- Money Morning Australia

Why a Resource Tax is Resource Theft

Written on 30 April 2010 by Kris Sayce

Why a Resource Tax is Resource Theft

There’s a lot of noise flying around about the publication of Emperor Ken Henry’s tax review on Sunday.

But let’s get one thing straight. Behind all the sound bites about “helping battlers” and “ensuring the rich pay their way” and “closing loopholes” and “making tax returns easier”, the ultimate objective is for the government to increase the amount of tax it takes from you.

When the government says it wants to make the tax system more efficient, it means that it wants to make it more efficient for it to take your money.

When the government says it wants you to be able to lodge your tax return with the click of a mouse, it means it wants to make it easier and quicker for the government to take your cash.

There is zero chance of the tax burden on Australians being reduced as a result of the Emperor’s tax review.

Unfortunately we don’t know what’s in the review yet, that will be released on Sunday. But one of the hot topics is the supposed resource rent tax. It’s the idea that mining companies could be taxed up to 40% of their profits. And that this would replace state royalties and the corporate tax rate.

What will that mean to Australia’s resources companies? According to Digger’s & Drillers editor Dr. Alex Cowie:

“Miners currently have a 30% corporate tax rate, with state production royalties of 2-8% on top. The theory goes that the review would scrap both taxes, and replace them with a single 40% tax rate. Those companies already paying higher royalties, such as coal producers, would be less affected by the change than those companies paying lower royalties, such as gold producers.

“We will hopefully get better clarification on how this works on Sunday. More tax on mining companies would clearly be a disaster for investors. One analyst at Merrill Lynch estimated this would reduce Rio’s profit by 30%. However this big effect is mostly due to the low (mates-rates) royalties Rio currently pays.

“Looking on the bright side, there are a few obstacles in the way of the proposed tax changes. Realistically, the state governments would first all need to agree to give up their royalties, which would be about as easy as rounding up a room full of cats. WA’s premier, Colin Barnett, is getting ready to defend his state’s royalties with a good punch-up with Kev if he has to. The resource sector is not taking the proposed tax very kindly either.”

But not surprisingly, the collectivists such as the trade unions think a resource tax is a wonderful idea. As Tony Maher, the top commissar of the Construction, Forestry, Mining and Energy Workers’ Union (CFMEU) told the ABC:

“This is a tax on the super profits, the profits above and beyond a normal or generous rate of return… They should share some of the billions they are making with the community.”

He goes on:

“Everybody knows that no-one likes to pay tax, but they have to pay a tax on the resources that are owned by the Australian people that they make squillions [sic] out of. It is only fair and it is the smart thing to do. Other countries have sovereign wealth funds. This is the opportunity for the Australian people to have a sovereign wealth fund that can pay dividends after the minerals are gone.”

We’ve chosen these quotes because they contain everything that is wrong about the socialist and mainstream approach to economics.

We’ll look at the key points that Commissar Maher raises. Although we’ll point out that he isn’t the only one with this view. And we’ll also point out that it isn’t just the ‘socialist socialists’ that adopt this view either. It’s the ‘conservative socialists’ that take pretty much the same line.

So, let’s take a look at the first point, the idea that “This is a tax on the super profits, the profits above and beyond a normal or generous rate of return.”

Our simple question is, if current profits are “above and beyond” what the socialists determine to be a normal rate of return, what level do they consider to be a normal rate of return?

Is a profit of $1 billion too much? What about $990 million? Or $826 million? Would that be OK?

And who determines what that profit level should be? Do these control freaks envision a panel of [hehem] experts setting profit levels for specific industries?

Retailers can make X amount of profits. Miners can make Y amount of profits. And chemists can make Z amount of profits.

But then what happens to a diversified company such as Wesfarmers?

It’s clearly a lot of nonsense.

What Mr. Maher and others fail to appreciate is that there’s no such thing as a “normal” rate of return. There’s no such thing as a “normal” profit. “Normal” profits only occur in the mythical world of a planned economy.

Except in those circumstances the profits aren’t real anyway.

A profit only occurs if consumers are prepared to pay more than what it costs the company to produce the product. A profit level can’t be arbitrarily set by a Profit Tsar.

If consumers don’t believe a certain product is worth the price set by the company then consumers won’t buy it. The company will have to reduce its price. And sometimes it may have to reduce the price so much that it makes a loss.

Maybe in the world of trade unionists they’d prefer that companies didn’t make any profit. But then of course what would be the incentive for the entrepreneur to go into business in the first place?

These so-called super profits merely indicate that buyers are prepared to pay up for something they want. It’s a bit like housing right now. Buyers are prepared to pay ever higher amounts for a house.

There isn’t much different as far as we can see. Except one – resources – has an end use, whereas the other – housing – is bought simply in the belief it can be sold at a higher price to someone else.

But in both cases the boom won’t last. The housing market will crash and burn. And China will crash and burn too.

Both are inevitable. But that’s a different story…

So, the fact is, there’s no such thing as a normal profit level.

What about the next part of Commissar Maher’s statement, “They should share some of the billions they are making with the community… they have to pay a tax on the resources that are owned by the Australian people…”

We have to say that those comments are the biggest load of hogwash there is. But again, Maher and the union movement aren’t the only ones to say it. The idea that all Australians own the natural resources in Australia is engrained in people across the country.

But is that really the case? Do you really own 1/22,000,000th of BHP Billiton’s Olympic Dam project in South Australia?

Do you really own 1/22,000,000th of Bow Energy’s coal seam gas fields in Queensland, or Woodside’s gas fields on the North West Shelf?

Of course not. You no more own 1/22,000,000th of the natural resources of Australia than do you own 1/22,000,000th of your neighbour’s backyard.

Just because Western Australia has a whole bunch of iron ore and copper several hundred metres below the surface doesn’t make it the property of the nation.

I mean, what have you or I done about all the natural resources buried deep underground in Western Australia? It’s not as though we’ve been in any hurry to raise millions of dollars in capital, pick up a shovel and head west. Well, maybe you have, but your editor hasn’t.

The fact is, the natural resources that are underground are owned by no-one. They only become someone’s property when an individual or an organisation invests the capital to recover them.

At that point it’s their property and they should reap the rewards of taking the risks. After all, how many explorers spend millions and billions searching for a resource only to strike dirt or water? The Australian Stock Exchange is littered with zombie miners perennially searching the outback for one big find.

Think about it, why should your editor take a 1/22,000,000th stake in Fortescue Metal’s iron ore mine when we’ve not done one single thing to earn it?

But let’s look at it this way. Let’s say a 40% tax is introduced on resource company’s profits. That means the “nation” supposedly gets 40% of the profits and the company and its investors keep 60%.

If we’re talking about having a fair tax system, how is that fair? The resources explorer only gets to keep just over half of the returns yet it’s the resources explorer and its investors that have taken all the risks.

The explorer will have spent millions of dollars searching for the resource. It will have spent millions more trying to recover the resource and then processing it. And then when all that’s done, the government steps in and says, “Thanks, we’ll take 40%. And if you don’t hand over the cash we’ll send you to jail. So pay up sucker!”

What has the government done for the money? Nothing. And what have you or I done, each as 1/22,000,000th owners? Nothing.

And as for the idea that resources companies should share the bounty with the community. Well, they already do that. They employ people to work at the mines. Those people don’t offer their labour for free, they demand a wage in return.

Then there’s the allied services that benefit from the exploration of the resource. And we’re talking real investment here, not a sham investment of building a school gym or a new hospital wing.

Not to mention other beneficiaries in the community. Such as steel makers who need iron ore. Or construction firms who need steel. Or electricity installers who need buildings to install wiring.

That’s what real investment provides to a community.

Of course, we suppose the nanny-staters wouldn’t get that. They’re too busy believing that money can just be printed to build stuff rather than wealth being created through real investment.

And don’t forget, you can draw a straight line from the mining sector all the way through to personal taxation. The government does the same with your income.

It would seem that if we use the same standards applied by Maher to the mining industry then the same standards must apply to your income. That is, that each Australian owns 1/22,000,000th of your income.

That’s why at the end of each week you only get to keep about 60% or 70% of the money you make. The rest is syphoned off to be shared by the community.

Finally, what about the idea of a sovereign wealth fund, “This is the opportunity for the Australian people to have a sovereign wealth fund that can pay dividends after the minerals are gone.”

Again, it’s the idea that money should be taken from you and given to the government to invest. Supposedly on your behalf. In reality it’s on the behalf of the government and its cronies.

Unfortunately, a sovereign wealth fund is undoubtedly on the cards. It’s the next logical step for Australia’s superannuation system. As we pointed out yesterday, it’s all about taking away control from the individual and placing it in the hands of “experts” and bureaucrats.

Make no mistake, Australia and all Western nations are heading down the same path of self destruction. It’s an economy where entrepreneurialism, initiative and effort are despised, frowned upon and penalised by coercive governments.

And where the mainstream view decrees that entrepreneurialism, initiative and effort are surplus to requirements because as Prof. Kriesler from the Australian School of Business reminds us, “printing money as a way to increase demand is a good move.”

Why go to all the trouble of exploring for minerals in the middle of a desert when the government can just print money and use coercive means to take it from its citizens instead.

I don’t know about you, but it’s pretty clear which one provides a real benefit to the economy and which one is a money printing, inflation loving parasite.


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Kris Sayce
Kris is never one to pull punches when discussing market developments and economic events that can affect your wealth. He’ll take anyone to task — banks, governments, big business — if he thinks they’re trying to pull a fast one with your money. Kris is also the investment director for Australian Small-Cap Investigator, Diggers and Drillers and Revolutionary Tech Investor. If you’d like to more about Kris’ financial world view and investing philosophy then join him on Google+. It's where he shares investment insight, commentary and ideas that he can't always fit into his regular Money Morning essays. Read more about Publisher and Investment Director Kris Sayce.

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2 Comments For This Post

  1. Darren Says:

    Chris, FYI my understanding from Rudd quotes (see http://www.smh.com.au/business/rudds-stumble-on-detail-of-new-tax-20100503-u3ty.html?autostart=1) is that the amount of “Super profit” is the amount remaining after deducting expenses, and the long term bond yield on certain (unspecified, but investment grade) securities.

  2. Janis Kittson Says:

    What really infuriates me is the statement that the natural resources are owned by all Australians. This rubbish will now be trotted out by all and sundry as their basic reason for believing in a resources tax. People are sheep and will latch onto any soundbyte that they hear. They call it ‘thinking’. Thanks so such for your erudite and rational article…succinct as ever.

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