Post-mortem on the RSPT II: observations and lessons

Economist Paul Frijters reflects on the controversial Super Profits tax and the lessons the public and the government can take from the circus that surrounded the issue.

In May of this year, the Australian government announced a tax increase on the mining company whereby all profits over the long-run bond rate would be taxed at 40%, with off-sets for losses. This tax on the rent created by the boom in mineral prices was spent on reductions in the company tax rate and on various overall subsidies. Following a fairly extensive campaign by the big mining companies and their representatives such as the Minerals Council Australia, the government in July negotiated directly with the three major mining companies and reduced the planned tax increases in return for the explicit promise to stop campaigning. If we compare the revenues the tax would have gotten (under the revised price estimates) with the current expected revenue, it seems radio silence has come at a cost close to 5 billion dollars per year. In terms of discounted values, every dollar spent on campaigning by the mining industry seems to have paid off (ball park figure) something like a thousand dollars in less tax.
Elsewhere, I have talked about how the media campaign was made up of false arguments and wild exaggerations. Essentially, jobs and investments in mining were never truly at stake and it was a straightforward fight over money with on the one hand a few dozen billionaires who stood to lose and on the other hand millions of small businesses and consumers who stood to gain but of whom a fairly large slice was scared into thinking they were going to lose.
Observations:
1. One lesson from this saga is that negative campaigning works, particularly in an election year. The basic recipe for protecting privilege has been applied here: muddle the argument; roll out experts with minor doubts and represent those doubts as sincere opposition; get the masses to believe something unfair is happening and they have something to lose; and never once talk about money. Not once did the media blitz even try to run the argument that it is fair for billionaires to make more money out of Australia’s mineral resources. The eventual outcome, 5 billion dollar less taxes for the mining industry per year, was never put forward as the goal of the campaign. Will the mining companies give this bonanza to charity? Don’t count on it.

2. The super-wealthy stood fairly united. As I remarked in an earlier blog, other wealthy organisations who make their money from rents, like property developers, banks, and most financial institutions, could have expected to be the next in line for tax increases. This is clearly the whole idea of the Henry Tax review. Probably as a result of this, Business Councils did not line up behind the tax even though all non-mining businesses clearly won out because of the reduced company tax rates.

3. Nothing is secret when this amount of money is involved. The mining industry had clearly prepared for this campaign long in advance, even though the Treasury tried to keep the exact plans secret.

4. The dip in Rudd’s popularity was used to settle old scores within his party and his administration. They must have really hated his guts.

5. The media seems to have been a victim in all this, being fed stories about Rudd from within his own circles, being fed all kinds of storylines by the mining interests, and being bombarded with opinions from all and sundry. No wonder the mainstream media had no idea what to believe.

Lessons:

Continue reading “Post-mortem on the RSPT II: observations and lessons”

Post-mortem on the RSPT I: the other hired guns

Economist Paul Frijters critically deconstructs the anti-RSPT report written by MIT Professor Jerry Hausman and funded by BHP Billiton.

With Gillard as our new PM, a compromise has been done on the RSPT, rewarding the big mining companies for their negative campaigning. In this first post-mortem, I have some mopping up to do regarding two as yet undiscussed ‘reports’ brought out on the old RSPT, one by Ernst and Young and one directly brought out by BHP.

Ernst and Young, paid by the Chambers of Minerals and Energy of Western Australia, put out a report in June by two relatively unknown American economists that is completely devoid of any new calculations on the RSPT but nevertheless talks loudly about potential job losses in mining. Its main point is that the RSPT reduces the pay-off on mining projects and that this might mean mining companies put greater priority on other investment projects overseas. Even if this were true, it would merely mean that the projects would be postponed, not cancelled, but it is in any case an empirical question relating to how profitable future projects actually are.

The KPMG reports from May, using data on actual projects obtained from the Mining Council, basically finds that with a properly implemented RSPT, nearly all currently planned Australian mining projects remain too profitable to walk away from.

BHP wielded out a short paper by Professor Jerry Hausman, an econometrician from MIT. Professor Hausman also doesn’t calculate anything new, but nevertheless calls for adjustments to the implementation of the RSPT. Professor Hausman does not take a stand on whether he thinks the RSPT is going to lead to more or less mining activity, but wants to make the RSPT far more complicated by taking account of ‘option values’. Professor Hausman essentially recycles an old 1997 paper of his on the optimal taxation of profits that has been roundly ignored in policy circles.

What is Professor Hausman on about and are there any merits to what he says?
Continue reading “Post-mortem on the RSPT I: the other hired guns”

Winners and losers of the Resource Profit Tax

Paul Frijters analyses the topical economic issue facing Australia’s resource industry and the public: the Federal Government’s proposed Resource Super Profits Tax. He identifies all the key stakeholders and how the proposed legislation change will affect them.

The recently announced Resource Profit Tax is in principle a profit grab, taking from those who owns large mines, and handing this out to those that dont. Obviously this makes mining executives angry and the noise they are creating at the moment is deafening, with all sorts of nonsense bandied about in the media about how this tax will mean the end of the world as we know it. Leaving the noise from a few super-rich to one side, it is useful to think of who belongs to the winners and the losers of the proposed tax.

A difficulty in making that assessment is that no-one yet knows how this tax will be carried out. Part of the difficulty is that the tax is meant to replace the existing royalty system in individual states, but these individual states are unlikely to simply agree to such changes in their tax raising activities. Also, definitions of ‘costs’, ‘rents’, and just exactly what constitutes a ‘mining project’ are yet to be worked out, so we can at the moment do no more than give a best guess. Let’s presume that the tax gets implemented in the way it designed, meaning that the profits of all current and future mining projects will be taxed at 40%, whereby the initial costs and losses count as a kind of tax-offset.

At the moment, the government’s plan includes the possibility that mining firms that made a loss on a project get part of that loss reimbursed, but exactly how that will work out is not clear (what happens in the case of bankruptcy?), so let’s presume that costs and initial losses will be treated as tax off-sets, which is what they will be for most of the big mining companies.

Since a profitable project now remains a profitable project in the future, the long-run effect of this tax is that at least as many projects will go ahead as without this tax. Indeed, more will go ahead because the tax replaces existing royalty taxes which tax all mining activity and do discourage all mining activity. Hence, in the long-run more mining will take place under this new tax, implying higher levels of investments. The beauty of the tax is that the underlying assets (minerals in the ground) cannot run away and hence the tax cannot be avoided by mining somewhere else. It is just not credible for any company to pretend they will refuse to make money and not dig up and sell the minerals that are there. All talk of capital flight, sovereign risk, and other forms of saber rattling are just not credible.

Another clear effect of this tax is that it will give mining companies (like Xstrata and BHP Billiton) an incentive to increase the costs, just like any tax-offset increases people’s incentive to use those offsets. This means that one should see increased job security, higher wages, and increases in other cost factors like transport. Indeed, the tax office will have a tricky time in deciding whether all the costs mining companies will start putting on their books are really costs associated with mining activities. Mining companies can for instance try to hide profits by paying excessive amounts to transport companies for transporting the minerals if these transport companies are owned by the same parent companies. All kinds of tax-avoidance games can be played. However, let’s presume the tax office will do a reasonable job and manage to keep the increase in ‘fake costs’ to acceptable levels. Even then, anything that is essentially a cost to mining (like employment, wages, and inputs) should get an easier time in negotiations with mining bosses because the government now effectively pays some of those costs.

Who, then, are the winners of this tax? Continue reading “Winners and losers of the Resource Profit Tax”

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