RESOURCE RENT TAXATION: SOME COMMENTS

JOHN BRUNNER

When I was asked to take part in this session I was inclined to demur on the grounds that you already had the case for and against a resource rent tax being put by two experts and there wasn’t any real need for another opinion. I can only assume therefore that I am cast here by the Economic Society in the role of the toad beneath the harrow, though I’m not sure I would have been chosen for the role ‘by the mining industry itself.

However I think I can claim to be speaking on behalf of the industry in saying it is virtually unanimous in its opposition to an RRT. People in the industry have been heard to argue for such a tax to replace present arrangements-tell it not in Gath, publish it not in Askelon; I have even heard such heresies expressed in BHP House-but only two serious arguments have been put forward for an RRT to my knowledge and neither really has much substance.

One was mentioned by Dr. Dowel1 when he referred to the preference once expressed by an MIM director for profit-related royalties over output-related levies or ad valorem royalties. My quick answer to that is “go tell it to the Barrier miners”. My more considered reply is threefold.

First, while output-related royalties may in theory cause a mine to be shut down prematurely, in practice this is seldom likely to be a serious factor except where they represent a large proportion of revenue. Secondly, where output related levies do represent a large proportion of revenue, typically in the petroleum industry, arrange- ments are usually made to exempt the first so many million barrels per field of annual output from such levies. Thirdly-and of special significance in Australia-to the extent that the States own the mineral rights and receive the royalties, their concern for employment is such that they are most unlikely to force the closure of a mine in their territory by insisting on payment of their royalty.

The other argument sometimes put in favour of an RRT is that it will provide the certainty that the industry craves. And to that I would say “go tell it to the oil industry operating in the North Sea”. The Petroleum Revenue Tax, the equivalent of the RRT, started at 45 per cent. It is now 70 per cent. And under a supposedly well- disposed Conservative Government there have recently been seven changes in the North Sea tax regime in eighteen months.

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Objections in Principle I can safely say therefore that the mining industry is opposed to an

RRT in principle as well as practice. The foremost objection in principle is that an RRT interferes with market signals. Above average profits serve a vital function in telling the market where more investment is needed. In the absence of government intervention such profits are self-correcting.

This isn’t just economic idealism. The history of the Pilbara iron ore industry demonstrates the self-correcting and ephemeral nature of high prospective profitability. At the end of the sixties expectations of the Australian iron ore industry’s profitability were similar to expectations about the energy industries’ profitability today. What in fact happened? All the usual self-correcting forces were set in motion. The advent of a major new supplier of iron ore helped to hold down the world iron ore price as the Swedes and Indians were not above pointing out. The strengthening of the Australian balance of payments for which the iron ore industry was in large measure responsible led to an appreciation of the $A thus further lowering returns to the iron ore industry. And the unions were responsible for making yet more inroads into what remained of the industry’s profits. Though Australia derived considerable benefit from the Pilbara iron ore developments, the bonanza that was so widely predicted for the producers provided them with only the most temporary benefit.

More generally, surveys have shown that average profitability in mining is much the same as in other industries, which is exactly what one would expect where self-correcting processes are allowed to operate. An RRT is thus as unnecessary as it is counterproductive.

If nonetheless above average profits, albeit temporary, are deemed ‘obscene’, then surely neutrality requires that all investors should be subject to an excess profits tax, not just mining. There is after all little that is peculiar in this regard about the mining industry. Vhgh rock, for instance, has no special or intrinsic value. It only becomes worth something by being turned into ore by mining. Mineral resources are not finite in any economically meaningful sense since they will never run out if the price mechanism is allowed to operate. And owners of mineral rights are as free to bargain with would-be developers as the owners of any other rights, be they capital, labour or patents.

There are no grounds in principle therefore for discriminating against mining. So-called mining rents are but one example of pro- ducers’ surplus.

Objections in Practice In addition there are at least four practical objections to an RRT.

For a start even if a tax on economic rent is no disincentive to a project which has been proved up, such a tax can be a considerable disincentive to exploration undertaken on the off -chance of profits

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well above the explorer’s discount rate. A subsidy for exploration for supposedly less prospective leases would be almost impossible to administer, particularly with respect to the criteria for deciding on prospectivity. (A general subsidy to exploration would be no less difficult to defend.)

A second major practical problem with an RRT concerns the choice of threshold rate. While in theory this should correspond to the discount rate of the investor or investors undertaking a project, ascsrtaining what this rate is raises all sorts of difficulties. Companies do not have discount rates which are stalble over time and across projects. Rates will vary according to perceptions of risk, forecasts of inflation and fluctuations in cash flow. Discount rates cannot be objectively determined, particularly in circumstances where a com- pany knows its discount rate is going to be held against it for tax purposes.

There is also a basic contradiction between the accepted canons of tax equity, that rates should be similar for like activities, and the requirements of neutrality as laid down by RRT advocates, that threshold rates should differ from project to project to reflect the different discount rates employed by investors.

And this leads to the third pragmatic objection to an RRT. It is not only the selection of the discount/threshold rate which is calcu- lated to invite government interference. Actual operations are liable to be subjected to extensive government intervention and supervision since, beyond a certain point, government can have a greater interest in a project’s profitability than the company undertaking it. This of course is the other side of the coin to the point Dr. Dowel1 makes about an RRT being detrimental to managerial efficiency and cost consciousness.

Finally there is the very real problem of conflicting jurisdictions in the Australian Federation. This is not a problem which will go away with a change of personalities or parties. That the industry’s fear of ibeing the meat in the sandwich on this account is all too well founded has been underlined by the experience of Canada. There a more or less continual struggle has been going on between Ottawa and the provinces, the latest manifestation of which has been the Federal Government’s wrangle with Alberta. Because Ottawa controls prices and held the price of petroleum lower than Alberta wished, the Province retaliated ‘by cutting production 15 per cent and putting a stop to further tar sands developments.

An attempt to replace existing mining taxation with an RRT or superimpose one on the existing tax regime will exacehate the incipient conflict here, a point well recognised by the IAC in its report on the Petroleum and Mining Industries. For when aJ1 is said and done Canberra would have to use the proceeds of such a tax on

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behalf of the Australian public as a whole and not just to benefit the States in which mines and oil fields subject to an RRT operated.

From all of which I conclude that an RRT is objectionable in principle and unworkable in practice.

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