The mining tax was a dumb idea – it always was. It was predicated on at least two heroic assumptions – that rent exists and that rent could be sufficiently well defined to form a tax base. To deliver the promised benefits both assumptions had to be true, yet neither stand up to scrutiny. Rent, at best, is a short run phenomenon.
This morning Ross Gittins is out and about maintaining the faith:
The case for requiring the miners to pay a higher price for their use of the public’s mineral reserves at a time of exceptionally high world prices (even now) is strong.
Remembering the miners are largely foreign-owned, a well-designed tax on above-normal profits is a good way to ensure Australians are left with something to show for all the holes in the ground.
Similarly, the argument that a tax on ”economic rent” (above-normal profit) is more efficient than royalty payments based on volume or price is strong, as is the argument that taxing economic rent should have no adverse effect on the level of mining activity. Relative to royalties, quite the reverse.
But Abbott cared about none of that. His response was utterly opportunistic. He would have opposed the tax whether it was good, bad or indifferent.
We can never know if Tony Abbott would have opposed a good tax – I haven’t seen it happen, but he has opposed a whole bunch of bad taxes.
If you want the antidote to Gittins’ piece read Henry Ergas in the Australian.
Rather, the real problem is the premise on which the MRRT and the RSPT were based: that there are vast mineral rents waiting to be taxed. Belief in that el dorado was central to the Henry report. But it never examined mining’s long-run profitability. Instead, it relied on questionable modelling to claim the resource states were leaving a fortune on the table.
Yet the government’s own data tells a different story. According to the Australian Bureau of Statistics, a dollar invested in manufacturing in 1985 would have been worth $10.70 in mid-2010 (the latest date available); invested in mining, it would only have been worth 35c more. And that reflects six recent years of unsustainably high mineral prices: for most of the period, manufacturing’s return was comfortably above that in mining.
Moreover, returns in mining, while barely higher than those in manufacturing, have been nearly three times more variable. That is unsurprising. Australian mining is immensely capital intensive, using $4 of capital for each $1 of labour. Yet it faces large and historically rising swings in world prices. True, there are periods of plenty; but there are lengthy lean spells too, when returns fall far below the level investors require to finance mining in the long run.
The mining tax – like the carbon tax – is bad policy. It violates one of Adam Smith’s principles of taxation – to take out and keep out of the pockets of the people as little as possible over and above what it brings into the treasury.
Henry Ergas explains how the mining tax scores on that front:
The MRRT was to yield $3.7 billion in 2012-13; instead, it has raised $126 million, with only one more payment due this fiscal year. And even that is an overestimate, as 30 per cent of the MRRT’s revenues are forgone company tax payments. So it has yielded a paltry $95m. But it costs $50m to administer, while the mining industry spends $20m on compliance. It therefore consumes 75c of resources for each $1 of revenue. And as Jonathan Pincus, Mark Harrison and I showed immediately after it was announced, those revenues are so volatile that each $1 may only be worth 60c or less as a “sure bet”. The tax’s direct costs alone consequently exceed its value to taxpayers.
As it turns out the greatest contribution this tax will make to national prosperity is its abolition.