Craig Emerson capably discusses the collapse of the comprehensive RSPT and the adoption instead of a much narrower resource rental tax (an MMRT) on coal, oil and iron ore. Readers of this blog will know (see last post) that I have changed my view on the RSPT. It was a (possibly justifiable) grab for resources by the Commonwealth Government but, correctly implemented as planned, it was neutral with respect to exploration activity. In this sense at least it was an ingenious tax that would transfer extra resources to the Government without influencing exploration effort. On the assumption that the mining companies understood this – if they didn’t they should sack their economists – it is apparent they were lying about disincentive effects on exploration to protect the rents they were earning. Again this motive might be justified but that that does not justify distorting the truth.
I am surprised that Emerson concludes that miners attached no value to the RSPT proposal to carry forward 40% of project costs and refund these (with interest) once the project either became profitable or failed. No value? This suggests they assumed with probability one the government would welch on its undertakings which seems extreme. If this was the only objection why not (as many have pointed out) refund the 40% share of costs immediately or issue a marketable bond for that amount that would need to be redeemed by the Government with appropriate interest?
The current tax will not refund losses to projects that fail and will on this account alone be non-neutral. The miners and their nitwit libertarian ‘supporters’ have forced a tax reform that reduces the Government take from tax reform but which is certainly inefficient since now winners provide rewards but there there are no cost compensdations to projects that fail. A better reform from this perspective would be to retain the original RSPT but reduce the tax take. This would have addressed the concern that the miners were not being left with not enough but would have yielded a neutral tax that worked better than its replacement. (1146)
“I am surprised that Emerson concludes that miners attached no value to the RSPT proposal to carry forward 40% of project costs and refund these (with interest) once the project either became profitable or failed. No value? This suggests they assumed with probability one the government would welch on its undertakings which seems extreme.”
And the miners would only have to look back at the examples of James Hardie and BP and their political treatment locally and OS for us to understand exactly where they’re coming from on that point. Furthermore they know they can’t even trust the Govt and Treasury officials with simple maths
http://au.news.yahoo.com/thewest/a/-/newshome/7506242/1-billion-treasury-bungle-paved-way-for-deal
In particular-
‘Julia Gillard has been able to give the nation’s miners huge concessions to win their backing for a new tax because Treasury massively under-estimated how much the original resources super profits tax would reap.
The West Australian can reveal that former prime minister Kevin Rudd’s original plan would have ripped $15 billion to $20 billion a year from the mining sector, almost double what had been forecast when the original tax was unveiled.
The true impact of the resources tax only came to light when Ms Gillard sat down with BHP Billiton, Rio Tinto and Xstrata executives this week and the companies opened their books to Government scrutiny.’
Furthermore, with this Govt flinging taxes from the balcony like Keynesians everywhere, the miners knew full well they’d need a bond rate plus margin before tax cut in, rather than the ridiculous fixed 6% current term deposit rate threshold, in preparation for the interest rates we inevitably have to have. All in all they have made the best of a bad lot, which in summary is why this incompetent bunch of L-Platers in Canberra(note how Ferguson had to wipe Swan’s runny nose) along with their political echo chamber in Ken Henry should follow Rudd just as swiftly.
An interesting reform of the MMRT would be to increase the tax rate for particularly high profits, e.g. you could have a 50% tax rate on profits that are higher than the LTBR + 20%, while maintaining the 30% tax rate on profits that are higher than LTBR + 7% but less than LTBR + 20%.
This would increase the amount of revenue raised but have a very minimal impact on the likelihood of a project going ahead.
Harry, Emerson says “Miners and their financial backers have said they do not place a high value on the government guarantee.”. That is not no value. Of course, as you say, the government could have allayed any concerns with bonds rather than future tax refunds.
I’m sure the mining companies knew perfectly well the real economics of the RSPT but this was a straight out fight over a pot of money, which the big miners won. But it is not just the government who lost. The small miners will now pay more under the MRRT than they would have under the RSPT. How so? Because under the RSPT, they would have got all the royalties they pay to state taxes rebated regardless of whether their projects were profitable. Under the MRRT, the royalties are only credited against profit. So if they make a loss on a project, they still have to pay the royalties.
BHP, Rio and Xstrata must be laughing. They screwed the government and their smaller competitors in one hit. The next meeting of the Minerals Council should be interesting.
Peter Wood (& hc): I am astonished how low the understanding of basic economics is in the debates about the RSPT and the MRRT.
The mainstream position is that flat rate taxes do not interfere with profits or welfare optimization as they do not change the point of equality between marginal costs and marginal revenue. That is why the States’ royalties usually at a flat 5% do not affect exploration or investment decisions except in Queensland where the royalty at 7% when coal prices exceed $100 per tonne (only 5% when prices <$100) is distorting.
Peter, your proposal is for a progressive company profits tax, and nobody has ever pretended that progressive income taxes do not impact on incentives at the margin (draw the MC and MR curves and see where the new point of equilibrium is).
Henry's RSPT as the words "super profits" indicate was also not neutral at the margin, when such profits were defined as profits above the bond rate, which made the RSPT a progressive tax.
Ironically, the existing company income tax is apparently a flat rate tax (at 30%) on ordinary taxable profits, even if Swan is still not aware of that, and Henry chose not to advise him of the existence of the company tax (it is absent from the Henry Review's Treasury's worked examples of the RSPT). But in practice, as dividends paid from after tax profits accrue to shareholders who are subject to progressive income tax rates of up to 47.5%, the company tax is in reality progressive (unlike say the GST at its 10% flat whatever the level of one's spending).
It is astonishing that nowhere does the Henry Review show any awareness that the company tax is a withholding tax, to be accounted for by shareholders' tax returns, whereby they get credited for the tax paid on their behalf by their companies, and have to pay up to 17.5% extra if their incomes including their dividends are above the relevant thresholds (and get refunds if their top rate is less than 30%).
The problem with both the RSPT and the new MRRT is that they are both payable by companies without reference to shareholders' incomes, like royalties, but as they reduce companies' available funds for payment of dividends, they unlike the company income tax, which is progressive, are both regressive so far as shareholders are concerned. And as I said, neither is neutral in hc's sense – after all, they don't aim to be, once they use terms like super profits and resource rents.
The trouble is that Henry has become comatose. He used to know why the GST is preferable to the myriad of previous special indirect taxes, because it is in principle flat rate across all sales. The MRRT by singling out coal and iron ore mining must lead to a switch in new investment to other mining and other industries as people see the fall in P/E ratios of Santos et al. I have just rearranged my family portfolios accordingly. Goodbye Macarthur Coal, hello Westpac.
You are doing a pretty good job of showing comatose nonreflectio yourself Tim. Why don’t you read some of the basic literature such as Ben Smith’s paper? The nonsense you and your lot are peddling have forced the government to swap a non-neutral MRRT for a neutral RSPT. The outcome is a loss for Australia. Why adopt these crazy views? The tax is an equity grab so it does grab shareholoder profits – noone denies that. But it does not affect development incentives because costs are shared as well as profits.
hc: your comment does not address any of the points I made. If they are incorrect, please show why. The new MRRT does NOT share costs.
What is your best estimate of the EXTRA yield of ALL taxes on coal and iron mining relative to the existing yield from royalties and company income tax? Mine is NIL or close to, having just read the BHP Billiton comments by Jaq Nasser.
Note that the MRRT is tax deductible, and that any gain in upfront total tax payable by companies will be more than offset by the reduced yield from taxes on dividends in the hands of shareholders (because the MRRT @ 30% preempts dividends tax payable at an effective rate of 40-45%).
It would be good to see your own working of the effective all-in tax rate on say Macarthur Coal post-MRRT (including taxation of the dividends it pays) as compared with now. Hint: check out the ATO’s Taxation Statistics (unknown to Henry).
The only winners from the Henry nonsense are la Julia and Waynie.