Resource Rents to Balance the Playing Field
The government must focus on the rate of return between those who benefit from economic rents and those that are entrepreneurial. The Age reports today:
…a Senate estimates committee was told the average profit in mining was 37.1 per cent, compared with 11.4 for the overall economy.
Some projects had ”extraordinarily high returns”, according to David Parker, the Treasury’s lead negotiator with mining companies. ”Some of the projects we have looked at while going through the consultation process have a payback period of less than six months and a rate of return in excess of 400 per cent.”
Your local mechanic or bakery has no chance to receive a 40% increase in the price of his products. But our mining industry received this this very year.
Iron ore prices have sky-rocketed because of Chinese demand. This had little to do with Tom Albanese’s salesmanship or the quality of iron ore product.
A Resource Rents tax is an attempt to balance the incomes of mining magnates with those engaged in retail, manufacturing and other key employment industries.
By capturing rent, the opportunities of production are somewhat balanced.
It is useful to note that 4 out of the top 5 wealthiest people in the most recent BRW Rich List were beneficiaries of economic rent.
Frank Lowy and Harry Triguboff benefited from economic rents in property (more accurately named land – buildings depreciate, land appreciates). Why did they benefit?
Your taxes fund the infrastructure that makes land in prime locations more amenable. Ken Henry was well aware of this in his very readable Tax Review. With few understanding the levers of taxation, we implicitly approve of some earning wealth off the backs of the community.
Gina Rinehart and Andrew Forrest were beneficiaries of mineral based economic rent.
Skill is not the prime determinant of their wealth. The privilege of ‘owning’ a scarce resource is the deciding factor.
For too long stories of doctors and lawyers giving up their full-time work to resort to rent seeking activities have distorted society. Our best and brightest are being lured into fields where the profits are the greatest. The rest of us are hit with a double-whammy: higher land prices from speculative activity and poorer service from GP’s etc.
One of the key mining critiques is that the Super Profits Resource Tax will scare off investment.
Capacity constraints of the economy aside, the above quote by David Parker goes to the heart of the debate. This is a 40% profits based tax. The government is still ever so nice in allowing the mining industry to massage their figures as they see fit. CEO’s can still pay themselves huge bonuses. They can even offshore their highest earning projects in tax havens.
But what they can’t do is find another industry that is as lucrative. This is why Norway can charge a 95% Resource Rents on profits and still have companies queuing up for leases. With the BRIC countries development to continue for decades, those with the privilege of owning leases over valuable mineral rights are set to profit more than other industries.
Chinese miners are rubbing their hands together at the thought of Rio Tinto leaving some room for them to operate in a well functioning society like Australia.
Iron Ore prices cannot be lifted to cover the SPRT because competitive forces in the global market will see Chinese mills buy their ore from South Africa for example. With recent skirmishes between BHP and China, one can expect the Chinese to be vigilant on prices.
This is the beauty of a Resource Rents tax. It cannot be passed on. It cannot distort prices like the GST does. Economists know this. The public is being sold a lie by the mining industry.
If there is one area that government education is needed, it is taxation. If only the State and Federal governments would educate on the importance of Land Value Tax.
In summary, the SPRT is an attempt to level that playing field so that we all have a fair go.
In a world increasingly influenced by resource scarcity, we expect that more countries will follow Australia’s lead by reducing the pressure on entrepreneurs by capturing economic rents.
In time, governments will have to move to a purer Resource Rents system where the land is valued yearly, if not monthly, and a rental paid upon that site according to the value of the minerals/ location.