July 03, 2010 | Graham

Gillard’s mining tax a fix not a masterstroke

With her rebadged Resource Super Profits Tax Julia Gillard confirms she has no vision for Australia and that big business cannot and should not be relied upon to look after the common interest.

It is a pea and thimble trick that appears to have fooled the mining companies, but should fool no-one else. The original scheme was supposed to raise $12B in the first year, and this scheme will fall around $1.5B short. So the government has gotten 90% of what it wanted. Or maybe they are exaggerating.

The original proposal was completely opportunistic. It was designed to fill a budget hole and fund some election year giveaways. It dressed this up by claiming that miners were making “super profits” and should be taxed differently from other companies because of this. Or alternatively, that minerals belong to all Australians and we should all reap the benefits.

Both of these points are obviously nonsense. As Phil Ruthven’s figures show mining is no more profitable than other Australian industries. The minerals actually belong to the states, not to all Australians, and the states already charge for the use of them.

By only taxing some companies in the mining sector the revamped tax completely blows away the second argument – apparently whether the rest of us are entitled to the value of minerals depends on who is mining them.

By increasing the threshold to 7% over the government bond rate it doubles what constitutes a super profit, showing it to be a completely flexible ad hoc concept.

When Rudd was first elected I expected the government to be incompetent but benign. Rudd’s record in Queensland was very poor, but what damage could he really do to the national economy?

Now we know. When the Global Financial Crisis arrived he panicked and threw far too much money at the problem. So much that the money is still being spent, over a year after the crisis ceased to be a major problem. In the process he caused all sorts of problems. I don’t need to go through the litany, it’s notorious.

But that is just financial and managerial miscalculation. The mining tax is something else, although its genesis lies in the over-reaction to the GFC and the subsequent need to make savings or raise revenue.

When Australia depends on the rest of the world to fund our projects, making our major export sector severly uncompetitive is wilfully stupid. But it doesn’t stop there. By picking on an industry simply because it was deemed to be both rich and politically vulnerable, it brought not just issues of sovereign risk into play, but called into question the whole moral legitimacy of the government.

One of the foundation principles of our system of government is that all ought to be treated equally. This is a principle which applies most strongly to legal liability, but it also applies in matters of economics. While it is a principle which is sometimes breached, it is normally breached by for example positive discrimination to a specific industry like automotive via a measure like export subsidies.

What is almost unique about this case is that an industry that is involved in a perfectly legal form of enterprise has been penalised so that the proceeds can be given to other industries and individuals.

Even in the bad old days of industry protection I can’t think of anything quite as blatant.

It was modern Labor through the Hawke and Keating governments that entrenched the view that the tax system shouldn’t discriminate between industries, although the first steps were taken by Malcolm Fraser.

So, not only has the Rudd/Gillard mining tax grab trashed the moral legitimacy of the government, but it trashes the entire modern Labor legacy.

It’s not a promising start for the new PM. Rather than a political masterstroke the Mining Resource Rental Tax makes her look like a visionless fixer concerned with wheeling and dealing to stay in power, and nothing much else. We could have expected better.

Posted by Graham at 1:26 pm | Comments (5) |


  1. Neat summary. And depressing.

    Comment by Jennifer Marohasy — July 4, 2010 @ 9:37 am

  2. It is curious that we demand that tradesmen go through an apprenticeship before qualifying, but we allow anyone to become an MP and possibly govern the country with no qualifications or experience of running any organization.
    Should we demand that all politicians spend at least 5 years running a small business or in top management of a large one before they are allowed to stand for Parliament

    Comment by Richard Pinsent — July 5, 2010 @ 12:03 am

  3. Of course big business cannot and should not be relied on to look after the common interest, businesses look after the interests of their shareholders, often against the public good. The common interest is overseen by the government, as it is with this tax. Of course the minerals belong to all Australians it’s our ‘goose’ and our ‘golden eggs’.As I pointed out in an earlier post,resource booms are detrimental to small economies,Resource Rent Taxes help to compensate for this.

    “Since the Howard Government introduced the New Tax System,the average tax rate paid by Australian Miners is 19% compared with an all-industry average of of 24%” (Australia Institute Newsletter Vol 62 June 2010 p2).
    The lower rate is a result of miners receiving (1)tax discounts for royalties paid to state governments.(2) other generous tax concessions. I presume that you would argue against tax concessions for mining companies,I certainly would.

    So,if I had any lazy money, I’d buy mining shares

    Comment by Russell W — July 5, 2010 @ 1:07 am

  4. Russell, the Australia Institute paper is obviously not reputable if it treats royalties as a tax discount. They’re not – they are the price that companies pay to extract minerals and are a cost of goods which is paid as a levy to the state government that owns the minerals.

    And as royalties amount to somewhere around 10% of profits from the models that I’ve been looking at it suggests that mining companies have been paying higher tax than other Australian companies.

    Your point about mineral ownership is just nonsense, although it is fashionable nonsense at the moment. The constitution gives the ownership to the states and that is the end of that. The Commonwealth doesn’t own the minerals and the states are getting value for them – the eggs are being harvested.

    Not much point arguing with you if you think booms are bad for economies. The Australian economy has been built on enough mining booms to put the lie to that argument.

    Comment by Graham — July 5, 2010 @ 2:24 am

  5. Graham,

    You’ve misunderstood,or you’re using ‘strawman’ arguments,the paper doesn’t treat royalties as a tax discount,it in fact criticises the previous federal government for ‘compensating’ the mining companies for state royalties–more socialistic welfare to transnationals.

    Well,I won’t argue then I’ll just expand on what what I said earlier,booms depress other sectors of the economy (1) they divert capital and (2) raise the exchange rate which reduces the competitiveness of domestic manufacturers.
    The Australian economy has not been built on mining booms,they have, in fact,inhibited development,we’re still dependent on commodities.In this sense,our economy hasn’t changed much since Donald Horne wrote the “Lucky Country”,that’s not ‘building an economy’, that puts the truth, not the lie, to the argument.
    Some of us who don’t live in the fantasy universe of neo-liberal economics and read economic history instead.
    Remember economics is not a science.


    Comment by Russell W — July 5, 2010 @ 6:17 am

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