Catallaxy Files

Okay – so the mining tax we ended up with is a bastardised version of the original proposal. Some are hoping this ugly duck will turn into a swan. Alan Mitchell in the AFR does a bit of revisionism.

The intention of the resource rent tax is to tax the miners’ “super profits” – the earnings in excess of the rate of return needed to justify the miners’ investment and production. …

Of course the decline in expected MRRT revenue will contribute to the 2012-13 budget deficit which the opposition sees as a failure of fiscal management.

But that is not quite how the International Monetary Fund and the Organisation for Economic Co-operation and Development see it. They both urged the government to let the budget’s “automatic stabilisers” send the budget into deficit and cushion the economy from the downturn in the terms of trade.

These stabilisers are primarily the tax revenues that rise and fall with the economy and automatically add to the budget’s surplus in booms and the deficit in slowdowns.

The MRRT is sensitive to the swings in mineral prices that play a big role in Australia’s economic cycles. As a result the tax has added to the strength of the budget’s automatic stabilisers, which most economists see as a good thing.

Of course, the opposition is critical of the government for cutting taxes and increasing spending on the basis of its earlier, more optimistic estimates of the MRRT revenue. But if the failure to generate the expected revenue is just the result of price changes, the problem is not with the tax.

Revenue from the MRRT was always going to be volatile – that is a design feature of the tax. Less volatile tax cuts and spending financed by the MRRT therefore have to be based on the tax’s long-term revenue stream. There will be a revenue shortfall when mineral prices are low, and excess revenue when mineral prices are high, but over the long run everything should average out.

Hmmmm – no. That is gilding the lily a tad too much.

First things first. Despite its name the original Resource Super Profit Tax was not meant to tax super profits. It taxed revenue earned in excess of the government long-term bond rate. For an industry as risky as mining that is not a super profit. Even the government was confused on this point. Step up Kevin Rudd. On May 3, 2010 then Prime Minister Kevin Rudd offered this explanation on Radio 6PR.

A super profit will be defined as if you’ve got a company … [that's] investing a certain amount of money what you then do do is deduct their expenses.
What you then do do also is deduct further the amount which would be collected if for example they were investing their funds in long-term bond markets. In other words what would constitute a reasonable rate of return on investment.

On his second attempt Rudd offered

Which is you have the total investment of the company, the total earnings of the company, you deduct their expenses.
And then of course you look at what would be a normal rate of return for that company if it were investing its money elsewhere, and it’s only if they go in excess of that is a super profit tax imposed.

On the third attempt

It is calculated on the basis of a company in terms of first of all, their total level of investment, secondly the revenues they earn in a given year, thirdly you remove the expenses that they generate in a given year, fourthly you then take into account what that company would otherwise earn if they were putting their money, for example, into an investment on the long term bond market, and it’s only if they are profitable using that formula, and earning super profits, that you would impose this… tax.
It’s not foreign, for example, to all those folk who are currently operating up there on the Northwest Shelf, the Petroleum Resource Rent Tax has operated for the last 20 years and on that basis huge projects, like the Gorgon project, have come into being.

This must have been particularly embarrassing – businessmen who used similar definitions to the then Prime Minister were subsequently abused under Parliamentary privilege by Treasurer Wayne Swan.

Perhaps the most pervasive myth is that every return over 6 per cent will pay Resource Super Profits Tax. I regret to say this is a calculated and deliberate misrepresentation. If you hear a mining executive saying it, they are either lying to you or they are ignorant – either way it should be of concern to their shareholders.

On the afternoon of May 3, 2010 Geoff Francis sent an email to Hamish McDonald – a Treasury tax official seconded to Treasurer Wayne Swan’s office – suggesting:

‘Expressions like “tax is payable only after providing a normal return to shareholders” are best avoided’.

I’m not convinced that the MRRT – the successor tax to the failed RSPT – was ever intended to be part of the automatic stabilisers. I’m sympathetic to the idea that the automatic stabilisers be left to operate – that actually means no active fiscal stimulus – but I’m not convinced that the government had the MRRT in mind for that purpose. They wanted to fleece the mining industry. They were looking for a steady tax stream, not a volatile stream. Financing steady spending out of a potentially volatile revenue stream is irresponsible and that was described as bug at the time, not the feature Allan Mitchell now suggests.

Here is the thing – the MRRT is raising no revenue when the government as recently as the (early) MYEFO was expecting $2 billion (net) this financial year after just six months of operation. That is not because mineral prices (coal and iron ore) are too low – that is due to the structure of the tax itself. The tax is unlikely to raise revenue when investment is high due to depreciation tax shields and the ability of miners to choose how to value their existing assets (at book or market). Only those profitable mines that are highly (fully) depreciated will ever pay the MRRT. In the meantime, the government has a growing state royalty liability.

So no excuses. No nonsense about automatic stabilisers, tax working as planned, prices are too low, blah, blah, blah. Bad tax design resulted in no tax revenue. Mind you the compliance costs and dead weight losses are still being incurred.