Economic illiteracy (letter)by Neil C. FearisNews Weekly
, June 12, 2010
In justifying his proposed resource rent tax, Prime Minister Kevin Rudd takes the populist line that the Australian people should enjoy a greater share of the so-called "super profits" that mining companies are currently earning by exploiting "their" mineral resources.
Putting aside for a moment the obvious point that these companies already make a substantial contribution to the revenue base through the payment of company tax, GST, payroll tax and other state and federal charges (not to mention state royalties and income tax payments by their thousands of employees), anyone with a passing familiarity with the Australian Constitution would know that mineral resources belong to the states where they are located and to the peoples of those states, not to the Commonwealth.
In this regard, the supposed analogy with the petroleum resource rent tax (PRRT) is flawed, since the PRRT taxes profits derived from the exploitation of hydrocarbons located offshore and, as such, within Commonwealth territory.
Mr Rudd's proposed super profits tax will cut in after the profit generated by a mineral project reaches the "risk-free" 10-year treasury bond rate (currently around 6 per cent). In contrast, the PRRT cuts in at a profit level 5 per cent above this rate.
To set the threshold for calculating a "super profit" at the treasury bond rate displays a fundamental misunderstanding of the risk profile of resource projects. Given the inherent risks associated with exploiting mineral resources, investors in such projects will typically be looking for a return substantially above the risk-free rate in order to justify putting their capital at risk.
To describe a return above the 10-year treasury bond rate as a "super profit" begs the rather obvious question of why an investor would risk his capital on a resource project that is going to be taxed at punitive levels when he could enjoy a risk-free return on his money by investing in treasury bonds.
That a federal Cabinet composed of individuals with little or no business experience - never mind experience in the mining industry - could display such economic illiteracy is perhaps understandable. Less understandable is why the federal Opposition and economic commentators have not pointed to these obvious flaws in Mr Rudd's sales pitch.Neil C. Fearis,