Mourning Gillard’s mining tax disaster: Kohler

Australia’s effort to levy extra taxes on mining companies has been an unmitigated debacle, capped by the passage early this morning of the Minerals Resource Rent Tax with a further last-minute compromise.

It is one of the great lose-lose outcomes. We can only hope the Senate knocks it back.

To get the vote of Andrew Wilkie, the Member for Denison, a seat about as far from mining as it’s possible to get, the government increased the profit threshold at which the tax kicks in, from $50 million to $75 million.

This is now a deficit tax – it will cost more in concessions to get it passed than it will raise in new revenue. That gap widened by about $100 million last night with the Wilkie amendment.

There are two big problems with the MRRT: state mining royalties can be offset against it and an increase in superannuation has been shackled to it.

A resources rent tax was proposed in the Henry Tax Review of 2009 as part of a package of measures designed to deal with the pressure the resources boom was putting on non-mining industries.

The idea was to replace ad valorem mineral royalties on mine production volumes with a rent tax on profits because governments weren’t sharing in the big increase in commodity prices that increased the terms of trade and therefore the currency.

There was, and is, a fundamental disconnect between the terms of trade boom that was killing manufacturing and tourism and the tax revenue governments were getting from it because royalties are levied on volume not price.

The Henry proposal involved a 40 per cent extra resources rent tax and a reduction in company tax to 25 per cent, plus a series of depreciation and capital allowance benefits for manufacturers and other small businesses.

The last time there was a sustained terms of trade boom in Australia, in the late 19th and early 20th centuries as a result of gold, wheat and wool exports, the policy response involved regulating wages through the Harvester Judgement and then imposing a tariff on imports to protect manufacturing. This so-called Australian Settlement had the effect of insulating manufacturing from the terms of trade and its effect on the currency but led to a gradual, disastrous decline in competitiveness.

It’s worth pointing out that the United States had the same terms of trade problem 100 years ago but chose not to protect manufacturing, with the result that it became the great manufacturing powerhouse, only eventually destroyed in the 21st century by China’s currency manipulation.

In the 1970s and 1980s Australia removed tariff protection and centralised wage fixing, so that the new terms of trade boom – ironically resulting from China’s defeat of America’s manufacturing supremacy – leaves Australian manufacturing entirely exposed to its effects.

Former Treasury Secretary Ken Henry had been banging on about the two-speed economy problem for years, and the Future Tax System review that he chaired contained his solution: a resources rent tax to be spent on reducing company tax. Without wage regulation and tariffs there is no other way to protect manufacturing from the effects of the mining boom.

But the Labor government has managed to completely mess it up.

First the Resources Super Profits Tax was plucked out of the Tax Review by Wayne Swan and Kevin Rudd and dumped on the miners by surprise. They revolted and won.

Then Julia Gillard negotiated a lower tax on iron ore and coal with BHP, Rio Tinto and Xstrata so that only the smaller companies with smaller advertising budgets would complain. As part of that, she was forced to allow existing mineral royalties to be deducted from the tax, which totally negated the idea of replacing ad valorem royalties from a tax on profits.

And then, to make the whole exercise completely pointless, she tied it to an increase in the superannuation guarantee levy from 9% to 12%.

That increases manufacturing costs instead of reducing them, and vastly increases the cost of the exercise to the federal budget.

According to Brian Toohey in this morning’s Financial Review, the cost to the budget of the extra superannuation tax deductions will be $4.2 billion in 2019-20. The total cost of the concessions connected to the MRRT will be $9.4 billion in that year – less than a third of which is paid for by the revenue to be collected from the MRRT.

In the 2012-13 financial year, in which the budget is supposed to return to surplus, the net cost of the MRRT package – revenue minus giveaways – is $1.7 billion.

It is, in short, a joke. Everybody loses. It was an idea designed to help Australia deal with the terms of trade boom that has been bastardised by politics into a complicated impost on mining that achieves nothing at all and in fact worsens the position of everyone involved.

This article first appeared on Business Spectator.