If feasible, taxes on “pure rents” are efficient, raising revenue without cutting activity generating it.
Is the Resource Super Profits Tax (RSPT) a “pure rent” tax or just another tax on contestable profits? If the former, replacing distorting royalties, it’s a good idea: if the latter, why is it being proposed?
The Government’s Henry Review response raises many questions. Here are six to start (more later).
First, what’s the investor tax rate under a 40 per cent RSPT (i.e., the final tax share of mining “super-profits”)?
Australians on a zero personal rate will pay 40 per cent, or 49.9 per cent (for those on the 15 per cent rate), 58.9 per cent (for those on the 30 per cent rate), 63.1 per cent (for those on the 37 per cent rate), and 67.9 per cent (for those on the 45 per cent rate). This covers RSPT, company tax, franking credits, and personal tax.
Super funds will pay 40 per cent (“pension phase” earnings), and 49 per cent (“accumulation phase” earnings).
Foreign investors will pay up to 80 per cent or more (allowing for RSPT, our company tax at 28 per cent, their company tax at 30 per cent, personal tax at 35 per cent, and no “franking” credits).
Various “effective” tax rates based on different total return scenarios can be devised. The above are the investor tax rates applicable specifically to deemed “super profits” under the RSPT.
The average Australian tax share of “super profits” is probably 60-65 per cent or more. Is this a “fair share”?
Second, the government says it’s taking 40 per cent of the risk in mining projects.
If the government gets 60-65 per cent(+) of mining “super profits”, shouldn’t it risk 60-65 per cent(+) of all expenses? An allowance of 40 per cent for (some) expenses seems niggardly. Governments taking on less risk than their share of returns implies a larger effective tax base for the RSPT (and a higher implied “super” tax rate too).
Asserting no such allowances apply to existing income taxes only draws attention to the risk-sharing defects of these taxes. It’s certainly not an argument for doing the same for (much higher) investor RSPT tax rates.
Third, the government argues the RSPT long bond rate uplift factor for (some) allowable expenses, including investment risks, accurately reflects the “silent equity partner” status of the government - at least for an equity share of 40 per cent. The second issue above suggests this is too low, because the government tax share is much larger, but let’s ignore this here.
Let’s also assume - for now - the proposed RSPT tax base is correct. Put aside the reality that full and immediate refundability of all expenses is preferable. Ignoring all other issues as well, on these assumptions the uplift factor seems to be OK.
But there’s no “free lunch”.
Under the RSPT the government shifts towards a higher risk, higher return tax base. When commodity prices are strong, this is a revenue plus. When conditions turn bad, it’s a revenue minus.
The RSPT makes Australia’s tax base more risky - even if it is properly specified in all respects.
Australia’s tax revenue will fall more in global economic downturns. Australia’s Budget expenses rise in bad times and fall in good times. Australia’s Budget “automatic stabilisers” might work more strongly: this might be a plus. But financial market implications may be less friendly.
Australian government contingent liabilities under the RSPT should rise. This should be reported in the Budget Papers.
Should investors price in more risk before buying government bonds? Could government borrowing costs rise? Will “risk free” government bonds include a new margin for sovereign risk?
Fourth, if we adopt an RSPT while others don’t, does the RSPT really tax “pure rents”? What if we aren’t taxing “pure” economic rents, but taxing contestable profits while owners of similar resources don’t?
“Going it alone” with a production-based RSPT can cause competitive losses. At the margin, activity and jobs losses follow, compared with a no-RSPT scenario. Isn’t this the lesson from the (deferred?) CPRS?
Mobile financial capital can be shifted to where risk-adjusted after-tax returns are largest. How can countries with assets that are substitutes for those in other countries claim to be taxing “pure rents”?
Fifth, the RSPT is retrospective. Its estimated net revenue comes substantially from changing rules for existing mines (with less scope to deduct past expenses, even if companies haven’t failed). Retrospective taxation increases the fast-growing perception of “sovereign risk” in Australia. Governments weren’t “silent partners” risking funds in existing mines, but now want large returns from them if successful.
“Sovereign risk” is now a major Australian issue. It has hit small businesses (e.g., those gearing up for home insulation activities), the finance, legal and accounting sector (building up practices to cope with the expected CPRS-related activity), arguably the telecommunications sector, and is now proposed for the most export-competitive parts of the economy.
The five issues reviewed above boil down to (i) high tax rates reducing Australian competitiveness, (ii) unequal risk/return sharing, and (iii) increased sovereign risk. These might deter investment in Australia. If this is unintended, a genuine RSPT consultation process might allow correction of design defects.
However, sixth, what if the government is deliberately trying to slow mining activity in Australia? If so, politically, the RSPT is not seen as a “pure rent” tax at all, but as an instrument of industry manipulation.
Others have already suggested the RSPT might help slow the higher-speed part of the “two-speed” economy that might re-emerge if China continues to boom.
Does the government see this as preferable to higher interest and exchange rates, and consequent adjustment pressures, arising from a resurgent resources boom?
Is this sensible, or not-too-subtle “back-door” protectionism?
Is it a productivity and income growth plus or minus?
Has the government really ruled out this strategy?
We’d better be clear on the answers to these questions (and many others) before we embark on the RSPT experiment, rather than learning the answers after the event.