The Minerals Council of Australia’s advertising campaign against the Resource Super Profits Tax (RSPT) highlights its $80 billion tax payments over the last decade. Eighty billion dollars in the abstract does not really mean much. It has to be related to the mining industry’s profits and compared with other industries. The Australia Institute has made those estimates based on the broad measure of profits used in the national accounts; the industry gross operating surplus.
Using the national accounts basis for Australian industry as a whole, the average tax rate paid by Australian business in the nine years since the Howard government introduced the New Tax System was 24 per cent. (To ensure the estimate is based on the same figures as the mining industry, tax contributions here include company tax as well as other taxes less subsidies on products but exclude the GST.)
In comparison, the $80 billion tax contribution of the mining industry averages out at just 19 per cent. So, on the mining industry’s own figures the taxes raised on the mining industry represent a smaller share of profits than for Australian industry as a whole.
It gets worse though. Mining is different to other industries since miners are given privileged access to resources that belong to the community as a whole. Royalties are collected to reflect the community’s ownership of the minerals. So one would expect to find mining is more heavily taxed than other industries. To find the opposite is surprising and reinforces the need for a resource super profits tax. It’s pretty clear that, to date, mining simply has not been paying its fair share.
The Henry Tax Review recommended a “resource rent tax” to cover most minerals in Australia which the Rudd Government has adopted as policy. The day after the release of the government’s response to the Henry review, the Reserve Bank published its commodity price index which showed the commodity price index had increased 18 per cent in the month of April alone. This seemed to reinforce the need for the RSPT to allow the community to share in those high commodity prices.
The essential idea of the RSPT is simple: if a mining project is only earning ordinary returns then it would only attract the ordinary company tax. However, where a mine is sitting on a superior resource and generating super profits then the company should pay more tax. As the Henry Report put it:
Through the Australian and State governments, the community owns rights to non-renewable resources in Australia and should seek an appropriate return from these resources.
The RSPT will also address the decline in the share of mining profits being collected by governments in Australia. The combined share of royalties and collections under the Petroleum Resource Rent Tax has fallen substantially: the annual figures quoted by the Federal Government show mining taxes, including company tax, went from around 40 per cent of profits on the eve of the mining boom to about 13 per cent at the moment.
The real question then is how much of the mining industry’s super profits should be taxed? Using Norway as an example, it imposes a 78 per cent tax on super profits in the petroleum sector.
The government has accepted the Henry Tax Review’s recommendation that super profits be taxed by way of a separate resources super profits tax of 40 per cent. However, ordinary company tax would still apply and the RSPT would be deducted from taxable income in calculating company tax. In the first year of operation, 2012-13, the total tax on super profits would be 58 per cent. However, as the company tax is reduced to 28 per cent by 2014-15 the RSPT would be reduced to 56.8 per cent.
While the rates on super profits could have been higher, in other ways the RSPT is rather tough. To tax super profits, or profits above a normal profit rate, the government has to define the normal rate of profit. For the Petroleum Resource Rent Tax the rate is the government bond rate plus 5 per cent for most expenditure and the bond rate plus 15 per cent for some exploration expenditures. However, for the proposed RSPT the rate is just the long bond rate, currently around 5.8 per cent. The government has flagged negotiations with the mining industry to determine the final shape of the tax and there may be some concession in the rate of return used to distinguish normal and super profits.
The reason the government uses the government bond rate for the RSPT is that it is seen as the risk-free rate of return in Australia. But a risk free mining investment would still not look like a government bond. Government bonds are not only risk free but are otherwise desirable; they are liquid in that there is a strong second hand market. They can be sold easily if a better alternative comes along. Presumably these and other arguments will be raised by the mining industry when they get beyond their immediate tantrums.
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