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
guarantee.

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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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

1  VERRENDER

"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."

2  GRUEN

"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."

3  RICHARDSON

"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."

4  CARMODY

"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."

5  MEGALOGENIS

"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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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.

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Gittins today - How Rudd got into the mess:

Gittins: Rudd is a weak man fallen among thieves

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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Okay so no-one likes to part with profit, but the mining fight is becoming a spectator sport

And both sides are getting desperate. On the weekend each quoted me

The mining giant Rio Tinto has urged its thousands of workers to mount a grass roots campaign against the government’s proposed resources super profits tax.

With tensions between the mining sector and Rudd government at boiling point, Rio Tinto’s managing director, David Peever, has sent all employees a letter urging them to lobby their local MP, write a letter to the newspaper, and even ring talkback radio.

It comes as the government yesterday accused the mining industry of skimping on company tax while running a "fear campaign" and the industry launched an advertising blitz targeting 190 radio stations.

Fortescue Metals chief Andrew Forrest told the ABC he had received a "note from the Chinese consulate" saying Australia's competitive advantage over China, Brazil and India was "now gone".

A spokesman later clarified that the note was not from China but from "an Australian counsel in China". Foreign Minister Stephen Smith said none of his staff had issued such a note...

Mr Peever met the government’s consultative committee last week and left complaining that too little was on the table. Rio, like the rest of the industry, wants to negotiate down the 40 per cent rate, the definition of a super profit and the tax’s retrospectivity.

His email to staff says the process was "flawed" and the parameters "too tight".

It says the company’s executive director, Sam Walsh complained directly to Kevin Rudd, Wayne Swan and the Trade Minister Simon Crean, and urges Rio employees to do their bit.

It directs them to a website that provides tips on how to "actively participate in the debate by contacting your local MP, writing a letter to newspapers or calling talkback radio".

The Minerals Council last night unleashed a radio advertising campaign to run on 190 stations claiming the tax would "make everything more expensive" and cut the value of retirees shares. The tagline for each ad is "I don't think they've thought this through".

Deputy Prime Minister Julia Gillard turned up the heat on the industry claiming Australian-owned mining companies paid an effective tax rate of only 17 per cent and foreign-owned companies only 13 per cent.

By contrast Australian-owned manufacturers paid 25 per cent, retailers 23 per cent and financial corporations 27 per cent.

"The next time the Australian people hear a fear campaign coming at them from the mining sector, they might want to consider those figures," she said.

The Minerals Council chief executive Mitch Hooke hit back claiming the figures came from "a small 2009 American study not commissioned as part of the Henry Review".

Including royalties the mining industry paid 43 per cent.

The government released a list of nine special tax breaks available to the industry including deductions for "black hole expenditure", site rehabilitation, "frontier expenditure" and fuel.

Resources Minister Martin Ferguson said there would be "no movement at all" on the proposed 40 per cent tax rate but held out hope of movement on other details including where the tax cuts in.

"The mining industry has had a great decade," he said. "The companies themselves acknowledged privately to me we should be getting more taxation. We will take our chances electorally and lead by example and make sure we put in place a proper taxation system."

Economist Ross Garnaut appealed for peace labeling the industry campaign "dangerous from a number of points of view".

"Simply to roll the Treasury on an issue that's been subject of very careful analysis without a lot of very careful analysis being the basis of variation of policy, I think would be very dangerous," he told the ABC.

"We need a strong Australian policy making process, we need a strong independent centre of Australian policy making, that's what gave us 20 years of reform and what is the main reason why we're in better shape than most of the world right now."

"To simply have pressure from industry roll this, rather than have a good discussion in the public interest leading to legislation would, I think, be dangerous."

Published in today's SMH 


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

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A Reserve Bank currency firm was willing to supply prostitutes and pay bribes...

Today's Age, tonight's Four Corners:

Sex, bribes in banknote deals

RICHARD BAKER AND NICK MCKENZIE

A RESERVE Bank currency firm was willing to supply prostitutes and pay bribes to win contracts, according to a federal police witness at the centre of Australia's most serious corruption investigation.

The revelation is one of many made by a key witness in the federal police inquiry into the Reserve Bank company, Securency International, which makes polymer banknotes.

The witness has told an investigation by The Age and ABC TV's Four Corners - aired tonight - that a middleman hired by Securency to win contracts from foreign governments told him that he intended to bribe a central bank governor from an Asian country.

The witness, who was a Securency employee, has given the Australian Federal Police his diary in which he recorded the middleman telling him in 2007 that the ''governor would be very happy if the commission [payment] was increased''...


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So what effective tax rates do mining companies actually pay?

Nowhere near the effective tax rates paid by our manufacturing, retail and finance industry firms:

Effective Tax Rates NBER 2009




The table comes from this paper quoted with approval by the Henry Tax Review.

At Catallaxy Sinclair Davidson reaches a different conclusion.


Do Multinationals or Domestic Firms Face Higher Effective Tax Rates?

Kevin S. Markle, Douglas Shackelford

NBER Working Paper No. 15091, June 2009

"To our knowledge, this paper provides the most comprehensive analysis of firm-level corporate income tax expenses to date. We use publicly available financial statement information to estimate firm-level effective tax rates (ETRs) for 10,642 corporations from 85 countries from 1988 to 2007. We find that multinationals and domestic-only companies face similar ETRs. We also find that, on average, ETRs declined by seven percentage points or 20% over the period. German, Japanese, Australian and Canadian decreases were large. American, British, and French declines were more modest. Nonetheless, because ETRs were falling worldwide, the ordinal rank from high-tax countries to low-tax countries changed little. Japanese firms always faced the highest ETRs. ETRs for tax havens and countries from the Middle East and Asia (ignoring Japan) were always lower than those for the U.S. and European countries. These findings should provide some empirical underpinning for ongoing policy debates about the taxation of multinational profits."




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Sort of puts Australia into perspective, doesn't it?

Click here to see the graphic in all it's glory.

informationisbeautiful


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Resources tax: Australia may be the first, we won't be the last

The Paris-based Organisation of Economic Cooperation and Development has swung its weight behind Australia's proposed resource tax saying it represents a "sharing of the bonanza" and will not frighten away foreign investors.

The extraordinary intervention in support of the tax, in an ABC radio interview to be broadcast tomorrow suggests the so-called "rich nations club" regards the 40 per cent tax as a model to be followed by other members trying to regain control of their budgets.

Angel Gurría the Mexican-born OECD Secretary-General told the Sunday Profile program the tax was one of "a number of preferred ways in which we like to see tax structutres work".

"Whenever there is a bonanza, whenever there is a period in which there is a price spike or a price hike then it is legitimate for a sharing of that bonanza, a sharing of that benefit, especially if there are ways it can be used to stabilise markets in the future."

Asked whether the tax would turn away foreign investors Mr Gurría said "what drives investors is not necessarily that they are going to pay higher or lower tax... but the availability of raw materials".

"If you look at these things strategically rather than with your sights on the profit of next year or next quarter of course it's a wise thing to take the plunge, to take the risk and invest in Australia."

OECD forecasts to be released next week will show Australia near the head of the pack with growth of more than 3 per cent this year and "perhaps a little higher than that in 2011," predictions consistent with those in last week's budget.

China's economic growth will lead the rest of the world at 11 per cent this year and 10 per cent next year, with little risk of a collapse.

"On the contrary, the greatest concerns we have with China are precisely derived from the kind of growth they are experiencing, Mr Gurría said.

"For a country like Australia which is very linked up with China you are going to have a rather formidable trading and investment program. Don't rely only on that, but it's a good bet, its a very safe bet."

"You seem to have all the things that China needs to secure their growth medium and long term and at the same time having such a potent and fast-growing partner and also potentially a source of investment for Australia is very positive."

Asked whether Australia should have spent so much money stimulating its economy to avoid recession Mr Gurría said "everyone in the world went down the stimulus path, but you began in a good position".

Mr Gurría did not know whether Greece would avoid insolvency. He was worried that other European nations with less than half of Greece's debt were at risk as a result of the herd mentality of financial markets.

Published in today's SMH and Age 


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It's not a tax, it applies to more than super profits, so how did so many people get it so wrong?

Someone somewhere in the Treasurer's office must be deeply regretting ever calling it a Super Profits Tax. For one thing it applies to profits that are pretty ordinary. For another, it's not a tax...

As Ken Henry has tried to explain since and as the Minerals Council itself explained in its submission to the Henry Review the right way to think of developing minerals is as a "joint venture" between the citizens who own them and the company that extracts and sells them. Each has rights to the proceeds.

Until now state governments have sold those rights for a standard fee, varying from a low of 3.5 per cent of the value of uranium mined in South Australia to a high of 10 per cent of the coal mined in Queensland. As mineral prices have soared and profits with them the fees have began to look shabby.

The Minerals Council proposed and the Henry Review agreed that instead each partner should share in the profit.

The Treasury has taken the idea further and made each side genuine partners sharing in both the costs and profits. While the government chose to emphasise the 40 per cent profit share (perhaps to make it look as if it was standing up for Australia) the other equally important side of the equation is its commitment to stump of 40 per cent of the costs.

It will not only be a partner, but the best kind any business could want, a "silent partner" as Ken Henry put it this week - someone who will without a vote and without complaint put up 40 per cent of whatever the mine developer decides to spend and then come back for 40 per cent of the profit only when and if that venture is raking in rewards.

That several high profile mining executives and much of the public don't see it that way says something about Australia, something about the thinking of the government as it planned its sales pitch, and also something about a kink in the arrangement that has ensured that many in Henry's words, don't "get it"...

Queensland mining magnate Clive Palmer demonstrated a shaky hold on maths in the days after the policy's release. Not only did he add the 30 per cent company tax rate and the 40 per cent super profits rate together to tell tell Lateline it would tax him at 70 per cent (the most it could tax him is 57 per cent which is what you get when you apply a 40 per cent tax then the new company tax rate of 28 per cent tax to the rest) he forgot about the government's pretty substantial contribution to his costs.

It's the kink that made him forget and the kink that's causing much of the anguish. The government doesn't actually pay 40 per cent of the costs at the time they are incurred - that might break its budget. Instead it does something that mathematically amounts to the same thing. It guarantees to pay the costs in the future by deducting them from any eventual super profits tax payments. If the company winds up without ever paying the tax, it'll send it a cheque. To compensate companies for the delay it increases what it owes by the bond rate each year.

As Henry sees it that's as good as handing the firms money. The only risk, as he puts it, would be if the government folded. Many of the firms see it as pie-in-the-sky algebra. BGF Equities chairman Warwick Grigor fronted Henry Tuesday and said in the real world miners relied on intuition not academic analysis.

Henry said he did "not want to debate the relative merits of intuition over analysis,' but added "I obviously I have a rather marked sympathy for the later."

Miners say they won't be able to get loans if the government merely guarantees to come good with the month later. Henry says that's simply a matter of financial engineering. "The people we call call financial engineers can translate theory into practice at the speed of light," he said this week. A guarantee of payment from a AAA rated government such as Australia should be valuable asset anywhere in the world.

Henry's probably right, and much of the rest of the resource-rich world including India, Canada, Peru and Chile is already looking at following Australia's lead.

But right doesn't always win the day. When launching the tax review process in 2008 Henry was asked whether he would have another go at removing negative gearing as he tried to when advising Treasurer Paul Keating in 1985.

Henry said he still thought he was right but that he "still wares the scars" of the attempt.

Australians have long been been attached to the idea of mining in a that extends beyond its practical importance and most of their day to day experiences as city dwellers. Mining directly employs just 174,500 of Australia's 11 million workers. it accounts for 7 per cent of our GDP.

But its booms and slumps have a outsized effect on an otherwise fairly steady economy. And it's seen as our Saviour, in away that wool once was when Australia rode "on the sheep's back" and we enjoyed a wool boom.

A previous Labor government lost office in 1975 when it tried to borrow $4 billion to buy back mines from mining companies. This government is planning to use legislative muscle to buy in. Neither has proved popular.

Published in today's SMH


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Two views of the Resource Super Profits Tax

Here's Ken Henry, Tuesday:

"I know that some of you would have found some of the commentary surrounding the Government’s proposal a little confusing. And its theoretical basis would not be familiar to all of you. In passing I should note, however, that some financial market economists obviously do ‘get it’ – Michael Blythe and his team from CBA in particular. If you haven’t had a look at their very clear presentation of the issues, then I would encourage you to do so."

Here it is:

Michael Blythe - Explaining the Resource Super Profits Tax:




And here's another view, less disinterested, view:

Fortescue Statement:





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What the Coalition would cut, according to the government

What the Coalition Would Cut


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The Coalition's savings list - $46.7 billion

Coalition's Savings Measures May 2010



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Wednesday Column: Who would have thought? It's all up to Hockey.

Could the dog have eaten his homework too?

There's a terrific story in biographies of Neville Wran. The centrepiece of the campaign that swept him to power in NSW was transport.

There was only one problem the day before the launch of his transport policy - he didn't have one.

He grabbed David Hill, a young economics tutor he had only just met, put him in a room with his Transport spokesman and they worked through the night to come up with the policy hours before it was launched to acclaim on a Tuesday morning.

Its Wednesday morning and the Coalition had better hope Joe Hockey has been working nights.

Last Thursday in one of the oddest Budget reply speeches in memory Australia's Opposition Leader played for more time.

Given a good TV slot and months if not years to come up with a economic program of his own Tony Abbott delivered what was perhaps the ultimate "dog ate my homework" line.

Here's what he said... "Next Wednesday at the National Press Club, Shadow Treasurer Joe Hockey will announce further measures to reduce spending and to increase productivity including a detailed response to the new spending and new savings proposals in the budget."

I'll be there. I hope it won't sound as if it's been thrown together.

Because the rest of the Coalition program outlined by Tony Abbott last Thursday night sounded scandalously thrown together.

"Smaller government," Abbott told us "in our DNA".

Ignoring for the moment the way the Coalition actually behaved during its final seven years in office, allowing the pubic service excluding Defence, ASIO and the police to swell 25 per cent, lets look at how Abbott proposes to bring about smaller government.

Rather than examine what's needed function by function and axe what's not needed the Coalition will "introduce a two year recruitment freeze to reduce public servant numbers through natural attrition".

If letting the public service explode 25 per cent (44 per cent for senior public servants, 30 per cent for ministerial staff) at was careless, this is worse.

As Abbott explains, "there will be no redundancies, but for two years 6000 bureaucrats who retire or resign each year will not be replaced".

He surely wouldn't manage a company that way. Think about a mining company, on in which the geologists resign or retire early because they can get better jobs elsewhere, leaving behind other less-useful staff in, say, public relations. Abbott appears to be saying he wouldn't hire replacement geologists for two years.

By then he wouldn't have a company.

As a government minister the consequences would be less obvious but potentially worse.

Abbott was minister for health. If he let go of his influenza specialists, because for instance they received better offers from the pharmaceutical industry, the consequences of getting bad or late advice in that area could be catastrophic.

Abbott would know this. He served Australia with distinction during the 2005 bird flu scare.

Shutting the public service to new entrants for two years would create broader problems.

An entire cohort of bright young economists would become unavailable to the Treasury, a constraint that would become accute if the private sector snafled its best macroeconomists.

Graduates who had enrolled in university in good faith would have to put their careers on hold and might find themselves unable to compete with new graduates when the freeze was lifted.

And public service numbers wouldn't be cut by anthing like the 6000 per year Abbott expects. As soon as the freeze took hold resignations would slow to a tricke. It's what always happens during hiring freezes. Workers with low prospects won't risk leaving if they know they can't get back.

The public service would seize up and the expected savings wouldn't come.

None of this is saying the public service shouldn't be cut. It is overdue for a cut, but it is best done intelligently by working out what the government wants to keep rather than in a "lazy way" as Abbott terms it in another part of his speech.

The pledge to cut government advertising by 25 per cent, coming from a man who served in a governement that filled our screens nightly is not credible.

And nor is the most specific promise in a budget reply speech generally free of them - rollback, Abbott's promise that the Coalition "will oppose the mining tax in opposition and we will rescind it in government".

That's right, the Coalition will not only oppose the mining tax ahead of its implementation but will roll it back afterwards.

The ongoing uncertainty this would add to mining investment decisions on top of that that's there now has the potential to do the industry real harm - if the industry took it seriously.

The tax treatment of mining is not only a 40 per cent super tax on profits, its also a 40 per cent government contribution to the cost of achieving those profits.

Rolling that back, unscrambling the egg, would be about as unlikely and damaging as would have been Labor's Kim Beasley coming good on his promise to "roll back" the GST.

Abbott could have outline serious policies last Thursday. He passed up the chance.

Today it's up to Hockey.

Let's hope he has come up with good ones.


Published in today's SMH and Age


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