So what is the Resource Super Profits Tax all about? And what is a resource rent tax anyway?
As it happens, I did a PhD in economics on these very questions, under the supervision of Professor Ross Garnaut. And as an economic adviser to Resources and Energy Minister, Senator Peter Walsh in the Hawke Government, I had the opportunity to implement my PhD findings by helping design the Petroleum Resource Rent Tax in 1984.
Let’s start with resource rent. Minerals like iron ore, coal, oil and gas possess two special features – they are non-renewable and deposits of them vary in quality and closeness to markets. These features give rise to resource rent.
The concept of rent was developed in the 18th century by economist David Ricardo in relation to land – another non-renewable resource. He observed that different tracts of land varied in fertility and some were closer to markets than others.
Suppose it was just worth a farmer’s while to work on a hectare of land capable of yielding 4 tonnes of corn; this just covered the farmer’s costs and enabled him or her to earn a living. That’s called a marginal tract of land. But other tracts might naturally be far more fertile, producing up to say 10 tonnes per hectare. The difference in yield between the marginal tract and the profitable tract in this case is 10 – 4 = 6 tonnes. This is the resource rent.
The 6 tonne difference is not due to harder work by the farmer but to the natural attributes of the land. And the 6 tonnes of rent is not necessary to attract farmers to the land, since they will do their work for a reward of 4 tonnes per hectare.
Similarly, tracts of land that are very close to a final market are more valuable than more distant tracts of land, even where they are equally productive, since transport costs for the farmer are lower.
So it is the case with mineral resources. Those deposits that are of higher quality and closer to market are more valuable than the marginal deposits – the ones that are just worth developing.
Australia is getting the highest mineral prices in half a century because of the China boom, a boom that is expected to continue into the foreseeable future.
The Australian people own the nation’s mineral resources and they are entitled to share in the extra profits from our mines made possible by the China boom.
That’s why the Rudd Government has decided to apply a tax on the resource rents of the Australian mining industry.
The Resource Super Profits Tax will replace mining royalties that are based on the amount of mineral extracted, not on resource rents. The problem with royalties is that they take no account of the quality of the deposit or its distance from market. By taxing production, royalties are payable regardless of the profitability of a mine. They are a disincentive to invest and to extract the full recoverable amount of the mineral deposit.
A tax on resource rent enables the mining company to earn a profit before the tax kicks in. And if mining profits were to fall some time in the future, the tax on resource rent also falls – unlike royalties.
Some say a Resource Super Profits Tax should not apply to existing projects. But state governments have proved to be very keen to jack up royalty rates on existing projects when mineral prices rise. And when governments reduce tariffs they don’t reduce them only for new investments.
Revenue from the resources tax will be used to invest in our country’s future. It will finance a reduction in the company tax rate for all incorporated businesses, large and small. And it will provide much-needed tax breaks for every one of Australia’s 2.4 million small businesses, allowing them to instantly write off the value of assets worth up to $5,000. That would be a welcome cash-flow boost for small businesses and an added incentive to invest in productive assets.
Increasing our national savings is an important investment in the country’s future economic security. Revenue from the resources tax will allow for a staged increase in tax-preferred superannuation for working Australians from 9 per cent to 12 per cent. And further proceeds from the resources tax will be invested in nation-building infrastructure.
This is genuine tax reform. But just like the 40 per cent Petroleum Resource Rent Tax for offshore oil and gas development introduced by Labor in the mid-1980s, this 40 per cent Resource Super Profits Tax for onshore minerals is opposed by the Coalition.
So, too, was the previous Labor Government’s 1985 repair of the income tax system to end the rorts of business executives booking up private school fees and golf club fees to the taxpayer, taking each other out to lunch at taxpayers’ expense and converting their income into tax-free capital gains.
Proceeds from those reforms were used to finance incentive-boosting cuts in the top two income tax rates, removing the 60 per cent top rate inherited from the previous Fraser-Howard Liberal Government. The day the reform package was finalised, Opposition Leader John Howard described the fringe benefits tax and capital gains tax as unfair attack on the private sector. He pledged to repeal them but never did. Nor did he repeal the Petroleum Resource Rent Tax, preferring instead to collect $16 billion from it.
In the Labor tradition, a reforming Rudd Labor Government will introduce a 40 per cent Resource Super Profits Tax to collect a fair share of resource rents for the Australian people as mineral resource owners. Australia’s mining industry will remain healthy because it is a tax on resource rents and not on production. The proof of the pudding is in the eating and, despite industry objections and dire warnings at the time, the Petroleum Resource Rent Tax has stood the test of time, avoiding the chopping and changing of tax rules associated with royalties, and enabling a go-ahead for the giant Gorgon and Pluto gas projects and an extension of the life of the Bass Strait fields by up to 30 years.
So will the Resource Super Profits Tax stand the test of time, an enduring reform that will finance investments vital to securing Australia’s economic future.
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