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2010-05-27

Pointed and detailed comments on leading economists' statement

The following is the 20 leading Australian economists' statement yesterday with annotated comments by me.
[Introduction: The statement by those economists was meant to be correctly informative to the public. But unfortunately it adds to more misinformation that very statement alleged to clear up. It is not only the economic principle those economists rely on but also the particular design and the proposed implementation that matters.
The following, shown in brackets, is some comments by an anonymous and amateur economist (as opposed to those leading economists), purely for purpose of balancing, or looking at the issue from a slightly different point of view. It is not meant to be very formal and completely self-contained, but as a response to some of the points in the economists’ statement.
While those comments are for the points in the economists’ statement, there is an important to make, that is, the proposed application of the RSPT to existing mines that is one of the most problematic issues of the RSPT at its current form.]

Statement

The following economists support the introduction of a resource rent tax to replace existing royalties. Although it is appropriate to debate modifications to the design of the proposed Resource Super Profits Tax (RSPT), the current public criticism of the proposed tax has been dominated by misinformation. [Both sides of the current debate have used and are guilty of misinformation.]

Mining is different to other industries in that it uses and depletes natural resources, Some return on those resources should flow to the Australian public [though correct, a bit unclear given that royalties exist already]. The existing royalty system reflects the fact that it is desirable to levy a charge for access to publicly owned mineral resources, in addition to normal corporate income tax.

There is no reason to expect a net contraction in mining over the longer term as a result of replacing royalties with the proposed resource rent tax [correct if done properly, but the proposed RSPT is not designed properly at its current form]. This is because a tax on economic rent of non-renewable resources is a more efficient way of raising revenue than taxing mining production (royalties) [correct, however, it does not mean any tax in the name of a rent tax will be good or equally good].

Royalties tax production no matter how profitable [that effectively reflects the costs of non-renewable resources, not just demand for them. Why is that not good?]. A resource rent tax only taxes production when it is profitable and only after all costs have been deducted [so in some circumstances the non-renewable resources are given away freely that certainly does not reflect any value of those nonrenewables]. If the project does not make a profit, some of its costs are potentially refundable or otherwise claimable [why should taxpayers be subject to those risks?]. This means the Government shares the risk associated with exploitation of our minerals resources. So, the proposed design for the RSPT effectively only taxes those profits over and above the hurdle rate of return for a mine (that is, its risk-adjusted cost of capital), after allowance is made for the proposed 40% rebate of the cost of developing each mine [these famous economists should talk to bankers and financiers to understand real world financing].

Given the Government’s commitment to bearing some of the risk by refunding losses, uplifting undeducted capital and losses by anything above a risk free rate would create potential distortions. Any increase in the uplift rate would require a corresponding modification of the risk shared with government. Any modifications in the design of the RSPT should be underpinned with evidence about the relative shares of returns for natural resources as well as returns on other factors of capital. [This is one of the key shortcomings of the current RSPT, isn’t it? If the economic principle is to get the mineral rent, why should the government need to get into risk sharing? The economic rent should reflect the non-renewable nature.]

Moving from taxing mobile capital towards less mobile tax bases in this way is consistent with economic theory and recent work of the OECD and IMF on the application of economic principles to guide taxation policy [isn’t the tax on capital as well? Isn’t capital more mobile than other factors or mineral production?]. Australia has a long history of resource taxation and resource economics. The Petroleum Resource Rent Tax that started almost 24 years ago only applies to some sites offshore and represented a significant practical and conceptual advance in our thinking and tax practice [why did the government use that design as the basis of the new tax design?]. Applying this principle more broadly to other minerals represents the next measured but difficult step [devil is in the details, isn’t it?].

The RSPT will reduce the profitability of mining companies and the value of the exploration and mining rights allocated to them by Australian governments on behalf of the public. The current high profitability of these companies means that this is an appropriate time for them to adjust to a more efficient and equitable system of sharing the value of those rights. [While it is always not a bad time to make taxes more efficient at any time, there is a danger that the current design if largely based income distribution could highly distort good principles of tax design, by purely grabbing any profits available at the time and sacrificing the underlying efficiency of a more efficient tax.]

The RSPT has been criticised on the basis that revenues are dependent on cyclical fluctuations in mining sector profitability [not sure this is one of current criticisms]. In reality, this is a substantial advantage of this aspect of the tax [both good and bad from rent point of view for non renewable natural resources. Imagine no rents collected at all when no “super profits realised in some years, is that a good thing?]. The counter-cyclical nature of tax revenues will help to stabilise both the macro-economy and the level of activity of the mining sector [so is the current royalties, it falls with both outputs and prices of minerals].

Signed
Fred Argy AO, former director of the Economic Planning Advisory Council (EPAC)
Jeff Borland, Professor of Economics, University of Melbourne
Deborah Cobb-Clark, Director of the Melbourne Institute of Applied Economic and Social Research and Ronald F Henderson Professor, University of Melbourne
Timothy Coelli, Professor of Economics, University of Queensland
Richard Denniss, Executive Director, The Australia Institute
Allan Fels AO, Dean, Australia and NZ School of Government
John Freebairn, Ritchie Chair of Economics, University of Melbourne
Quentin Grafton, Professor of Economics, Crawford School of Economics, Australian National University
Nicholas Gruen, CEO Lateral Economics, Director of the Business Council of Australiaʼs New Directions economic reform project from 1997 to 2000.
Ross Guest, Professor of Economics, Griffith University
Clive Hamilton, Professor of Public Ethics at Centre for Applied Philosophy and Public Ethics and Vice-Chancellor's Chair, Charles Sturt University.
Michael Keating AC, former head of the Australian Public Service and Department of Prime Minister and Cabinet
John Langmore, Professorial Fellow in the Political Science Department at the University of Melbourne
John Mangan, Professor of Economics, University of Queensland
Flavio Menezes, Professor and Head of School of Economics, University of Queensland
Christopher OʼDonnell, Professor and Deputy Head of School Economics, University of Queensland
David Pannell, Federation Fellow in Agricultural and Resource Economics, University of Western Australia
John Quiggin, Federation Fellow in Economics and Political Science, University of Queensland
Prasada Rao, Australian Research Council Professorial Fellow, University of Queensland
John Rolfe, Professor of Economics, Central Queensland University
Ben Smith, Associate Professor of Economics, Australian National University
David Throsby, Professor of Economics, Macquarie University

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