Wednesday, May 19, 2010

Henry to miners - no compromise on where the tax kicks in

His whole speech is worth reading

Treasury boss Ken Henry has flatly rejected talk of a compromise over the mining super profit tax saying to give in on the threshold would overcompensate miners to the point where they might not actually mine.

In a series of sometimes fiery exchanges at the annual business economists post-Budget address in Sydney he also denied suggestions that the tax changes were intended to slow the mining industry and ease the effects of a two-speed economy.

"I have provided no such advice to government. Indeed my panel's view is that the resource super profits tax will not in any way affect the pattern of Australia's comparative advantage," he said.

"And taking a long-term view one should expect to see over time a higher level of mining activity - that is an Australian economy that has more mining activity taking place rather than less."

The Treasury Secretary said by design the tax ensured that projects which are earning supernormal profits at present would continue to earn supernormal profits, "and for that reason in the long-run the level of that mining should not be affected".

"But projects which are right at the margin will become profitable once the existing royalties are removed. That's why the modelling projects an increase in mining investment."

"Now bear in mind this is long-term modelling, this is not modelling that attempts to nail down quarter by quarter what the result will be," he told the business economists.

"The results should not surprise anybody."

When told mining companies didn't see things that way Dr Henry said he did "not want to debate the relative merits of intuition over analysis," adding "obviously I have a marked sympathy with the later."

"I don't know how many times in 25 years I've been told... well that's all very well in theory but it's not actually how the real world works, only to observe years down the track that the people we call call financial engineers who can translate theory into practice at the speed of light have moved so quickly and done so much that governments have had to respond and at last recognise the power of the theory over perceptions of what the real world is like."

The tax effectively made the government "a silent partner in each investment, sharing in costs, risks and returns".

Those costs were carried forward at the bond rate and written of against tax or handed to the company when the project was wound up.

To use a higher rate would "overcompensate for the delay in the government guaranteed tax credit".

"It would be equivalent to the government issuing an alternative debt instrument at the same price as normal government bonds, but paying a higher rate of interest."

"It would provide an incentive to delay production to maximise the value of the subsidy — which could be as large as $330 million for every $1 billion invested.

The Treasury Secretary produced calculations to show that if the rate was 5 percentage points above the bond rate a project with zero net present value would generate a taxpayer funded return of 33 per cent.

Published in today's SMH and Age

Related Posts

. This Resource Super Profits Tax... how will it work?

. Swan on the Resource Super Profits Tax - worth reading

. So this idea of a super tax on mining profits... who raised it with the Henry Review?

. We'll still be mining