The mining super-profits tax debate - an analysis

For the most part since its election in 2007, the Rudd Labor Australian Government appeared to enjoy a position which could almost have been said to have been unassailable. Kevin Rudd himself was riding high in the polls as one of the most popular prime ministers ever.

Importantly, Labor steered Australia successfully from the threat of recession, engaging in the practical and necessary business of counter-cyclical expenditure and investment in the face of dogmatic and opportunist resistance from the Conservative Opposition. Rudd’s apology to Australia’s “stolen generation” of Indigenous peoples removed from their families was also crucial and ground-breaking. And more recently, the wages of Australia’s lowest paid were, to a significant degree, restored.

But in recent months these achievements have been obscured behind scandal over the implementation of Labor’s home insulation scheme; and almost entirely overshadowed by a co-ordinated campaign to derail Labor’s proposed “mining super profits tax”. We will deal here mainly with the struggle over tax reform.

Labor Party parliamentary candidate, Andrew Leigh has put the case for the “super profits tax” on the ALP website. Leigh points out that 20 leading Australian economists support the proposed tax, including himself, John Quiggin, Fred Argy, Allan Fels and many others. And the revenue gained from the proposed tax is projected to pay for a 2 per cent reduction in company tax more broadly. This is to provide the scope for a rise in employer superannuation contributions from 9 per cent to 12 per cent.

In Australia, superannuation is a system of private retirement savings, sponsored by government, with contributions by both employers and workers. While there are serious flaws with regard to equity in the broader scheme of superannuation, obviously the proposed reform could make a big difference to the retirement incomes of Australian workers over the long term.

Also at the Australian Labor Party website, David Bradbury has put the case for the proposed tax. Bradbury argues:

The existing royalties system is inefficient and out-dated and hasn’t kept pace with the increasing profitability of the resources sector through the mining boom. Before the last mining boom, the Australian people received $1 out of every $3 of profits in royalties and charges, but at the end of that boom, that rate was down to $1 out of every $7.

Labor Minister Craig Emerson also puts a case in favour of the proposed tax. Writing at Australian political website The Punch Emerson explains how the “super profits tax”, a form of “resource rent” taxation, would replace the current system of royalties. He argues that the proposed tax regime would be fairer in that it taxes profits specifically, instead of “on the [basis of] the amount of minerals extracted”. This, Emerson insists would actually remove disincentives for new investment.

Australian economist John Quiggin has also put many arguments in favour of the proposed tax reform. He explains that in cases where mining companies make “super-normal” profits regardless of tax, the proposed tax reform will not comprise an obstacle to investment.

Specifically, Quiggin entreats us to take mining industry threats of capital flight “with a grain of salt”, listing occasions on which the mining giants have made threats in the past:

… when they were upset about tax policy, about environmental restrictions, about Aboriginal land rights, about union wage demands and work practices …

Quiggin believes such a tax would be equitable, falling mainly upon wealthy investors “many of whom are foreigners”.

Veteran Fairfax journalist Tim Colebatch has also made a number of interesting points in a recent opinion piece. The title of this piece is perhaps misleading: “Resource Tax amounts to 50% nationalisation of the mines”. The tax no more represents nationalisation than does company tax considered more broadly. In any case, the land belongs to the Australian people already. And even though Colebatch is dubious of Treasury claims that “the community's share of mining profits has shrunk from 55 per cent over the five years to 2003-04 to 27 per cent in 2008-09”, he nevertheless recognises that the government has a genuine case for reform.

A crucial point, as Colebatch recognises is that:

The Bureau of Statistics' recent round-up of industry data for 2008-09 estimates the profit margin in mining that year was 37.1 per cent. That's three times the industry average of 11.2 per cent … They're doing well.

In fact mining profits are sometimes even higher than this. Colebatch also observes that:

Analysts believe the mining boom is the main driver of the dollar's rise, which has wiped out sales and profits for industries lacking its huge profit margin as a cushion.

The point of this is that with the robust dollar, some industries such as tourism and manufacturing are becoming less competitive. Restructuring the tax mix as Rudd Labor is attempting to do is one way of redressing this situation. But cutting overall tax as a proportion of GDP is not an acceptable alternative as there remains a need to provide for welfare and services; including education and infrastructure from which business clearly benefits (and therefore must pay its fair share to support).

As the debate on the proposed mining tax has developed the fragility of Australian democracy has in some ways become apparent. While the mining giants have a war-chest of billions to draw upon in pushing fear and disinformation, no political party, NGO or social movement can possibly compete.

Much of the Australian media have also apparently abandoned any pretence to inclusiveness and objectivity; throwing themselves head-first into what could honestly be described as a “campaign”. Somewhere, we must assume, there is a convergence of interests. The Herald Sun, a Melbourne newspaper, for instance carried the headline “Bloody amateurs! Harvey Norman chief blasts Kevin Rudd, Wayne Swan over mining tax”.

But excluded entirely from this article was recognition that elsewhere Gerry Harvey, the CEO of major retail chain Harvey-Norman, had actually stated that he did not oppose the tax.

Meanwhile, amid the fear and disinformation, Labor’s implementation of paid parental leave - a landmark reform - received minimal attention from significant sections of the Australian media.

And Chief Executive of the Australian Industry Group (AIG), Heather Ridout, after stating her support for mining tax reform by focusing on “super-normal” profits in The Age, was ignored by much of the Australian media. (The AIG is a significant and important employer peak body.)

Finally, sections of the media have constantly referred to the “mining super profits tax” instead as the “super tax”, with an obviously altered connotation.

This kind of “framing” of the debate - with very selective quotations, and sometimes a virtual “media blackout” of themes inconsistent with the “campaign” - is both biased and deliberate, and is a genuine threat to Australian democracy in the meaningful sense of the word.

Much attention has been paid to the “hypocrisy” of the Labor government in devoting public funds to an advertising campaign of its own, but while Rudd Labor seems to be contradicting its past policy here, there are subtleties that are lost in this debate. In fact civic organisations need to be empowered against the potential clout of big business - not just in these circumstances, but also more broadly.

In fact a fair compromise would be to devote sufficient public funds for information campaigns and advertising to be made available for political tendencies across the political spectrum. One way or another we need to make sure the resources of political parties, NGOs, social movements and such, are sufficiently able to get their message across clearly, and are not disadvantaged - or even eclipsed - by the level of resources available to the most powerful and wealthy interests.

Theoretically, government also has other options at its disposal. If a “capital strike” was to take place government could “step into the breach”. Abandoned mines could be commandeered, with fair compensation being paid to those who formerly held title.

And a public mining company could be established directly, with the effect of profits flowing directly to the community, literally providing many billions which could be invested in infrastructure and social services.

Perhaps the current political climate, influenced by the long-held neo-liberal consensus, works against such options. But when billions are being ripped out of the country with “super-profits” every year, it is in the national interest for government to invest directly in mining.

Importantly, there are precedents which point to the workability of some form of mining super-profits tax. A “Resource Rent Tax” has operated successfully in the oil and gas industries for more than 20 years without any “collapse” of investment. Although as Tim Colebatch explains, while this tax is also applied at a rate of 40 per cent, it factors in only “above a benchmark [regarding profit levels] set 5 percentage points higher than Kevin Rudd and Swan now propose”.

Progressive blogger, John Passant has quoted John Kehoe of the Australian Financial Review to the effect that the existing mining tax proposal would only “kick in” at 12 per cent and higher. This means the regime proposed by Colebatch would see higher taxes on “super-profits” of 17 per cent and above.

As observed earlier in this article, there are many big mining operations which enjoy profits way above this threshold.

While the existing proposal from Labor is fair - and genuinely does focus on “super-profits” (far above average business profits), it’s important also for the government to think strategically about the current struggle.

Under favourable conditions, it’s important to set new standards; especially where existing arrangements are unfair. Some commentators (for example, John Passant) have written that it’s actually the prospect of a new precedent that frightens the mining bosses most.

But the power of existing precedents certainly should not be understated.

Given this, it would be legitimate for Labor to consider some restructure of its mining tax proposal to more precisely match regimes already existing and maintained successfully. By this I refer to the existing resource rent arrangements that apply in areas of the oil and gas sectors. That such a regime could be shown to have already been successful elsewhere - could go a great distance in allaying the fears of the Australian public. Such a compromise would still focus on “super-profits”, and - importantly - would establish a foothold for Labor in establishing the principle of resource rent for the mining sector.

And it is a very important principle to establish: as these non-renewable resources belong to the Australian people as represented by democratically-elected government; and there must be some reasonable kind of premium paid by miners on top of company tax to reflect this.

Calls for Labor to “dump” Kevin Rudd clearly factor into a broader de-stabilisation campaign by the biggest mining bosses and their allies - such as the conservative Opposition which has sold-out the Australian national interest out of sheer opportunism. To replace Rudd now would also set a precedent - that Labor will “dance to the tune” of big business whenever it faces real resistance.

That said, at times, Rudd has looked rattled as if he was entirely unprepared for the scale of resistance he would face in promoting resource-rent reform. Rudd now needs to project an image of being calm and in control.

Prominent political theorist, Christopher Pierson, has considered the dilemmas facing social democrats in great detail. Observing a general trend in social democratic politics, he has written (Pierson, 2001. p57):

… social democratic politics has always been resolutely possibilist or pragmatic.

And:

… being available to fight on another day is almost always preferred to heroically taking the field against the odds.

There are times when commentators, political parties, social movements and NGOs need to be more uncompromising. If everyone always simply focused on the relative political centre, broader political debate would be silenced, and the course of long-term progressive reform stymied. That means there is still a need to talk about things even that are not possible for the time-being.

But following Pierson’s observation Labor, for now, could do to withdraw to a “better defensive position”, adopting the compromise suggested by Colebatch, and selling resource-rent reform on the basis that the same regime has already been implemented successfully elsewhere in the Australian economy. Again, precedent is very important in cementing an aura of credibility in the eyes of the electorate.

There are those in the mining industry who certainly feel that they have been “singled out”, but beyond this there is a genuine case for reform, and that the Australian people truly deserve a share when it comes the natural resources which belong, collectively, to all of them.

The challenge for Labor, though, is to apply these principles fairly and indiscriminately regardless the interests involved, for the principle of distributive justice, to promote a robust and balanced economy and for the collective sake of the Australian people.