Why a resources tax can build a better nation
Pssst? Heard about the good tax? Hopefully after the release of the Henry Tax Review this weekend you will.
It’s called the Resource Rent Tax and, for those of us who want to see the development of frontier mining towns into sustainable communities, it is a thing of beauty.
It is always reassuring to hear the mining industry cry poor when new ideas are put forward to share the benefits of the resource boom.
While the big companies and their lobbyists are sharpening their tongue to decry a new ‘tax’ the rest of Australia should be hoping that a new tax is exactly what emerges from the Henry Tax Review.
The tax is called the Resource Rent Tax and, for those of us who want to see the development of frontier mining towns into sustainable communities, it is a thing of beauty.
It works like this.
It is an “extra” tax levied on the “additional” profits that a firm makes because it has been given exclusive or privileged access to a limited resource - in this case the minerals owned by the Australian public.
A firm can make super or excess profits from mining because not everyone has access to the mineral resource. That is, there are only a certain amount of mineral reserves (though more does tend to be found) and the government allocates leases to only a small number of players. Further, there are other “barriers to entry” in that most firms lack the scale and expertise to get into mining.
Economic theory holds that if any industry is making excess profits (over the “normal” rate of profit of somewhere in the order of 8-15%) then competitors will enter the industry, and keep entering, until profits fall to the long-term normal rate.
But in mining the combination of government regulation and other barriers to entry can mean that there are only a few players, their output is less than perfectly responsive to market demand, they command a premium price and they make super profits.
These super profits can be taxed heavily by government without affecting the investment decisions of the few players, because they will continue to invest, and keep existing operations going, as long as they make at least a normal profit.
This is therefore an effective tax for governments to deploy, as the tax revenue is collected without (in theory) adversely affecting the level of economic activity in the industry.
Of course the mining companies will cry poor – but right now they have huge profit margins and are making billions of dollars from Australia. The existing royalties they pay are a minor part of their expenditures. And the income tax they pay? At most it is the same as other industries, even though most other industries do not get the benefit of privileged access to Australia’s public assets – its mineral resources.
The Resource Rent Tax is a crafty instrument – it is calculated on profits, on the success of a venture.
With all projections pointing to massive increases in the resource sector over the next 30 years, the tax has the potential to bring in billions of dollars of additional revenue each year – while still allowing mining companies to make large profits. Remember – it’s only a tax on profits above and beyond a generous threshold.
This will have two clear benefits to Australia.
First, in development of mining communities – it can provide a revenue stream that should have a significant chunk devoted to the rural and remote regions from where it came. Mining towns are all too often desperate and deprived places – not enough housing, schools, hospitals, playing fields, swimming pools and other community infrastructure. A Resource Rent Tax can and should improve the social infrastructure of mining towns – something mining companies stopped doing for two decades and have only recommenced in recent years in a piecemeal and inadequate effort to retain more workers.
Secondly, and just as importantly, the income from a Resource Rent Tax can be the basis of a broad sovereign wealth fund – a way of transforming wealth in the ground to long-term wealth above the ground. A source of wealth that can exist for generations after the minerals are gone – providing assets and income for future Australians in this century and the next.
Critically any decision needs to be made quickly. This shouldn’t be a debate that goes on forever. Mining communities need certainty, and businesses need investment certainty.
The Henry Review is an opportunity to be visionary in the way we build our nation. The presence of one good tax – the Resource Rent Tax – would show it is meeting this challenge.
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