George Fane makes more sense than the group of 21 economist on the RSPT. I summarise.
The RSPT will adversely affect investment, jobs and production. The RSPT isn’t really the E. Cary Brown tax proposal of 1948. This required that government should levy a tax of, say, 40c on each $1 earned and contribute 40c whenever $1 is spent on the project. Since governments prefer to collect revenue than to pay it, an amended version of the proposal, known as the resource rent tax, was proposed by Ross Garnaut and Anthony Clunies-Ross. They suggested that instead of paying out on losses, the government should allow the investors to carry them forward to offset against future profits. Of course the future profits must eventuate for this to work. If investors have a cast-iron guarantee that they will be able to use their tax credits, even if the future profits never eventuate, then the credits are equivalent to government bonds as pointed out by Fane and Ben Smith in 1986.
At the Senate select committeee last week, Ken Henry asserted that the RSPT would have no different economic impact if the rate were raised to 80 per cent or perhaps even to 95 per cent. One can only assume that the reason the rate has been set at 40% instead of 95% is that at 95% the de facto expropriation of shareholders would be too blatant.
If the guarantee that future tax credits will be refunded is cast-iron, the Treasury should issue the bonds needed to pay cash refunds to the companies for initial losses in the year when they are made. The companies would presumably prefer the cash to the promise, so everyone would be better off. The only benefit to the government from not cashing the credits arises because the guarantee is not cast-iron.
This is obviously the case, since the RSPT rules are so complicated that they could be changed with negligible electoral consequences. To adapt an aphorism attributed to Ed Murrow, anyone who is not confused by the RSPT cannot have understood it. The accounting rules are too hard for economists, the economics is too hard for accountants and it is all too hard for everyone else.
Announced far enough in advance, applied only to new projects with full allowance for the use of overheads and goodwill, and in the absence of the huge problems in distinguishing between new and existing projects, a pure rent tax with a cast-iron guarantee that credits can be used is like the purchase by the government of equity. BHP shares have been a superb investment if you bought them 20 years ago, but can you be sure that dividends and capital gains over the next 20 years will be as good? Administratively, the application of a rent tax only to new projects would be a nightmare: how would the expansion of existing projects be differentiated from new projects? How would overheads be defined and allocated among new and existing projects?
It is true that the Australian community probably does not get an appropriate return on the resources that it owns. But it is important to note that in the case of a mining lease that has been allocated, the minerals belong to the successful bidder who, in exchange for promised development and exploration expenditures, has been promised the right to sell whatever can be produced . The solution to the problem of getting full value for the resources that have not yet been allocated is that exploration leases should be auctioned not allocated to those willing to spend the most on exploration. If the Commonwealth government wants to share in the equity risks of new projects, it should get the Future Fund to purchase mining shares.
In Fane’s view there is no case for taxing mining companies differently to others and no case for the partial expropriation of shareholders in these companies. Most of the shareholders are ordinary Australians who hold the shares through their superannuation. The best approach to moderating wealth inequality is through the progressive income taxes not the covert expropriation of equity of all those who happen to have invested in mining.
Well you only have to ask yourself what would be the fiscal situation with the BP predicament now, had it been ‘super profits’ taxed to date and Govt bikky jars are now empty everywhere. Nuff said.
I am proposing to nominate Ken Henry and Wayne Swan for a shared Nobel Prize in Physics, as their RSPT definitely demolishes Einstein’s totally erroneous claim that E = MC^2, which alleges that if M rises, then E rises by the factor E^2, when the Swan-Henry papers on the RSPT show irrefutably that if M rises, E falls pro rata. They have both always been convinced that a much less qualified clerk (than Swan and Henry) in an obscure Swiss patent office who could come up with such nonsense was probably Charlie Chaplin. For they in their “Announcement” of the RSPT have conclusively demonstrated that if a royalty levied at 5% of sales revenues of $100 million yielding $5 million is a lower proportion than 5% of sales revenue of $1000 million yielding $50 million, and likewise with the mining company tax of 30% of Taxable Profits. For Henry and Swan claim in their Announcement Paper that 5% of Revenues and 30% of Taxable Profits have yielded only an increase of 3 times of the 1999-2000 level of Taxable Profits while those Taxable Profits rose from less than $10 billion in 1999-2000 to $90 billion in 2008-2009.
This will surely come to be known in due course as the Swan-Henry Law of Percentages, and will no doubt soon be compulsory in all schools, as part of The Australian Government’s “Building the Education Revolution” programme, and especially in all the Uniervsirieties of The 21 “Economists” who endorsed the Swan-Henry farrago of nonsense in their Open Letter so generously endorsed by Australia’s equally arithmetically challenged Prime Minister at Question Time in the Australian Parliament on 26th May 2010.
The Australian Government’s Announcement Paper also states repeatedly that a company tax rate at 30% of taxable profits of $100 million ($30 million) produces a LOWER rate than 30% of taxable profits on $1,000 million, namely $300 million. The whole paper, supported as it was by the 21 TOTALLY dishonest and incompetent Australian economists in their Open Letter of 26th May, asks us to believe that the average of more than 5% of sales revenues from Australian mining PLUS the 30% of taxable profits since 1999-2000 has not increased pro rata with those Revenues and Taxable Profits between 1999-2000 and 2008-09.
This is the new Mathematics foreshadowed in George Orwell’s “1984” – 5% of sales and 30% of taxable profits in 2000 are shown by Ken Henry and swallowed by Swan and Rudd to have grown by less than the growth of Revenues and Taxable Profits in 1999-2000.
Truly, Einstein did get it wrong, as while for him E=MC^2, in Ken Henry’s Australia
E=MC^1.5.
I know it is beyond the mental capacity of any of The 21 super brilliant Australian economists who endorse the Henry RSPT, including their zeitgeist Ross Garnaut, but let me try:
The mining industry’s actual contribution to State and Commonwealth Government revenues constitutes around 5% of sales Revenues (more in Queensland) and 30% of Taxable Profits respectively, and that is BY LAW the case both today and for many years past.
In algebra, the TOTAL tax take T of both levels of governments is
T = xR + yTP ….(1)
where x is the percentage rate (between 0 and 1) of the royalty tax rate on total sales Revenues, and y (between 0 and 1) is the percentage tax rate of the company tax on Taxable Profits of the mining companies.
Since Taxable Profits are rarely if ever more than 40% of Revenues, only the sort of arithmetic taught in Australian schools and (by the Universities of The 21) could find that xR + yP was less than 5% of total before tax profits in 2000 and still less than 10% in 2008-09 despite the BY LAW tax rates of 5% on sales Revenues and 30% on Taxable Profits (Fig. 2.1 of the Australian Government’s Announcement paper,
http://www.futuretax.gov.au/documents/attachments/Announcement_document.pdf)
Sadly, neither George Orwell’s 1984 nor Aldous Huxley’s Brave New World figure in what passes for literature in Australian school and university syllabuses. It is easy to see why they do not.
Harry, Fane’s argument that an appropriate return to the owners of the minerals (i.e., us) can be obtained by auctioning the exploring rights assumes that there would competitive tension in the auction. Hmmm, take the case of iron ore. There are only two iron ore miners to speak of, BHP and Rio. And if they succeed in getting their Pilbara production JV approved, there will be one. BHP and Rio also dominate coal, though Xstrata is also a player there, but it is hardly a model of atomistic competition.
Auctioning something to a monopsonist or duoponists is not a good idea if you want to maximise your return. That is why you have to tax them.
Continuing …I don’t really know why there is some much doubt about the government’s promise to allow carry forward of losses. Companies have always been allowed to do that, and individuals can carry forward capital losses.
But suppose it is a genuine concern. Then, as Fane says, the same effect can be realised by the government giving a 10 year bond to mining companies, with the special provision that it can only be redeemed at the end of the mining project. This would be instead of allowing them to carry forward the losses. The interest would be taxed at a one minus the RSPT rate. The effect on the cash flows of the mining companies would be identical to what the government has proposed. A secondary market could develop in these bonds, adding to their value. Even if there is doubt about the government changing the tax rules in the future, presumably nobody (other than Barnaby Joyce) thinks the government is going to default on its debt.
Uncle Milton, I think auctioning would improve on the current situation. I think the outcome would be reasonably competitive.
I agree with your suggestion that GF’s bond issue suggestion makes sense.
I think a core issue GF identifies is that a $9b net increase in the tax take will not even come close to being neutral however it is structured. Including royalties Australian miners pay a rate of tax comparable to miners in other countries. It will create a diversion of exploration effort to other countries – particularly given the difficulty with Australiabn environmental approvals.
Roxby Downs in SA will cost BHP-Billiton $20b to develop and will underpin much of the growth of the SA economy over the coming decades. Of course BHP seek a big reward. But if they do do and governments turn around and say you have done ‘too well’ – we will expropriate a share – of course they will think twice about making such a huge investment.
Uncle Milton, Swan & Henry claim that the government will reimburse undeducted losses, not merely allow carrying forward as already applies to losses…(p.26 of the document I linked to above).
But I think I have discovered the origin of the bizarre claims by the government that the mining industry has been paying less in royalties than the royalty rate and less in profits tax than 30% of before tax profits. If we consider “the simple representation of the mole fraction is thinking in terms of A and B. The mole fraction of A would be moles of A divided by the moles of A and moles of B. This way, adding the two mole fractions together would equal one” (Wiki). So mole fraction of A = Moles A/(Moles A + Moles B). In other words, it seems the goons in Treasury have ADDED tax paid to Profits before tax – so T@30% on $100 = $30, then T/(T+P) = 30/130 = 23.3%; same with royalties, adding royalty paid to the revenue base yields a lower “effective rate”. Truly we do indeed have a new Henry’s Law, not unlike that found in chemistry (or alchemy).
Further to my last, it gets much worse: First, actual tax data from the ATO shows mining net tax at $2.8 billion in 2003-04, which was just under 28% of taxable profits (less than 30% because some companies had tax offsets or the like), while royalties paid in Australia were $2.9 billion, for a total 59% of taxable profits payable in royalties and company income tax. Needless to say the Government’s RSPT Announcement document claims that the resource sector paid less than 40% of its taxable profits in tax and royalties in 2003-04 (Fig.2.1, p.10).
Then we have the incredible KPMG Econtech report commissioned by the Henry report, which is blissfully unaware that the incidence of company tax is not borne by the company or its workers, but in the first instance by its shareholders. Kenny Henry seems equally unaware of this, because his Treasury’s claim that the RSPT will yield $9 billion in its first year seems not to appreciate that allowing the RSPT as deductible against company tax – but not dividend imputable – will surely have a considerable impact on the government’s tax take from mining dividends. Total franked dividends were $11 billion in 2003-04, of which an est. 7% were attributable to the resource sector, more likely 10% now. Now most dividends (c.77%, source ATO Tax Statistics) accrue to those with incomes above $50,000, of whom most currently pay income tax on their incomes above $60,000 at rates of up to 47.5% (depending on their medicare levy). Thus the RSPT must have a serious impact on net cash available for dividends, so the nice little earner from mining dividend taxes accruing at 42% or 47.5% of amounts paid will be seriously eroded.
The SMH reports today that KPMG is somewhat disconsolate about the effect of its consultancy arm’s Henry Report on its mining clients. It should also apologise for the dismally low standard of that report, with its complete disregard of Australia’s dividend taxation.
Harry, on what basis do you think that auctioning would be reasonably competitive?
Uncle Milton, The two companies could collude to underbid but there would be a host of smaller operators out to take advantage of this – with the probable intent of selling a joint interest at a profit.
Selling the joint interest to whom, Harry? The monopsonists? They’d underbid on that auction too, so the smaller operator would bid (or rather, not bid) accordingly.
An essential feature of a tax, as opposed to a charge, is that there is no clear quid pro quo, except that you cannot be prosecuted for non-payment. Royalties are not taxes if they were negotiated and agreed before the investment in the mine; that kind of royalty is a non-tax payment to the owner of the resource for the right to extract and sell the resource. Similarly, the up-front payment agreed in an ex ante resources auction would not be a tax, but rather a charge, or an ordinary price-like payment. In competitive circumstances, either an up-front auction or royalties agreements should gain for the owner 100 per cent of the ‘rent’ (ie, the value of the resource-in-the-ground = the PV of stochastic stream of sales revenues minus costs of achieving the sale–extraction etc). A difference between the two kinds of charges is that a resource owner who decides on royalties takes on the risk that the stream of royalty receipts will vary over time (with consequential effect effects on both sides of the agreement). If, after a competitive assignment of mining rights and after the investment has been made, government violates the royalty- or auction-contract, and imposes more payments on the miner, then these additions would be the equivalent of taxes on quasi-rents (or partial expropriation). However, if the right of access were awarded for less-than-competitive payment, then (in theory) the subsequent and unexpected imposition of a suitably-calibrated RSPT, imposed after the investment has been made, would be able to capture the residual that could have been captured by a competitive auction (and that have not otherwise been dissipated by rent-seeking expenditures). It is almost impossible, nonetheless, for the one and the same RSPT to substitute perfectly for an ex ante auction, as well as to recoup perfectly any deficiency in the royalty charges previously agreed for existing mines. The former requires a tax rate of 100 per cent on appropriately-measured excess profits; the latter, a tax rate calibrated to the size of the deficiency in royalty payments for each project or each company with a set of projects.