Tuesday, June 8, 2010
FOR five weeks, our politics has been dominated by a debate that for most of us has nothing to do with our daily lives, and which we have no hope of understanding. Yet it could decide who will govern us next.
What have we learnt from a month of claims and counter-claims on the resource rent tax? I think it comes down to three questions. Should we increase taxes on mining, to give shareholders less and the community more? If so, is this the right way to do it? And, all things considered, is this tax rise about the right amount?
(Future Fund chairman David Murray last week threw in a fourth question: What's the best way to use the new tax revenue? But while I agree with him that a big slab should be invested for long-term benefits, not spent, the first three are the key questions right now.)
The Rudd government chose this fight because it was confident that voters would agree they are not getting a fair share of the record prices now paid for Australia's minerals. Yet, in a month of debate, it has failed to make a convincing case on this. Even its new TV ads focus yet again on what miners pay in royalties to state governments. But why ignore the larger amount they pay in company tax to Canberra? In eight years, that has grown from $1.4 billion to $8.1 billion in 2007-08, and $10 billion-plus in 2008-09.
Treasurer Wayne Swan has hit back with estimates that, even including company tax, the community's share of mining profits has shrunk from 55 per cent over the five years to 2003-04 to 27 per cent in 2008-09. But that is based on Treasury's own estimate of mining companies' "economic income" which it refuses to publish. All we know is that it makes no allowance for depreciation of capital equipment, which some of us might think essential to the industry.
Is the government's case really that weak? No. The Bureau of Statistics' recent round-up of industry data for 2008-09 estimates the profit margin in mining that year was 37.1 per cent. That's three times the industry average of 11.2 per cent. (Mind you, there were no banks in its survey). Mining earned 7.2 per cent of all industry income, but 23.4 per cent of all pre-tax operating profits. They're doing well.
Then there's a second argument the government fails to make, although it slyly alludes to it: the mining boom makes other industries unprofitable. Over the 20 years to 2005, the Australian dollar averaged US70: manufacturers, farmers and tourism operators could live with that. But in the past three years it has averaged US84, even including the months of financial panic and US88 with the panic months excluded.
Analysts believe the mining boom is the main driver of the dollar's rise, which has wiped out sales and profits for industries lacking its huge profit margin as a cushion. And it's only in the early stages.
Access Economics estimates that mining companies have $107 billion of projects already committed or under construction, and another $186 billion in the pipeline. What impact would all that have on other Australian industries?
There are good reasons to believe the mining industry could pay a bigger return to the community and it would be a good thing if our mineral wealth were extracted more slowly. But how?
Even the miners support the principle of a resource rent tax. But this version is fundamentally different to those operating elsewhere, including our own tax on the oil and gas industry. It amounts to a 40 per cent nationalisation of mining projects, with the miners paying the government's share of the costs upfront. They face a sharp fall in the value of their mines, while taxpayers face the risk of paying 40 per cent of the losses of unprofitable mines.
Why on earth did we end up with this? One striking feature of the debate is that, one university economist aside, no one has come out to support this version of the tax. Officials present it as taking from big miners to give to small miners, yet no small miners have come out to support it. And the industry has dented its assumption that a government IOU is as good to the miners as cash.
A first step back from the brink would be to scrap this version for something like the existing resource rent tax, under which oil and gas projects pay the government 40 per cent of profits above a benchmark set 5 percentage points higher than Kevin Rudd and Swan now propose.
How much should the government take for us? Well, it should heed the advice of Jean-Baptiste Colbert, finance minister to Louis XIV: "The art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the least possible amount of hissing." And, of course, without making the goose die of cold.
This is a big tax rise, maybe $12 billion extra a year on successful mining projects. Both sides effectively agree it would lift taxes and royalties by roughly half. That could easily be reduced were it not that Rudd is now committed to spending virtually the lot.
Both sides are facing tough choices. If the government gives ground now to placate the miners, they will demand more; but if it doesn't, the fight goes on and the government is losing. If the miners hang tough, they could end up with Tony Abbott as prime minister but if Rudd gets back, they will have lost their best bargaining opportunity. And the real election will be about more than a mining tax.