Yesterday saw the introduction into federal parliament of the Minerals Resource Rent Tax bills. This marks another retreat from Australia’s position as possibly the best country in the world (see Peter Hartcher’s new book Sweet Spot) along the path that leads to Argentina, or something like it.
The MRRT is not an ordinary tax – it is state-mandated theft whose only real justification is populism (note that yesterday’s news reports carried as part of the justification for the tax the results from a poll which said Australians thought they should be getting more from the mining industry).
It is a bad tax because it taxes companies not on the basis of their earnings, but on the basis of what part of an industry they are in (only coal and iron miners face it), and it has been designed in consultation with some of the larger companies in mining (BHP and Rio for example) to ensure that the tax falls more heavily on their competitors (like Fortescue Metals).
Good taxes do not pick and choose, but apply equally to all.
It is a bad tax because it taxes an imaginary thing – super profits. While some economics text books may say that such a thing exists, it is in fact the sort of profit that everyone in business strives to make. At the moment, miners may be making a profit in excess of 20%, but then so too are banks.
If you look at the flag ships of the new economy – companies like Apple, MicroSoft, Google and Amazon they will all be making super profits because the assets they need to deploy to earn their income are so tiny compared to the size of their income. Successful countries don’t put punitive taxes on these sorts of companies, they work out how to grow more of them.
A good return in a particular industry is a signal to other businesses that this is a good industry to invest in. The more of a country’s assets invested in such industries, the wealthier the country will be. Turn-off the signal, as this tax does, and you turn-off the wealth.
So this tax doesn’t just steal from the companies involved, but it steals from our collective wealth, and it steals from our future growth.
It is a bad tax because it pretends that the commonwealth has a right to mineral rights when it is in fact the states that have that right. States already charge mining companies for the extraction of the minerals, so this tax represents a sort of double jeopardy for the companies involved, and steals from yet another entity.
This tax is a bad tax because it steals from the states.
It is an indictment of the mining industry in this country that the polls appear to favour this tax. When the opposition was campaigning against the tax it was relatively unpopular, but since the opposition moved on, as oppositions must, the tax has been increasing in popularity because the industry has failed to move in to fill the gap.
I hope our irresponsible socialist govt will start subsidising small mining companies who fail too
Comment by Richard Pinsent — November 3, 2011 @ 9:50 am
Graham,
Enterprises with very high intellectual inputs such as Apple,Microsoft etc are radically different business enterprises from mining companies which simply extract minerals and ship them. When the resources are exhausted the miners simply move on, their legacy is a series of holes in the ground and because of currency appreciation often a depressed manufacturing sector.
Whatever the merits of this particular tax, it’s worth remembering that mining is a very mixed blessing.
Comment by Russell W — November 3, 2011 @ 1:09 pm
Russell, you are selling mining short. Mines can last very long times – look at Mt Isa and Broken Hill, and we are still extracting gold from Ballarat and Bendigo.
It is a highly complex business which thrives on fresh theories and technologies and sophisticated financing.
The skills and the expertise last long past individual mines, and that is one reason that Australia is a dominant mining power.
On the other hand you are crediting technology companies with a longevity that they don’t deserve. There’s a good chance that BHP, for example, will actually outlast any of the tech companies that I name.
Comment by Graham Young — November 3, 2011 @ 2:00 pm
Yes, of course,however I wasn’t really referring to individual enterprises but to an industry. Many European countries have hi-tech manufacturing industries that have origins in the early 19th century that are still in situ and still competitive, it’s only recently that Germany lost its position as the #1 exporter, for example.
I’m not sure what you mean by ‘dominant mining power’, yes, there’s a large mining industry in Australia, however both BHP-Billiton and RIO-Tinto are majority foreign owned companies and the percentage of local ownership will probably decrease even more in the future. So the real mining power houses are in Europe, Asia or America and that’s where miners repatriate their profits.
So if you admire mining companies as enterprises that’s your perogative, however I’m rather sceptical as to their contributions to our economy.
Comment by Russell W — November 3, 2011 @ 3:03 pm
So you don’t think mining will be around in a century? Happy to take a wager on that. I’m not sure what your point is about ownership. Both Rio and BHP are headquartered in Melbourne. Most of our large public companies have a large proportion of their shares held overseas, that doesn’t mean they aren’t Australian.
BHP is the largest mining company in the world and third largest company in the world. I think you will find Australia is one of the major mining countries in the world. Our peers would be the USA and Canada, not European countries. If you want to raise money for mining, we are one of the places you go, even if you want to mine overseas.
Why are you skeptical of mining’s contribution to our economy? Whose economy do you think it is contributing to? I just went to the launch of http://www.queenslandspeaks.com.au. At the launch Mike Ahearn made the claim that 20% of people who live in Brisbane now make their living directly or indirectly from mining. I’ll have to research it, but I certainly know a number of people who live here who do, and their contribution to the economy is not trivial.
Comment by Graham Young — November 3, 2011 @ 11:05 pm
Graham,
“So you don’t think mining will be around in a century? Happy to take a wager on that”.
I really didn’t say that at all, actually come to think of it, I’ll take the bet that mining will be of very minor importance to the Australian economy in 100 years. For two reasons, (1)the country’s resources will be exhausted and (2) most of the global infrastructure projects will be completed. I’m sceptical as to what industries will be left due to Australia contracting the ‘Dutch disease’, a mining boom isn’t necessarily an unmixed blessing. Once mining infrastucture is completed the industry uses very little labor relative to output, so the curent building boom will not last long.
Yes, mining exports earn foreign exchange,however without mining a lower dollar might allow a more competive manufacturing industry.
If a majority of a company’s shares are held offshore the enterprise is not “Australian”.
In the final analysis, I suppose most large companies are transnational and will locate where profits are maximized. (QANTAS?)
I take a long view of our economy.
Comment by Russell W — November 4, 2011 @ 9:20 am
You mightn’t have said it, but it was a logical extension of what you did say. To suggest that the country’s resources will be exhausted in 100 years time is nonsense. There is a lot of resource out there to be found and exploited. But even if there is less resource, our mining services industry will continue to be a big export earner, and that includes exploration and construction in overseas countries.
You can see that happening at the moment where a lot of Australia’s mining countries earn all of their income offshore, not onshore at all.
I think the “Dutch disease” is largely a myth. And I’m unsure why people hanker after low paid jobs in manufacturing when there are high paid jobs in industries like mining, and the various industries that service mines.
The higher Australian dollar is one way that the benefits of mining are actually shared around through cheaper consumer goods.
I think a moment’s thought would show that your definition of what constitutes an “Australian” firm doesn’t work. Under your definition unless shareholders of one country had more than 50% of a companies register, it would have no “nationality” at all. As share registers fluctuate as well, “nationality” would also potentially move back and forward.
Better to look at where it is primarily listed, and where it sees itself being based. There’s no reason to be afraid of foreign shareholders – they increase the potential pool of capital that companies can access, making national savings less of an issue, and also reducing reliance on overseas debt.
I don’t think you’re taking a long view at all – you’re taking a sectional view.
Comment by Graham Young — November 4, 2011 @ 9:48 am
Why not a tax on the fractional reserve system of banking which counterfeits our currency to the tune of $100 billion pa.
Comment by Ross — November 4, 2011 @ 8:26 pm
Australia great achievement has been the largest middle class of any country in the World, brought about in large part because of the past strength of our unions. Argentines failure was the concentration of the wealth in the hands of a few.
It would seem Ambit Gambit hasn’t yet worked this out.
No doubt on Argentines road to failure there were people who claimed resource are there to benifit a few and taxation is theft.
Comment by fredn — November 5, 2011 @ 2:28 pm
Unfortunately Fredn you have it exactly the wrong way round. Australia has considerable middle classes despite the added burden of carrying unions. There is no way the activities of unions can be regarded as improving the wealth of anyone except the small number of the members of their union. In every enterprise the first essential is the entrepreneur to get it off the ground, the next essential is to persuade the owners of spare capital to invest in this hopefully promising idea. Finally as the third essential there have to be people who are prepared to work at making the idea prosper.
Problems all come with the division of the profits between the three. But unions have a very unfair advantage in the bargaining process. Neither the entrepreneur, by now management, nor the owners, shareholders, can withdraw their parts completely without completely ruining the whole enterprise. The workers if they are unionised, can and fairly frequently do, bring the whole enterprise to a halt on a temporary basis. If they are not unionised then there is much more equality. The shareholder can sell his shares, management can organize to be headhunted, and the worker can find another job. None of these should cause the enterprise any major upset.
But unions, with the aid of a new obviously seriously biased “Fair Work Act” can bankrupt the whole enterprise by degrees to ensure that they get the maximum amount possible. This frequently is done by causing the customers discomfort and distress. This is where inequity comes in and it is where there is a role for the Government to provide for the financial compensation of customers by either management, if they shut down the business, or the unions if the withdrawal of labour causes customers to suffer.
Comment by Dickybird — November 6, 2011 @ 8:18 am