Prosper Australia

photo credit: Grégory Tonon

 
This week’s backdown by the federal labor government on the Mineral Resource Rent Tax will cost Australian taxpayers $35 billion over the next ten years.

The shortfall in government revenues will be made up from taxes on work and taxes on business. 

That means it is coming out of your pocket.

You pay, because the miners threatened the government in a staggering display of ruthless corporate violence.  For their troubles, the foreign-owned miners pocket $35 billion.  Nice work if you can get it.

The $35 billion loss to revenues isn’t my figure.  The number comes from Goldman Sachs’ Australian mining analyst Hamish Tadgell, reported in today’s The Age.

The Resources Super Profits Tax was one of the five recommendations – out of 130 – of the Henry Tax Review taken up by the government.

But Dr Ken Henry told a Senate Committee on Monday he does not really mind that his recommendation was ditched.

“Believe it or not, not really or at least not much,” he said.

“The fact is, after 25 years of providing difficult and controversial… contentious advice to government, it is almost something of a surprise when something does get up.

“No, I was not particularly disappointed.”

Well I am.  I am disappointed for the citizens on whom the cost of nation-building now falls.  The Australian Tax Office will squeeze us harder and we will get less from the government for our efforts.

The original RSPT was fair, non-distorting and shared the mineral bonanza with the owners of the minerals: us.

Happy taxpaying, everyone!

The author owns OZ Minerals shares.

photo credit: Urban~Spaceman

Miners finally agree to tax reform. What are the changes?

The attempt to harness economic rents for the public good has been renamed from the Resource Super Profits tax to the Mineral Resource Rent Tax.

The MRRT kicks in at the corporate bond rate plus 7%. That is 12%, rather than the proposed 5%.

The taxable rate has been dropped from 40% to 30%*.

* We are concerned about this bolded line in the Treasurer’s press release:

Iron ore and coal will be subject to a new profits-based Minerals Resource Rent Tax (MRRT) at a rate of 30 per cent.

* MRRT assessable profits are calculated on the value of the commodity, determined at its first saleable form (at mine gate), less all costs to that point.
* Projects will be entitled to a 25 per cent extraction allowance that reduces taxable profits subject to the MRRT. This allowance recognises the contribution of the miner’s expertise to profits at the mine gate.

Miners can add an additional 25% to their extraction expenses, inferring that the real effective tax rate will not be 30% but 22.5%. Sneaky! Will such wordsmithing go over well with the electorate?

Mining assets can now be marked at market value, allowing considerable depreciation write offs. This offsets the ‘retrospectivity’ argument. Throwaway machinery will be encouraged. Anecdotal reports of giant pac-man type robots working underground being just left behind, buried, when they are retired. Let’s hope they are made to corrode ‘environmentally’.

Only companies earning over $50m in profits will pay the MRRT. We hope the use of shelf companies in tax havens doesn’t proliferate for those companies operating in this profitable vicinity.

Gold and other less profitable resources have been left out of the agreement.

Improvements:

The new Mineral Resource Rent Tax name – much better to share the rents rather than demonise profits.

The Politics

The miners ran a better campaign, a campaign run on mis-truths and more emotive communication.

If only Paul Keating were in office. He would have hit back hard at the miners, calling on all Australian’s to roll out the red carpet for the magnates where ever they went. He would have filled our heads with visions of the small businessman polishing his shoes and sweeping his pavement.

Keating would have trumpeted the new resource sovereignty sweeping the world.

Israel’s Knesset Research and Information Center stated in a recent draft report:

Israel’s government takes between 35% and 40% of companies’ revenues from the extraction of natural gas, mostly in taxes and royalties. Other countries, however, get between 40% and 94%.

Some will be saying but even Keating got whipped by the property lobby over removing negative gearing. Yes – the name of the game is mining democracy for vested interests.

New PM Gillard showed how compromise politics can work. The public is greatful to receive $7.5bn extra in revenue. With BHP averaging profits in the $20bn mark, this will be nothing spread amongst the big 3 miners of Rio Tinto, BHP and Xstrata.

Australia’s 2nd richest, Andrew Forrest (Fortescue) will no doubt have his face all over the press with a big smile. What unique concessions did he pull to shut out competition from smaller miners down the ladder?

Let’s hope he doesn’t turn his attention to having Ken Henry sacked.

What have we learnt from this experience?

Simplicity is the key for all tax reform. Joe Public must be able to understand it.

We still believe an ad valoreum tax is fairer. Profits based taxes encourage bloated mining management fees and unnecessary complexity.

The public’s attention may well have been inspired using the profits to share amongst all citizen’s as part of a citizen’s dividend. This is a long way from our ideal aim but it would help as a first step in building the public’s understanding of how much money is being pocketed by rent seeking
(PDF).

It seemed that small business was kept out of the loop, as defined by the decision to stage a debate between Paul Howes, representing the working man, and Clive Palmer, of the mining interests at the National Press Club. This really should have been between small business and mining. Look at how profitable mining is.

Where was the Australian Chamber of Commerce and Industry? Finally we heard from them yesterday. Small miners also belatedly got to have a say as the ink was all but drying on the new ‘heads of agreement’ document between government and mining.

Who would want to go into small business when there are so many more profits in mining? This poor media presence has cost small business, our largest national employer, $1.5bn in additional taxes. That is what has been lost in the compromise, a 16% handback to the magnates.

A useful report to read on mining business risks can be found via Ernst & Young, where in the steps to avoid Resource Nationalism suggestion box (p18) one can read how miners should:

Align with multi-lateral agencies, such as the World Bank, to achieve a ‘prominent victim’ status in the face of mounting resources nationalism.

Read the Treasurer’s Press Release with attachment for more detail.

Listen to the Renegade Economists podcast for more on this hot topic in next week’s show.

The appointment of Australia’s first female Prime Minister is very welcome, the circumstances of her elevation are not, says Prosper Australia.

“Dumping Kevin Rudd is obviously linked to the Resource Super Profits Tax,” Prosper spokesman Karl Fitzgerald said today. “Mark Arbib and the NSW Right faction may well have been bought out by the Machiavellian miners.

“Tragically, we have to wait 18 months to know whether and how much the Machiavellian miners have paid.

The Australian Electoral Commission will eventually tell us, but in an age of instant information, this delay is totally unacceptable.

Advertising supremo Harold Mitchell summed up the mood that led to Kevin Rudd’s downfall in the AFR of 23 June:

It is an ‘amazing fact’ that ‘ordinary people on the street are barracking for five people… who have got so much money they don’t know what to do with it’.

“If policy-distorting donations are to continue, politicians should be announced as the Member for Rio Tinto and have the company logo embroidered into their suits – like race car drivers. 

“We need to know who represents whom.

Consider Rudd’s raft of reforms: saying sorry to indigenous people, signing the Kyoto accord, free insulation, a $900 GFC handout, no recession, hospital reform and national broadband.  Now, for trying to secure a share of our resource profits for Australians, his leadership is terminated.

“History will compare him to Gough Whitlam, a similar fast-paced Prime Minister willing to take on monopolists, tragically overthrown in a constitutional coup,” Fitzgerald said.

“Yes, there were issues with Rudd’s communication skills, but all supporters of the Henry Review must now fear the political knife will cut down any tax reform that threatens entrenched interests.

“We must maintain vigilance in the belief that incentives belong to entrepreneurs, not the beneficiaries of the privilege of mining and hoarding the economic rent of the land.

“Gillard must come out strongly and call the lobbyists for who they are. She must assert control over the RSPT rather than negotiate with each and every individual company.

“Sure, allow miners a return of 8.8% before the tax kicks in, but keep the EBIT profits rate at 40%. And move quickly,” Fitzgerald concluded.

photo credit: Gary Denness

Harold Mitchell, advertising supremo, summed up the mood that led to Kevin Rudd’s downfall, as quoted in the AFR, 23 June:

It is an ‘amazing fact’ that ‘ordinary people on the street are barracking for five people…who have got so much money they don’t know what to do with it’.

The moves to dump Kevin Rudd are obviously linked to the Resource Super Profits Tax.

Mark Arbib and the NSW Right faction may well have been bought out by the Machiavellian Miners. But who knows how much they have donated to them in the last month?

It is tragic that we have to wait 18 months to see how much has been donated by the Machiavellian Miners. The Australian Electoral Commission must be told – in an information age this is unacceptable!

It was suggested on Renegade Economist radio by Kevin Danaher, Global Exchange that if donations are to continue, politicians should be announced as the Member for Rio Tinto (and wear the company logo on their suit a la race car drivers) so we know whose interests they represent.

Democracy should be re-framed as Lobbyocracy.

When considering Rudd’s raft of reforms – saying sorry to indigenous people, signing kyoto, free insulation, a $900 GFC handout, no recession, hospital reform, national broadband and now for trying to divy up the country’s resource profits he’s on the chopping block – how many times we will hear of comparisons to Gough Whitlam, a similar fast paced Prime Minister who was wiling to take on the monopolists but tragically overthrown in a constitutional coup?

Yes there were huge issues with Rudd’s bureaucratic communication capabilities, but all fans of the Henry Review must fear that the political guillotine can be applied to them too. To hear radio discussing the US Ambassador commenting on the leadership spill brings into play the larger geo-political forces at work.

We must maintain vigilance in the belief that entrepreneurs should be given more incentive than those who benefit from the privilege of mining and hoarding the economic rent of the land.

Gillard must come out strongly and call the lobbyists for who they are. She must move quickly on the RSPT rather than negotiate with each individual company.

Give the miners a rate of 8.8% before the tax kicks in, keep the profits rate at 40%, remove all additional depreciation allowances and government guarantees on losses. And move quickly. Mining leases should be automatically removed with significant penalties when a company is found to have set up a tax haven shelf company.

See you at tonight’s key event – When You’ve Paid Your Rent, You’ve Paid Your Way

Part 3 to Phil Anderson’s Asset Bubbles Forever talk – what is the future for this commodity bubble?

photo credit: Robbert van der Steeg

Surprise! A new Age survey found that investors were concerned about the Henry Review’s proposed Resource Rent Tax:

… a staggering 92 per cent believed that the higher taxes would hurt the share prices of resource stocks. Long-term effects were also considered, with 25 per cent believing that a resource rental tax was ‘short-sighted’ and likely to ‘damage mining’ as an industry. More frightening was that 45 per cent of investors said the implications of the tax would make them rethink their investments in the sector.

These figures suggest significant support for a mining campaign against the tax, at least among those actively in the stock market. However, the miners have a big job ahead of them balancing this campaign against an already-widespread perception among investors that the tax is damaging to earnings. Too vigorous a response could increase risk-aversion significantly.

The miners have some room to move. When asked about how the government should deal with any resistance to the tax, 42 per cent of investors reckon authorities should ‘give in’ to miner demands. If the miners threatened to move offshore, 23 per cent said ‘let them go’. The results sounded one note of caution in that 36% of investors agreed the government should counter-threaten with nationalisation of assets. This figure is likely to be higher among the general population.
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It seems investors are keen to fashion Australia’s economy into a resources powerhouse – with all of the population increases that entails – but they don’t want to pay for it.

With this BRIC-led resource boom in full steam, a number of countries are charging over 70% in Resource Rents (Norway, Bolivia, Bahrain). Let’s hope the Rudd government can keep the public’s interest front and centre when the lobbyists knock on their door. Extraction should never be confused with production.

Please read our Dec – Jan edition of Progress (8MB), a special on Resource Rents.

photo credit: ToOliver2

Dr Gavin Putland

Taken from the Dec – Jan edition of Progress.
Download Progress (8MB)

If a “site” is a piece of ground or airspace, then the “rent” of the site is simple enough: it is the price per unit time that the highest rational bidder will pay for the use of that ground or airspace, subject to any legal constraints on the uses to which that ground or airspace may be put.

But what if the “site” confers — or simply is — the right to exploit a mineral deposit? At any given time, that right will command a rent of so much per year. But because the deposit is depletable, the time over which the rent can be collected is limited. Moreover, as other deposits are depleted, the value of this deposit will presumably increase over time.

“Hotelling’s rule” says that because the conservation of this resource must be competitive with other uses of capital, the capitalized rent per unit of the remaining portion of this deposit must increase at the going rate of interest, in which case the present value of the right to exploit the deposit is independent of the timing. But this rule assumes unrestricted competition between uses of “capital”.

If in fact the “capital” available to exploit this deposit comes from a limited pool of which the owners expect some element of economic rent, then the remaining portion of the deposit must appreciate faster than the going rate of interest in order to justify its conservation. If, in addition, this deposit is a small part of the global reserve, exploiting it faster will not significantly accelerate the appreciation of the remaining portion, in which case the company with access to the resource will simply deplete the resource as fast as its capital allows. That (as Michael Hudson told me in October) is what typically happens.
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