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Taxing times - better than a mining super profits tax

By John Reid - posted Thursday, 1 July 2010

The stated objective of the tax on super-profits the Rudd government proposed to levy on miners was to give Australians a bigger share of the wealth inherent in Australia’s minerals. We shall see if this laudable objective survives the right-wing-union coup d’état that brought Julia Gillard to the prime ministership. But in any case, a profits-based tax is probably not the best way to achieve the objective. Why? Because a tax on profits is not linked directly to the value of the product. In purely economic terms, the value of a product is in what someone is prepared to pay for it, and that is only established at the point of sale - which in this case is when the minerals are shipped to the overseas buyer.

I propose that rather than apply a supertax on profits in excess of some arbitrary base figure, we should impose selective export tariffs on particular raw materials - essentially, non-renewable materials, such as minerals and wood from native forests (although trees may be renewable, forests are not).

This regime would have several advantages over a tax on profits, but before I enumerate the advantages, I should say I believe an export tariff would not contravene World Trade Organization (WTO) rules (see Collier & Venables, 2010. International rules for trade in natural resources, WTO Working Paper). The first world-based companies that take our commodities would like to get them as cheaply as possible, just as they buy coffee and cocoa from other third world countries at obscenely low prices; but it seems that export tariffs on raw materials are not presently prohibited under WTO rules.


The advantages of export levies over a tax on “super” profits are:

1. Profit is a slippery construct that can be adjusted to reduce tax liability. Transfer pricing is an obvious way foreign-owned companies can cook the books to reduce profit in a high-tax jurisdiction by transferring the profit to a lower-tax country, but there are other less blatant devices.

2. If the export levy applied only to unprocessed raw materials, it would encourage companies to add value here in Australia before exporting the product. Simply pelletising iron ore should not count as adding sufficient value; similarly, exporting alumina instead of bauxite might not represent a sufficient manufacturing process. The advantages of encouraging secondary manufacturing of primary materials in Australia are obvious.

3. Export levies would obviate the need to bribe foreign-owned companies to invest in exploration in Australia, as the Rudd government proposed to do. There is a tradeoff between risk and profit: if exploration is a high-risk business, companies are entitled to say, “We are only prepared to take the risk if we can expect a high rate of return on our investment”. If we remove the speed governor on the engine of profits, we can expect companies to incur the risks inherent in their chosen line of business.

4. By levying an export duty, we are setting the real cost of the raw material as an input to the manufacturing process, and helping to establish the true cost of the final product. At present, it is not only the mining and exploration companies who are reaping the benefits from selling Australia’s minerals, it is also the manufacturing countries which are getting their raw materials on the cheap. That is one reason why Chinese manufactures are so cheap, allowing China to compete unfairly on world markets, and consequently, to kill off manufacturing in the countries to which they export their products.

5. If imposing an export levy means buyers like China will say they prefer to buy cheaper iron ore from countries that do not impose a levy, so be it. It will not be long before suppliers like Brazil and Africa join our club. No matter what Mr Mitch Hooke. et al., may threaten, if civilisation survives the next 50 years, Australia’s minerals will always be worth more tomorrow than they are today, so leaving them in the ground for a bit longer will only enhance their value. Having said this, I do not believe there would be a strike by the importers if we increased the price by adding an export levy. Just look at the way importers of iron ore have had to accept the increases in spot prices over the past couple of years.


6. For the miners to claim that the proposed super-profits tax is “retrospective” is nonsense, but an export levy could not be (mis)represented as being a retrospective tax on existing mines.

The Rudd government may have been inept in the way it presented its proposed tax to the miners and the community-at-large, and its response to the counter-attack led by the pick-and-shovel brigade and their political pensioners and allies only compounded its folly. The change of tactics by the Gillard government, which appears to be waving a surrender flag in the face of the miners, is an even less appropriate response.

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About the Author

John M Reid PhD is Adjunct Senior Research Fellow at the School of Psychology and Psychiatry, Faculty of Medicine, Nursing, and Health Sciences at Monash University. The views expressed are those of the author, not necessarily those of the university.

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