected or made worse off."


"Under the RSPT the government shifts towards a higher risk, higher return tax base. When commodity prices are strong, this is a revenue plus. When conditions turn bad, it’s a revenue minus. The RSPT makes Australia’s tax base more risky - even if it is properly specified in all respects."


"Using the figures the Minerals Council of Australia cites in its defence, mining is taxed less at a federal level than all but five sectors: accommodation and food; electricity, gas and water; agriculture; real estate; and financial services. Comparing apples with apples, mining pays 0.57 percentage points less than manufacturing and 0.63 points less than construction. The highest-taxed sector is public administration and safety, which is 1.84 points above mining at 29.65 per cent".

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Monday, May 24, 2010

The Treasury strikes back - Disparities in Average Tax Rates

Released early, tonight for some reason.

"With the exception of the finance & insurance industry, all industries pay a less than proportionate amount of tax, relative to their contributions towards gross operating surplus. The standout industries are mining and electricity, gas and water — the latter is of particular note with a contribution of less than 1 per cent to corporate tax collections for the 2004-05 financial year, but 7 per cent of corporate gross operating surplus."

Disparities in Average Tax Rates

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Believable statement? Rio says Australia number one sovereign risk worldwide

From Business Spectator today:

"Global miner Rio Tinto Ltd has described Australia as the company's top sovereign risk and says it is reviewing all of its capital spending plans in Australia as a result of the federal government's proposed resource super profits tax (RSPT).

"This is my number one sovereign risk issue on a global basis," Rio chief executive Tom Albanese said, noting that the tax had set up the prospect of a long period of uncertainty which was corrosive to new investment.

"If we are dealing with a, say, two-year extended period of time... in that period, we'd be asking our managers to evaluate it on a worst-case basis," he said, adding that capital would shift in the meantime to other resource-rich nations like Canada.

Mr Albanese said the miner's Australian managers had been asked to review all projects under a worst-case tax scenario.

Speaking to journalists after arriving in Australia ahead of Rio's annual general meeting, Mr Albanese warned the miner's operations in Western Australia's Pilbara region would not have achieved their scale under such a tax.

"If the tax had been in place 10 years ago, we would not have made the investment ... in the Pilbara," he said."

HT: Chris Joye

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Peter's post: Continued... Published in today's SMH and Age Graphic: From here Related Posts

The Minerals Council quoted me here, Swan quoted me here.

Gittins today - How Rudd got into the mess:

Kevin Rudd has his back to the wall. He's no fighter, but he has little option but to stand and fight for his bitterly resisted resource super profits tax. With luck the experience will help turn him into the more substantial figure we need to lead us.

All Rudd's instincts - and those of the Hollow Men on whose counsel he relies - must be to ditch or greatly water down a tax he now discovers has proved hugely unpopular with the miners and which an economically uncomprehending business community doesn't like the sound of.

For a man who's always searching for a soft cop - those "reforms" that are riding high in the opinion polls, such as health care and, formerly, action on climate change - this must have come as a great shock to him.

But Rudd has no choice but to stand and fight. Having instantly shredded his credibility with his cowardly decision to cut and run from his emissions trading scheme when its popularity slipped, he simply can't afford another blow to his reputation.

If that's not enough, there's this: almost all the nice things he's promising to do if he's re-elected - cut company tax, help small business, further subsidise superannuation and the rest - hang off the resource tax. No tax, no goodies.

Normally, a prime minister has room for tweaks to placate the vested interests, but this time Rudd has none. His credibility is too low.

And the precedent of weakness he set with all his cave-ins to miners and other rent-seekers over the emissions trading scheme means giving the miners something this time would be more likely to further incite their greed than calm them.

Rudd is a weak man fallen among thieves. He may be from Queensland, but his moral compass now comes courtesy of Sussex Street. I'm sure he remains convinced of his own uprightness, but clinging to office comes first.

Actually, for a bunch that puts political expediency above all, Rudd's cynical advisers have made a succession of bad calls...

Continued at SMH

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