The SPT shouldn’t be such a tough sell

The government have made some solid major decisions during their first term. In my opinion, the size and delivery vehicles for the stimulus were appropriate. I think the Super Profits Tax (SPT) is sound, though you can argue over the details and which minerals it should apply to. Unfortunately, the government are not only incompetent administrators but positively autistic communicators. The SPT was well received in the days immediately after the budget. What happened? The SPT should sell itself. Especially because it feeds well into what should be the government’s two strand narrative.

 [DDET Read More]

The first strand should be that they saved us from the GFC. Never mind whether you agree with this or not. It is a strong positive for them and they will win a landslide if the election is fought on this issue. The SPT is the flip side of the stimulus and an excuse to keep the stimulus front and centre of political debate.

The government put us into a big fiscal hole with the stimulus package. They have taken some criticism for the implementation (i.e. pink bats and school canteens) but the voters are mostly glad of the fact of the stimulus, while having misgivings about the debt going forward. The government have always claimed the country should get back into surplus over the business cycle. The money has to come from somewhere. Where else are we going to get the huge sums required?

Yet Wayne Swan denies that this is the main reason for the SPT. He wants to claim credit for getting us back into surplus by 2012-13 but is coy about how he is doing it. He should openly acknowledge his strategy. Yes, we need the money to balance the budget in 3 years.

This not only moves the focus back to on the consequent early surplus, but it feeds beautifully into what should be the second strand of the government’s narrative, namely investment in infrastructure and long term management of inter-generational wealth. Back when they were able to communicate, the ALP ran very hard with the idea that Howard had squandered the resources boom, pointing to slow trains and under-resourced schools. Regardless of whether you accept this view, it gained a great deal of traction. They should be positioning the revenue gained from the SPT as the avoidance of losing revenue the way we did in the last boom. People hate to lose revenue. If they position it this way, every time the punter hears the SPT mentioned, they think of all the money that would be lost  if we did not have it.

But Rudd lives in Canberra and doesn’t know how ordinary people think. How else to explain calling it a Super Profits Tax? This is the greatest own goal of all time – a minor variation on the opposition’s “Great Big New Tax” mantra.  They could have called it the 10% Excess Profits Premium, which carries the message that (a) it is only on high profits, (b) it is only a marginal change from 30% to 40% and (c) the country receives a premium on their resources. Premium is such a nice positive word compared to tax. Does the government have anyone who knows how to sell a product?

Apparently not. Instead, their shifting message is drowned out by mining industry propaganda which does not bear the slightest critical scrutiny. Journalists apparently think that they must not point out nonsense in the interest of appearing balanced. The mining lobby’s campaign has the following elements.

The SPT tax is excessive. It is only a change from 30% to 40% on profits over 6%. I am sure that most punters think that mining companies are being taxed an extra 40% on all their profits, if not on all their revenues. Rudd should have called it a 10% premium, not a 40% tax. The fact that this is worth $9 billion per year tells you how much profit is being made.

The SPT will harm investment. Since it is only a marginal charge on excess profits, it could not cause any existing profitable projects to close. It could certainly affect the economics of future ventures, since the rewards on the denominator of the risk/reward ratio will be smaller. So we might see less projects in future. This is not such a problem though. First, it will roll out slowly over time so there is a chance to react. If necessary, we can encourage new projects in the future by allowing more of the exploration costs to be deductible. Second, the resources are still in the ground so nothing (or little) is actually lost.

The marginal rate of 40% is internationally uncompetitive. It is suggested that the 40% rate being higher than say 25% in Chile is somehow relevant. This is nonsense. A decision to invest in country A or B will depend on the relative profit margin, not the tax rate itself. If Australia had diamond fields where you could just walk around and pick them up then we would be well advised to tax profits at 99%. I reckon mining companies would still fall over themselves to pick the diamonds up. No journalist has called the marginal tax rate argument for the nonsense it is.

The SPT tax is retrospective. It applies to future profits only. The mining companies complain that they made the decision to pursue these projects under a different tax regime. That’s true but in that case every time a landlord puts up rent on a commerical property it is retrospective. As the unfortunate holder of Tabcorp shares I know first hand that the value can decrease when government removes a monopoly right.  Retrospective? This is just abuse of language.   

The SPT increases sovereign risk. If they mean sovereign risk of the country then Kyran Curry from S&P disagrees. He says the mining tax would have no effect on our  credit rating, which is an indicator of  sovereign risk. In fact, he says the tax raised over the first two years could strengthen the rating. 

The SPT will harm the whole economy. It is only a change from 30% to 40% on profits over 6% for one industry sector that is currently thriving. Moreover, most of the big mining company dividends go to foreign based shareholders. If you had to find $9 billion per year to take out of the economy to get us into surplus, you would be hard-pressed to find a less damaging way to do it.

None of this means that I support every aspect of the SPT. Many economists prefer a purer Resources Rent Tax. Nor do I think that the SPT would necessarily be an easy sell even if Rudd was at the top of his game. Nick Gruen thinks that the political landscape has fundamentally changed from when the RRT on petrol was introduced, and he may be right.

So what has been the effect of the SPT on the fortunes of the big miners and the country? I downloaded the share prices of RIO, BHP and the ASX for this year and looked at the month prior to the budget announcement and the month after. I calculated the movements of $1 equally invested in RIO and BHP on January 1 and subtracted off value of the same $1 invested in the  ASX. The graph is below. The zero does not mean anything in particular. It is changes in the graph that tell you how mining is faring compared to the general market. I also downloaded the DJI for the same period so I could compare Australian and US shares.

The budget was May 11, about the middle of the graph. I guess you can tell two stories here. The mines drop compared to the ASX on May 11 and 12 and the ASX drops compared the DJI over the next week. Or you can look at the previous month which suggests that the market already knew the SPT was coming. If the drop from April 12 to May 12 is all due to the SPT then it is around a 10% loss for the mines. If you only count post announcment it is about 4%. Either way,  mining share prices have been moving up compared to the market over the last month – as has the ASX compared to the DJI – recovering perhaps half the lost ground. This might represent the market perception of the likelihood of the SPT actually ever being implemented.

I wish I had the time to do a similar graph for “small miners” but I do not know enough of their names and there are too many of them. If the SPT designers are to be believed, small mining shares should show the opposite pattern to that of the large miners.

 [/DDET]

10 thoughts on “The SPT shouldn’t be such a tough sell”

  1. Chris, is your 10% more tax line taken from a calculation of the way the tax works or from your calculation of the 10% loss in capital value in your second last para? If the latter, can you take us through the calculation.

    Like

  2. No, the 10% I quote earlier in the article is just 40% minus the standard company tax rate of 30%. It is interesting that the drop in the mine shares is also around 10% – just estimated by eye from the plot. As I point out in the post, the drop you attribute to the SPT depends (among other things) on when you think its effect kicked in.

    Like

  3. You are wrong. It is 40% on top of the 30% corporation tax. The twist is that the RSPT is deductible when calculating profits for the corporation tax. So the combined rate is 57% and not 70%.

    Like

  4. Damn! Global search and replace 10% with 27%. So with 6% threshold 12% profit is taxed at 44% on average compared to 30% now. Not quite as easy to sell as 10%.

    Like

  5. While you have the right end opinion and the mining companies should get back in their box your understanding of the ‘tax’ is wrong. It shouldn’t be called a tax because it doesn’t work like a tax. It is indeed in addition to the company tax rate that will be 28% in 2012 thus some people claiming it is 56.8% all up, but it scales with profits, to make less profitable ventures more attractive under the new ‘tax’ and take a large chunck of profits from ventures that ‘kill the pig’. The ‘tax’ also comes with significant benefits at the start of a venture, where the amount of capital put in has benefits later down the track and 40% of all capital investment is guaranteed by the government, meaning if the venture fails the government will cover $0.40c in every dollar lost. This is where people get the retrospective arguement, they claim ventures already in progress do no get the benefit of these startup concessions. Tought luck I say. And I agree it is an abuse of language. Twiggy and Miss Piggy are up in arms becuase it will gouge their operations (very profitable) and make it easier for smaller companies to go ahead with riskier projects that otherwise may be shelved. http://petermartin.blogspot.com/2010/05/three-of-best-things-written-about.html

    Like

  6. Even supporters of the RSPT should recognise that it will reduce share prices. It is designed to be a transfer of earnings from shareholders to taxpayers. It effects the dividends that are left to pay shareholders ergo it effects the value of domestic assets.
    BHP / Rio would not be the best companies to check this domestic story as they have assets offshore. Their shares are also probably improving because the chances of govt backflip / coalition victory are improving.
     

    Like

  7. Matt: I do indeed expect share prices to fall. That’s why I had a look at them. And, like you, I wonder if the recovery in prices reflects the market assessment of the chance of this tax ever eventuating.

    Tony: I agree that the SPT will reduce the incentive to take on high risk high payoff ventures.

    Here is a creative way to still use the 10% tag. If a company makes 10% on their investment then the total tax ends up being 4.1% which is 41% of 10% which is 11% higher than 30%.  So the government could still say “companies who make 10% on their investment will pay about 40% average tax under the SPT compared to 30% prior.

    If the mining companies are making 20% then their average tax will be 50%. If they want to run the line that 50% is too high they can, but they do not admit that they make 20%.

    Like

  8. Because the RSPT also reduces investment risk, it doesn’t necessarily reduce share prices across the sector.
    “The money has to come from somewhere”. Technically, we have a fiat monetary system backed by the power of government to levy taxes in money. Money is a medium not a substance, it doesn’t have to “come” from anywhere. We are not in a gold-standard era any more.

    Like

  9. You missed another selling point – the RSPT (or the royalties it replaces) are the price at which we sell minerals in the ground to the mining companies. By claiming they should pay the government no more than any other company (which is what they do every time they add company taxes and the RSPT together) the mining companies are claiming that we should give them the mineral resources for nothing.

    Like

  10. James,

    It “reduces” investment risk by increasing sovereign risk that the government will not cought up the money when needed. Therefore, they will be prudent and assume that no money will be forthcoming – all downside and limited upside equals lower investment.

    Like

Comments are closed.