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2010-05-05

Does mining super profit exist?

Comments on Paul Kelly “Modest tax reform with an eye to election”, 5/05/2010, http://www.theaustralian.com.au/news/opinion/modest-tax-reform-with-an-eye-to-election/story-e6frg6zo-1225862266146

The concept of super profit and super profit tax is questionable.

If ownership of the investors of mining companies is the same from start to now, then the concept seems fine.

But modern mining is generally characterised by public companies such as BHP and Rio, so their shares are traded and some investors would have paid more than the book values of those companies. To those latter investors, there is hardly any super profit for them, because if there is, other investors will buy the stocks and push the share price higher until there is no super profit after adjusting for differences in risks with other industries.

In such a context, the super profit hardly exists and impossible to define.

If the government is to go ahead with that super mining profit tax, then it will result in investment flight out of mining stocks to other stocks, lower their share prices and reduce investment in mining in Australia.

Australians will be worse off as mining production is affected, and the perceived super profit dissipates and little super profit tax revenue collected.

While the naive and static analysis by some Treasury officials and economists apparently appears fine, but it in reality hardly works.

We will see another tax design failure on a grand scale, just as the Reagan's policy design of lower tax rate to increase total tax revenue in the US based on the concept of the Laffer tax curve.

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