Resource Super Profit Tax (RSPT) for Dummies
MCJ Posted on Friday, May 21, 2010 at 13:10 Since the Australian Government announced its Resource Super Profit Tax (RSPT) recently, based on one of the recommendations of the “Australia’s Future Tax System” review (colloquially known as the “Henry review”, after the head of Treasury, Dr. Ken Henry), it’s become a big topic of discussion. Having had a chance to look at the actual proposal, I feel that much of the mainstream media coverage (including the Government’s attempts to “sell” the tax) has been pretty poor, and am going to have a crack at explaining it:
Underpinning the tax is idea of what we’re taxing: natural resources (i.e. minerals). These natural resources have the characteristic that they are non-renewable – once they’ve been dug up and sold, they’re gone for good. This is quite different to most things produced in Australia, which are goods or services that to a greater (services) or lesser (some goods) extent can be produced again, and again, and again. You can milk a cow today, and milk it again tomorrow; milking it today does “rob” future generations. However, if we mine something today, we can’t mine it again tomorrow: the resource is gone.
Further, natural resources aren’t private. They aren’t skills someone has learnt; they aren’t objects someone has bought or created. They are parts of our country, and as such belong to all Australian citizens. As the Government says (PDF, 372 KB), “If the community undercharges for the use of their non‐renewable resources, it is akin to under‐pricing the sale of a public asset.”
These two arguments – and there are others, which I won’t go into because I consider this point to be the least debatable in the discussion – provide a strong case for “getting more” out of our natural resources when they are sold, i.e. taxing them more highly.
The question, then, is how to do it. At the moment the states have resource royalties, which are based on the quantity of resources extracted. This is silly, since if two people sell the same quantity of different things, but one makes more profit than the other, taxing them the same amount is clearly unfair. More importantly for our example, a “flat” royalty fee doesn’t account for changes in value, so that we – the owners of the resources – aren’t getting all we could should be.
What the RSPT does is the following: the Government pays 40% of whatever investments the mining companies make (e.g. on equipment & machinery), in the form of a tax credit. In return, the Government gets a 40% share of the profits.
BUT, the Government doesn’t take 40% of all profits. Instead, the mining companies get to make a “normal” profit, to compensate them for the fact that they are running the thing, and taking account for the fact that they could be investing their money somewhere else. A “normal” profit is usually seen as the risk-free return(1) plus the level of systematic risk: in the case of the RSPT, I’ve heard the figure “6%” used a lot, but I suspect that’s just the “risk-free” rate. Based on an example in Dr. Henry’s post-budget address to the Australian Business Economists, I suspect the systemic risk is about 9%, which would imply a “normal” profit of about 15%. So it’s only once the profits start going ABOVE 15% that the Government steps in and asks for their 40% share (of the excess).
[EDIT] Based on comments made by Labor pollie Simon Crean today, it looks like the Government actually does intend for the RSPT tax to kick in at 6%. Given that’s barely above the risk-free rate, it seems a little low… hmmm.[/EDIT]
Now, the miners still have to pay company tax - on everything: the normal and the super profits. Taxing the normal profits at the normal rate is hard to argue with (everyone else pays it!), and adding the company rate to the RSPT just gives you a higher marginal rate on the super profits. Again, you can argue about the level, but it’s not really that high IMO.
The wonderful thing about a tax like the RSPT is that is has very little distortion (if any). That’s pretty much the holy grail of public finance/tax policy, because it doesn’t change the decisions the market would have made in absence of the tax: profitable mines are still profitable, unprofitable mines don’t suddenly become profitable, and – because it only taxes “super” profits – prices shouldn’t increase either… theoretically.
What’s good for the mining sector is that the old royalty system didn’t use to tax profits, but turnover, so even unprofitable mines were being taxed. The RSPT doesn’t do that, so “marginal” mines – those on the cusp of making a profit – are benefited. Also, it’s part of the proposal that the Government uses a portion of the RSPT to subsidise exploration, which is also good for the miners (and for us).
In short: the owners of the resources (us) get a more equitable return for selling them, resource companies get to make a fair profit before we start sticking out our hand, struggling resource companies aren’t unfairly disadvantaged, and some of the proceeds are reinvested to benefit the whole sector.
Post-Script: The argument that implementing the RSPT damages Australia’s reputation as a stable regulatory environment has some weight, though not nearly as much as the mining companies would have you believe. However, this is primarily a problem of how the Government has gone about announcing the RSPT (true to form), rather than with the tax itself.
Post- Post-Script: The comparison between the RSPT and the petroleum resource rent tax (PRRT) is a furphy. The RPST gives the miners 40% of their investments back, regardless of whether the project makes a profit or not. The PRRT, on the other hand, only lets the industry use their tax deductions if they make a profit. As the RSPT credits are obviously worth more, the PRRT compensates by using a higher rate – Government bond rate + 5%, I think – than the RSPT to “uplift” the credits (when carrying them forward in time). If you don’t understand this, it’s okay: we’re a little beyond the “for dummies” level here.
(1) The risk-free return is defined as the return on 10-year Government bonds, as you can’t get much less risky than that. Currently that’s a headline (coupon) rate of 4.5%, but the real return is closer to 5.3% given the coupon price. I don’t know which is used, exactly – 5.36% seems the more sensible – but what’s bandied about in the media is ~6%
Further Reading:
MCJ
Chris Joye has collected links to several insightful criticisms of the RSPT in its current form, and added a few himself: http://christopherjoye.blogspot.com/2010/05/unravelling-rspt.html
They don’t spell the proposal’s death, but they’re precisely the complicated issues that should be the focus of public debate around the topic, rather than the crap we’re currently getting.
(Just today I heard an Opposition MP ask why the Telstra or the banks shouldn’t have to pay extra tax on their “super profits” – it’s because they’re not selling non-renewable resources that belong to the public, you dripstick!)
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