KEVIN Rudd deserves all the flak he is getting from the miners over the resource tax and from people concerned about the climate over his junking of the emissions trading scheme.
I am not going to write “I hate to say but I told you so,” because like most journalists I relish saying “I told you so.”
But here is what I wrote in this space in January: “So far, the Government’s treatment of the Henry Tax Review has been out of character. Usually, Governments allow reviews to go public to test reaction before putting out their response or even draft response.
They do this to weed out any proposal that gets a toxic reaction from the public. Then the Government can quickly disown the proposal and say it is, after all, just a proposal from an inquiry and not a fixed government position. The Government is not accused of a ‘backdown’ by the media – and we all know that the media likes a good ‘backdown’. . . .
“It would have been better to have a wide debate first – not just an ideological fight between the Government and the Opposition, but a debate in which the public, academics, think tanks and commentators take part. Often they can point out things not seen by the initial review.”
And then in February: “And by the way, when are we going to see the Henry report – which was handed to the Government nearly two months ago? So much for open government. Not good enough, Kevin. Why are you seeking unfair advantage for the Government at the cost of two months’ worth of constructive debate on the tax system?”
As it happens, of course, it was not an unfair advantage to the Government, or if it was, the Government completely muffed it.
Obviously the miners were going to have a view and spend millions propagating it. One of the reasons we get a lot of bad public policy in Australia is that rich and powerful interests can spend lots money persuading people that good policy is bad policy and vice versa.
Having stupidly sat on the Henry report for several months, you would think the Government could have devised a plan to explain and sell its mining plans. But no, just like the emissions trading scheme, it assumed the public would just accept that the Government was doing the right thing. So public support for both plans fell away.
Very few people have even the most rudimentary idea of how the mining scheme works. The Government’s failure to explain it has allowed the big profitable miners to get away with describing it to the public as a big 40 per cent tax on mining profits.
There is much more to it than that. The Government was stupid even to call it a tax. Presumably it naively thought the public would applaud it as a Robin Hood scheme to tax the rich and give to the poor. So Rudd called it a Resource Super Profits Tax and thought everyone would cheer. Yes, the public does not like super profits; but it likes tax even less.
In fact, the scheme should have been called something like the Mining Assistance and Readjustment Plan. Because that is what it is.
At present, if I spend $10 million on a new mine and it fails to produce anything. I have done my dough.
Under the readjustment scheme, however, you get a guaranteed 40 per cent tax deduction against other income, and not just for mines that go bad. Good mines get the deduction, too. But mines that turn a profit higher than the Commonwealth bond rate (6%) will have to pay the 40 per cent new tax.
So on our $10 million example, the tax will be payable on profits over $600,000. But the miner still has a deduction of 40 per cent of the $10 million, or $4 million, paid in installments, unless the mine goes instantly bad when it is paid immediately – thus taking a lot of the risk out of new mines. And successful mines will have to be profitable for quite a long time before they are worse off than at present.
In effect the Government has bought itself in as a 40 per cent stakeholder and gets 40 per cent of the profits of the super profitable mines. Sure the big miners who are fairly sure their mines will be profitable are not going to like the government muscling in.
But overall the scheme is good for mining.
Also, the new arrangements abolish royalty payments to the states. Good. Mining royalties often apply unfairly because they are based purely on the volume of mineral extracted, irrespective of the costs of extraction – a bit like applying a tax on all income irrespective of the costs of earning it.
In short, the new arrangements will make new mining less risky, not more risky, and impose a tax on long-term very profitable mining.
This is why the big, very profitable miners, like BHP-Billiton, Rio and Fortesque, do not like the tax and are spending a lot of money giving us all sorts of dubious reasons why not. They don’t like the competition from new mining and don’t like the idea of this smart Australian-invented tax being exported.
And let’s face it, it is not really a tax. The minerals belong to the nation and the miners should pay for them. It should not be thought of as “a tax” but as the purchase of an input in the same way that other businesses pay for their inputs, like builders pay for bricks and wood.
Overall, the new arrangements are good for mining and fairer for all.
Don’t believe me? Well here’s an excerpt from the Commonwealth Bank’s Budget analysis dealing with agriculture:
“Finally, the proposed Resource Super Profits Tax (RSPT) will have some second round impacts on the farm sector. The structure of the RSPT will result in more investment in the mining sector and increased output. This will result in greater competition for labour in rural areas, exacerbating farm sector labour shortages. There will be increased competition for rural services such as mechanics, storage facilities and transportation (i.e. fly-in fly-out operations). Finally a larger mining sector may result in increased competition for natural resources such as land and water.”
The Commonwealth Bank knows a thing or two about finance and tax. Unfortunately, it may not know enough about the poisonous capacity of big money to launch self-serving public-relations campaigns that don’t tell the full story.
Alas, the big miners’ PR campaign might become a self-fulfilling prophesy. But the Government cannot escape responsibility for failing to sell its scheme, just like the ETS.
It pains me to write this, but compare this with the competence and passion with which John Howard sold and put into effect the two best policies of his government: gun control and the GST.
Howard was so well-prepared for the fall-out from his guns policy that on one occasion he even wore a flak jacket.
Good public policy requires more work, more competence and more hard sell than bad policy because the former is usually complex and difficult to explain to the masses whereas the latter is often visceral and simplistic.
CRISPIN HULL
This article first appeared in The Canberra Times on 29 May 1020.