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Like many contemporary political issues, everyone has a very strong opinion regarding the proposed Resource Profits Super Tax (RPST). But as it was with the proposed emissions trading scheme (ETS), very few of us have a comprehensive understanding of how exactly it works. Fewer still are able to appraise the situation from a perspective that does not relate specifically to their own self interest. But such is the nature of these things.
Rather than get lost in the detail of the proposed tax, let us instead evaluate the situation from a broader perspective. The first thing to appreciate is that the current tax regime for mining companies is in dire need of reform, something both sides of the debate acknowledge. A tax based on the principle of economic rent is one that most experts agree is not only fairer, but also encourages investment (in essence, economic rent is the level of profit in excess of the bare minimum required to make a given economic venture worthwhile). Here too both sides are for the most part on the same page.
Where opinions start to differ is with the detail. Essentially, the miners argue that the rate of tax that is levied is too high, and the level it kicks in is too low. The Government maintains that this is very reasonable and that the miners have just gotten used to paying very low taxes for too long. They also argue that the proposed system will provide significant benefit to those projects that turn out to be unprofitable, or not highly profitable.
As is often the case, both sides have some valid points, but both are guilty of exaggeration and spin. I tend to think that a rent based tax is a great idea, and that although the details may need some adjustment, it will be of great benefit to the mining sector over the long term. Especially so when the resource boom eventually and inevitably starts to wind down.
The point I want to discuss though is the broader issue with Sovereign debt. Australia is lucky enough to have escaped the worst of the GFC, and indeed we are the envy of the western world. But the fact remains that, like so many countries, we need to ensure that our debt levels remain reasonable and under control. If we don't we will eventually end up like Greece, and of course no one wants that.
However, there are essentially only two ways to reduce budget deficits and Government debt: cut spending or raise taxes (or both). Neither is politically palatable, as we have seen with the reaction to the European austerity measures. But be that as it may, it is unavoidable.
The Government of course knows this, and knows it needs to act sooner rather than later. The Henry review seemingly provided an answer on a silver platter: tax the super profitable miners and avoid the angst of the general population. Well, obviously it hasn’t played out like that, but only because the Government has been very bad at explaining the issue, and the facts have been tainted by very powerful and well resourced interest groups.
People opposed to a higher tax regime for the miners must understand that if it doesn’t go ahead, the Government will need to raise money elsewhere, and that could well be in the form of higher personal tax. No one will be happy with that and it will be political suicide. Otherwise the cuts to Government spending will need to be far more aggressive. Again though, voters probably won’t appreciate significant cuts to hospitals, education, welfare, infrastructure and the like.
So let’s all take a step back and understand that although the RPST is far from perfect in its current form, it has the potential to reform the mining tax regime and raise significant funds in one stroke. The miners will always and should always do what they can to maximize returns for shareholders, so we can expect them to fight tooth and nail against this, but the fact is that they can afford to pay more tax and still remain very profitable. Even in its current form the RSPT will not decimate the Australian mining industry, despite claims to the contrary.
Let’s not forget too that what they are profiting from are the natural resources that are collectively owned by every Australian, and we need to extract a decent return for ourselves. One day this boom will be all over and we will ask ourselves who reaped the lion’s share of the benefit. Most likely it will be corporate interests, and indeed they are entitled to make a decent return from their hard work. But citizens should understand that the current regime means that the country itself is not getting anywhere near its fair share.
Somewhere between the two ends of the spectrum of this debate the truth lies. Rather than get hysterical over the extremes, let’s debate the issue in a calm and objective way. This issue is a big one and requires strenuous debate, but let us first establish the facts before we all go off half cocked.
Make the markets work for you
Andrew Page
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