Some people would say that all taxation is theft. I don’t accept that, but in the case of the Rudd government’s so-called Resources Super Profit Tax theft is occurring at two levels. That is what has got me angry about the tax, and I suspect it underlies a lot of the public opposition to it even if it is not articulated.
The theft occurs at two levels. First the tax confiscates wealth from existing mining operations and their shareholders. Second it justifies this on the basis that the minerals belong to all of us, when in fact they belong to the states.
So it is muscling in on the rights of the owners of the companies and the owners of the minerals.
While the government calls the RSPT a tax, it is more like a compulsory joint venture. The 40% tax is justified because in the event that the mine fails, the government will pay 40% of the capital cost to the miner. It is this sharing in the risk that is used to justify sharing in the profit.
But for existing profitable mining operations the government will share in the profits without ever having put in its share of the risk. So it gets its 40% for nothing. In most people’s language taking something without paying for it is theft.
If the government were genuine it would grandfather the tax so that it only applied to mines that were developed from now on. That way everyone would know where they stood and the government wouldn’t get a free ride on the risk of development. But it can’t do that, because if it did, then it wouldn’t collect the billions of dollars which it has budgeted from this tax.
The value of a share should be the net present value of the sum of its anticipated future cashflows. The government just decreased the future cashflow going to shareholders for existing mines by 40%. That means that if you bought shares in a successful Australian mine just before the announcement you have theoretically lost 40% of your investment. Not too many government decisions have that effect.
That mining shares have not dropped to that extent represents disbelief amongst investors that the government will actually be able to implement its tax.
For the states the sums work a little differently. They charge mining companies for the right to extract minerals and they do this by charging a set fee per tonne of ore extracted. They have the ability to increase this fee from time to time.
The federal government has now made it more difficult for them to increase their royalties. By applying an additional charge, which they represent as a tax on the use of the minerals, they effectively freeze the states out of being able to charge more in the future if mineral prices continue to increase. So while the states may be guaranteed their royalties under this arrangement, they get the less profitable end of the bargain with the Commonwealth giving itself the side of the equation that will increase most with increases in the value of the minerals.
The government cannot be allowed to get away with this. If they do, the question will then be, which industry will they target next.
This “tax” is justified on the basis that minerals are a non-renewable resource. They are, but they are not the only non-renewable resources. Land itself is a non-renewable resource, and I can think of a few ways that the federal government might seek to take more than its fair share of development activities, rapid escalations in asset values or highly profitable farming.
It is also justified on the basis of “super profits”. Again, I can think of a few industries at risk. Banking has a high rate of return on funds invested, for example.
On this analysis the tax poses a big threat to the government. It is one thing to increase taxes, but if the public feels the increase is justified, then they may be persuaded to accept it. But when they feel that the tax is dishonest, and you are a government that trades on your moral integrity, then at the same time as you steal the cash from your citizens, you also rob yourself of your authority and your right to demand respect.
Labor needs to retreat from this dismal decision, but it is hard to see how they can.
The problem with the article is that it neglects the increase in value of the resources in the ground. Royalties have not kept up with this increase and the states are probably tied into rates that are in effect being eroded by capital asset inflation. As I understand it the states will still be compensated for the contracted royalties.
I dispute that below surface assets should be the property of the state. We should all share in them as citizens of the country.
Comment by John Turner — June 8, 2010 @ 12:42 am
Hi John,
The fact that something has gone up in value does not justify you confiscating the increase in value. What ever happened to the idea that a deal is a deal?
The deal that the miners thought they had done was that they would pay a certain amount per volume, irrespective of what they made from it. That’s a good deal for the state when prices are low and a good deal for miners when they are high.
There is no justification for taking more money from the miners at this stage just because they are now enjoying the upside in the deal. It was always part of the deal.
Imagine I agree to sell my house to you for $500,000, and then twelve months later I find you have wold it on for $1,000,000. Do you think I should be allowed to retrospectively redo the sale to you and receive part of your proceeds because if I’d known it would have been worth more in 12 months I would have asked more?
That is essentially what the federal government is doing.
Your last paragraph means you don’t agree that the states should exist. You’re entitled to that view, but it doesn’t represent the legal situation so can’t form part of government policy in a country that respects its laws. You change the nature of the states, you don’t find ways to appropriate their assets.
Comment by Graham — June 8, 2010 @ 2:13 am
All About Discovering, Developing and Operating a Mine.
Swann and his mentors, do not realise that before miners go in for mining any ore from any mineral, exploration for the mineral or metal, has to be conducted.
Exploration in mining is like research and development in other industries. Explorers use:
* Geology.
* Geophysics.
* Geochemistry.
* Intuition.
* Then if a promising possibility starts to appear, drilling.
Finally, if positive results follow, they then have to finance a large, close order drilling programme involving many millions of dollars to assess the size, shape, length, depth and width of the occurrence.
After that, Mining Engineers with the expertise to do so, plan the mining and extraction process.
Quite often, several alternatives are explored by these experts, as they decide what the optimum design, and tonnage per annum will be. Also will an underground or open cut operation produce optimum results.
Appropriate milling and smelting designs follow.
Then the accountants and financiers arrive. All use their particular expertise to decide whether the deposit is economic or not.
Everybody involved has to accept the fact that miners are price takers and the market for minerals is volatile. Finally the decision is made.
All of the following have to be built.
* Town, airport, and all of a town’s facilities.
* Dam or dams for water supplies.
* Roads and rail lines.
* A port and facilities developed.
Many obstacles have to be overcome, such as Native Title, Green objections to everything, and permission from every authority there is to proceed. This process can take years.
By this time expenditure can amount to hundreds of millions of dollars. On large deposits, it can be up to a billion dollars. All of this is somebody’s risk capital.
Should it be deemed economic, Mr. Swann, then declares it the property of the Australian people.
What could be fairer than that?
Naturally, says Swann, explorers will be rushing in from everywhere to discover and find payable ore for “the people”.
But under his scheme, taxpayers will actually be liable for 40 per cent of the losses incurred by the mining sector.
The labor proposals nullify the profit and loss system on which entrepreneurs depend to guide them in investment decisions.
The Labor Party proposals effectively nationalise the mining industry, making us all liable for corporate losses.
When Lenin became dictator of The USSR, he declared that the land and resources, factories and banks become the assets of the Russian state.
Labor’s proposals mirror his actions. Think that over.
The sole reason health, hospitals and education matters are in hopeless continuous turmoil is that state interventions have nullified the profit and loss system. What Labor is proposing is that the entire exploration and mining industry goes down the same disastrous track.
Interested people can read Ludwig von Mises lecture, which he delivered to the Mont Pelerin Society at Beauvallon, France in September 1951 titled “Profit and Loss” See:
http://mises.org/resources/3736/Profit-and-Loss
488 Words.
Comment by Ronald Kitching — June 8, 2010 @ 4:47 am