Rudd's plan to kill off Australia's most profitable industry

Because of the risks involved, mining has to have higher returns than most businesses but Rudd plans to tax those higher returns away. Most likely result: No new mining projects, no new revenue from mining, no more job creation in mining and a gradual fall-off in mining exports -- which in turn will devalue the dollar and lead to higher prices for everyone. But in an election year none of that matters, apparently

THERE are three simple tests that should be applied to the government's plan for a new super tax on the minerals sector.

What problem is the new tax intended to fix? Will it harm or hinder investment, jobs and growth in the sector that kept Australia out of recession and underpinned economic growth over the past decade? And is there a better way? Let's test the five key propositions underpinning the government's case for a super tax on the resources sector against these criteria.



* First, the government argues that the existing arrangements - six different state and territory-based royalty regimes - are unwieldy and inefficient. But will the new tax streamline these arrangements? Actually, no. The states will still operate their own schemes (with Canberra rebating these imposts back to companies from its new super tax back).

So a mining company operating in several states will still pay royalties to them as well as dealing with the complexity of the new federal resource tax. And this is reform?

And what is the incentive for state governments to restrain themselves from levying new royalty hikes? None.

* Second, the government claims the new super tax will ensure the community gets a fair share of the dividend from mining expansion. Citigroup analysts wrote last week that Australian royalties and taxes are already some of the highest in the world. And this new super tax will make us the undisputed world champion on mining taxes.

Of course, the government claims that it missed out on $35 billion in revenue over the last decade. The facts tell a different story, but don't take my word for it. Prime Minister Kevin Rudd wrote last year that the mining boom had boosted commonwealth revenues by $334bn since 2004-5. That is the equivalent of a GFC-style stimulus package every year for the past 5 years. Treasurer Wayne Swan told the National Press Club a few months ago it had been raining gold bars as a result of the minerals boom.

Until yesterday, the federal Finance Minister, Lindsay Tanner, spoke frequently about the surge of revenue into government coffers as a result of higher commodity prices.

The simple fact is existing arrangements have delivered a big dividend to the Australian community. That is plain from the fact the mining sector accounts for almost 18 per cent of corporate tax revenues, despite accounting for about 8 per cent of the economy.

And the tax office's own data shows the average tax take from mining is 13 per cent higher than the all-industry average. We have a two-speed tax system and the mining sector is already in the fast lane.

* Third, the government has decided for the mining industry alone any profit higher than a 6 per cent return (the long-term government bond rate) is a super profit which will attract the new 40 per cent super tax. How will that promote investment in inherently risky mining projects?

One investment house, MF Global, wrote last week that with the tax charge on mining likely to increase, investors might want to diversify their holdings away from highly Australia-exposed stocks.

* Fourth, the government claims a new tax on the minerals sector will actually boost investment, jobs and growth in the sector. There are two critical issues here. The government plans to apply this new tax to existing mines. In other words, the rules applying to hundreds of billions of dollars of long-standing investments will change overnight (and dramatically). The value of projects will be summarily slashed.

Leaving aside the grave risks to Australia's reputation as a safe place to invest, working out the liability of 500 existing operations will be highly problematic. The only industry earning super-profits in the post-Henry era will be tax accounting. Then there is the question of the $108bn of minerals projects under feasibility study or awaiting a final investment decision.

The inevitable consequence is many of these projects will be reviewed involving lower growth, fewer jobs and reduced investment. The burden will fall heaviest on regional Australia, where one in four jobs depends on exports. But the impact will be wider. Just as the benefits of the mining boom spread through the Australian economy, so will the consequences of a self-induced slowing of the sector.

The beneficiary will be projects abroad. And there are plenty of overseas options. Australia provides for less than 10 per cent of global output in most of the key commodities. Investment capital will look elsewhere with a keener eye. Australia will be the only nation in the world with a super tax on mining projects.

It is worth noting in this context that the government cites the year 2000 as an informal benchmark for the optimal share of mining profits to royalty take. In that year, there were just three major mining projects under way.

* Finally, there is the proposition that the mining tax grab should fund corporate tax cuts, infrastructure provision and changes to superannuation.

The government argues that in defiance of economic logic, a new multi-billion dollar annual mining tax will actually increase mining output and therefore increase tax collections, which can then fund other commitments and promises.

But the more likely outcome - projects deferred, lower growth, and a new enthusiasm for off-shore investment - will mean revenue gains from the new tax could be much, much lower than the government anticipates. Locking in future spending on a gamble on future commodity prices is an interesting approach.

None of the above should be interpreted as a refusal on the part of the minerals sector to play a constructive role in resource tax reform. We have been saying for months that current arrangements can be improved. But key features of this version of reform falls well short.

There is a better way, but to find that solution, the consultation process established yesterday cannot be limited to technical design questions. The government's message seems confused.

The government wants more from the mining sector while taking actions that will slow it down. The government is tapping the brakes to slow the mining sector down and let the rest of the economy catch up.

But as American comedian George Carlin once said, when you step on the brakes your life is in your foot's hands.

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Posted by John Ray (M.A.; Ph.D.). For a daily critique of Leftist activities, see DISSECTING LEFTISM. To keep up with attacks on free speech see TONGUE-TIED. Also, don't forget your daily roundup of pro-environment but anti-Greenie news and commentary at GREENIE WATCH . Email me here