Resource rent tax is absurd as its predecessor
The resource super-profits tax is buried, the minerals resource rent tax is terminally sick.
Treasury's estimate that the MRRT would reduce the RSPT's estimated $12 billion tax collections by only $1.5bn was never credible.
Analysts assessing the costs of the government's attempted plunder of the mining industry are now revealing a more accurate picture. According to Citibank, the RSPT would have devalued the main businesses' worth by 13 per cent to 25 per cent; Citibank puts the cost of the MRRT on BHP, Rio and Fortescue at 1 per cent to 3 per cent of value. Deutsche Bank sees the MRRT's adverse effect on two of the three main listed coalminers at less than 1 per cent of value.
The RSPT was founded on seizing present assets of businesses and adding heavy penalties to future mining investment. It was glibly assumed these measures would have no influence on the affected sector's decisions.
How could such naive policy have been developed? Who was responsible and how do we prevent a repetition? The government has offered Kevin Rudd as the fall guy. And he was doubtless a big player in the debacle.
The RSPT was devised by Treasury secretary Ken Henry and is the only recommendation of his taxation review picked up by Wayne Swan. The Treasurer saw the tax as a way to bridge the fiscal haemorrhage created by the government's spending spree in response to the global financial crisis.
Finance Minister Lindsay Tanner was part of the quartet that ticked off on the proposal, as of course was Julia Gillard.
An early endorser was Resources Minister Martin Ferguson, who called it a major reform. Such is political life. Another was Small Business Minister Craig Emerson, who said, "We are going to implement a resources tax, a resource super-profits tax, because we want to use the proceeds, again, to invest in the future."
And Climate Change Minister Penny Wong proved her gullibility is not restricted to buying the underestimated regulatory cost of measures to reduce carbon emissions when she maintained the RSPT "would strengthen the Australian economy, increase productivity and increase mining output".
Although the MRRT raises little from big existing mines and Treasury's revenue forecasts of the two mining taxes are grossly inconsistent, the MRRT is still scheduled to raise future revenues. Eventually, however, the government will realise it will actually have a negative revenue effect. This is because the Treasury forecasts are predicated on the tax bringing no adverse future investment consequences.
According to Goldman Sachs, the combined effect of the MRRT plus profits tax on a future coal mine will be 45 per cent, which is down from 57 per cent under the RSPT but up from 37 per cent at present. Among big competitors the equivalent tax rate in India is 41 per cent, South Africa 35 per cent and Russia 24 per cent. For iron ore, the MRRT plus profits tax combined is also 45 per cent, up from the existing 35 per cent and somewhat above the 36 per cent equivalent in Brazil.
Miners will use these or similar numbers to assess the merits of different investment locations. As Rio's Tom Albanese has said in the context of the MRRT: "But of course our Australian projects will always have to compete for capital with our other investment opportunities across the globe."
This dooms the MRRT. Miners will quietly divert capital to places with more accommodating tax regimes, the bureaucracy will duly inform the government, which, also anxious about constitutional challenges from Western Australia, will discreetly drop the whole proposal. Unlike the RSPT, the death of the MRRT will therefore not follow a humiliating capitulation by the government.
The proposed tax changes have foundered on the shoals of demand, supply and competition. Demand and supply has led to a doubling of coal and iron ore prices in the past year or so. But analysts (whose guesses are better informed than most) expect prices to subside to their previous levels in the coming years, even if China continues to boom. This is because no firm has a monopoly on mining skills and technology continues to offset the increasing costs of accessing new deposits.
With the RSPT, a costly policy error was made. Rudd has paid with his political career. So far Swan, the chief propagator, and Henry, the chief strategist, have shown themselves to be indifferent to the costs - probably billions of dollars - of their incompetence in proposing the tax.
This is understandable with Swan, a politician with the hide of a rhinoceros. But Henry has done a massive disservice. He has presided over the debauchment of Treasury. His poorly thought-through mining tax was accompanied by deceptive estimates of its revenue effects. This follows other actions in promoting fiscal irresponsibility, including the response to the GFC and inventing data that put a rich gloss on the adverse repercussions of a carbon tax.
The suspicion is these mistakes are more than errors of judgment and stem from a contempt for the market system and a hubristic wish to reconstruct it. Either way, he and others of similar mind who are in positions of influence within the Treasury should be dismissed as a step towards repairing confidence in the department.