Rudd’s Cuba solution

Modelling an ‘elegant’ magic pudding tax

A lot has been made about the two speed economy: mining industries and their downstream beneficiaries versus those rural, manufacturing and service industries that don’t particularly benefit from mineral extraction. There have been reported suggestions – as silly as they are – that some economists in the Reserve Bank and the Treasury think there might be advantage in hobbling the mining industries to mitigate the adverse affect their vigorous growth has on other sectors of the economy.

Ken Henry rushed to counter this reporting with a media release which explained that Treasury modelling pointed to the new resources ‘super’ profits tax (RSPT) actually growing the mining sector. And it’s an ‘elegant tax’ too; Ross Garnaut pointed out in an oxymoron moment before apparently having second thoughts.

Presumably Treasury’s arcane model works by predicting that if marginal projects have part of their losses underwritten by taxpayers at the expense of ‘super’ profitable projects, mining production overall will increase. Hey presto, more tax more mining production. But there is more. It will bring in revenue to help balance the budget and it will help to right a lopsided economy by sharing the wealth. More mining, more revenue for government, and a more balanced economy; it really is a magic pudding tax. Why stop at 40 per cent? Why not tax and rebate at 50 per cent rather than 40 per cent and get even more benefit?

The problem with all of this is that Treasury’s predictions based on its modelling are often quite wrong. Unemployment, for example, peaked far below the level Treasury predicted. Even something as straightforward to predict as government revenue a year ahead is often beyond the wit of Treasury modelling. Arcane modelling has its uses but it is disingenuous and foolhardy to pretend that models can reflect the complexity of the real world and provide reliable predictions.

How exactly has the model factored in what BHP, Rio Tinto and other miners, large, medium and small, will do when faced with the new tax? I doubt the miners have figured it out, but apparently the model has. How gullible of Kevin Rudd and Wayne Swan to fall for this and without thinking they needed a wider range of views than provided by Henry and his model. Presumably the siren call of all that extra revenue seduced them, just when they needed to apply logic and common sense.

Mining companies reinvest a large proportion of their existing profits. Logic and common sense tells you that reducing these profits will tend to increase miners’ financing costs and lead to less investment.

Mining companies operate on a worldwide basis and compare investment opportunities on an after-tax basis. How else would they do it? Logic and common sense tells you that having relatively high taxes in Australia will tend to drive investment away.

Logic and common sense also tells you that applying punitive taxes (retrospectively) on existing mining projects has the hallmark of a banana republic.

If the full page advertisement by the Minerals Council of Australia is right; Australian taxation on mining will become the highest in the world and more than double that applied in Canada. Is this true? It would surely be of concern if it were. For clarification, I turned to the Government’s “Fact Sheet” on the RSPT. But there was no clarification to be found. The fact sheet told me that a “meaningful comparison of profit- based tax rates among countries is difficult to make due to variability across jurisdictions in the measurement of the tax base”.

So, apparently, we are to believe that Treasury has a model which can predict the future of mining investment and production in Australia without knowing how the Australian taxation regime compares with our competitors. This model either becomes cleverer by the minute or more divorced from reality by the minute. Take your pick, but most people of common sense – with or without an economics degree – would probably think the second is more likely than the first.

What should be done when a country has the bounty of leading companies producing commodities of great value to the rest of the world and reinvesting their profits into producing even more? “Mis camaradas! Those companies and projects are too profitable, they must be penalised to help the less profitable; we must share the wealth.” Kevin, Wayne, Ken – is that you? Ah it is you Fidel, I thought you had gone.

(The author owns up to being a BHP shareholder)