Australian Latest Mining Boom - Essay Example

? This paper attempts to look into the reasons for Australia’s latest mining boom. Along with this some fiscal policy implications that havearoused out of this are discussed in details. It is seen that the profits made out of non-renewable resources should be invested in such a way that the future generations also get the benefits of it i.e. one form of assets are to be converted into another type of assets. In this light, the proposed super-profit tax is studied. Its cost and benefit study clearly shows that the benefits surpass the costs attached with it. A personal point of view regarding this tax policy being a good fiscal measure is also incorporated. Both quantitative and secondary research is done to reach at a conclusion. Contents Topic Page Number 1) Introduction 3-4 2) Main Body a) Fiscal policy challenges emerging out 4-5 of the recent mining boom in Australia b) Resource Rent Taxation and Negative externality 5 c) Economic Framework of Non-Renewable 6 Resource Taxation d) Economic Costs and Benefits of Mining Super 6-8 Profit Tax e) Conclusion 9 f) Recommendations 9 g) Appendix 11 Introduction Mining boom in Australia is an outcome of huge demands for these resources in the global market, mainly Asia because of its growing need for these minerals. In all parts of Australia, mining companies are increasing their present operations, shuttered mines are being re-opened and all this is taking place at a never before pace. Moreover, this latest boom in this mining sector can also be attributed to the expansion in demand for Australian commodities by the foreign nations. This, coupled with decreasing import prices has resulted in an amazing enhancement in their terms of trade. (Banks, 2011, p. 1) At first it was perceived by most of the Australians that the boom in their mining sector had bought unequivocal benefits to their nation’s economy by creating more jobs, generating higher revenues from exports, taxation and higher incomes for most of the people. But studies have revealed that some of these increased profits from the mining companies are at the cost of profits from the non mining institutes (Richardson, 2009, p. 2). Australia is known to be an inherently resource rich nation and one of the leading countries in the world from the point of view of production of minerals. Australia, as already said, is a major exporter of mineral resources, exporting huge amounts to Asia and the Pacific regions. The Australian economy, during 2007 had grown at a rate of 3.9% owing to the increasing global demand for mineral commodities. Since, higher prices in world market for mineral commodities were expected in future as well, the Australian economy kept on expanding. As a result of an increase in the domestic demand for more workers and thinning labor market, in 2007, the consumer price index (CPI) rose by 4.2% (Australia Mineral and Mining Sector Investment and Business Guide, 2006, p. 45). With this boom came the need to review the ongoing tax system in the country. Under the Henry tax reviews the mining super profit tax was introduced which was instantly subjected to a lot of opposition from the mining community as well as the media. Here, in this report, the economic costs and benefits arising out of the mining super profit tax are analyzed and the discussion also includes some reasons as to why this tax is a good/bad policy measure. In this paper, both quantitative and qualitative research has been done. In order to analyze the costs and benefits of the super profit tax, vast literature in the form of journals, articles, books etc. have been reviewed. The proposals made by the government regarding the use of the revenues that would be generating out of this tax led to the cost-benefit analysis part. Quantitative analysis has been performed to see the amount of revenue that would have generated out of this tax, had it been implemented. Fiscal policy challenges emerging out of the recent mining boom in Australia In the upcoming years, with the increase in value of Australia’s mineral and energy assets, beneficial impact on income and activities will be seen. But, with this arises a few fiscal issues. The first issue is related to the sharing of profits made by the mining firms, who are privately exploiting the non-renewable resources of Australia, which belongs to all the Australians collectively and not to an individual. The most important issue here is finding the correct balance between the proper distribution of benefits and efficient exploitation of the natural resources. Secondly, there is the issue of economic diversification, i.e. the nation, in the long run will not be in an economically desirable position if it relies/concentrates too hard on one sector only. Thirdly, the huge investments made in mining and infrastructure has lead to an increase in foreign deficit and this can prove to be a likely source of vulnerability (OECD Economic Surveys: Australia 2010, p.68). In order to overcome the above said issues, the government of Australia took up some tax reforms like imposing a tax on the usage of non renewable natural resources, giving tax benefits for future savings or for superannuation and company taxation. So, because of these reasons came the Resource Super Profit Tax. The Resource Super Profit Tax (also called the mining super profit tax) was to be introduced on July 1, 2012. It was proposed that the profits made by exploiting the non-renewable resource base of Australia will be taxed at 40 percent. This taxation plan was announced under the Henry Tax Review, by Wayne Swan, the Treasurer and Kevin Rudd, the then Prime Minister of Australia. This tax was to be applied on every extractive industry which included gold, uranium, nickel etc. But, after Prime Minister Kevin Rudd lost out to Julia Gillard in June 2010, this proposed RSPT system got replaced by the Mineral Resource Rent Tax (MRRT). Under the proposed MRRT, a 30% tax is to be levied on the super profits that will arise out of iron ore and coal mining in Australia. MRRT too is proposed to come into force from 1st July 2012. (Australia Mineral and Mining Sector Investment and Business Guide, 2006, p. 168) Resource Rent Taxation and Negative externality Resource Rent Taxation theory has its idea in the fact that the revenue of the government should also keep pace with the profits earned from the usage of these limited resources. It is so because the resources which are being used by these private investors are the property of the nation as a whole and not an individual and therefore its profits/benefits should be for every one as well (both present and future generation). (Lund, 2008) By imposing a tax on these resources, government can invest these proceeds in such a way that it will reap benefits for a much larger section of society. (See figure (a) in appendix) Sectors such as mining put an environmental cost (say the cost arising from global warming) on the nation as a whole. Miners do not include this cost in their cost calculation, therefore they under-estimate the cost. (See figure (b) in appendix) Economic theories prove that taxes such as the Piguvian Tax or marketable permits can be used to curb down these (marketable permits here are more favorable as they also impose an upper limit on the allowed emission) (Hackett and Moore, 2011). Government can improve or restore back the environmental condition using the proceeds from taxation. Economic Framework of Non-Renewable Resource Taxation From the economic point of view, in case of non renewable resource based industries, the government of the country has a very important role to play in addressing the problem of market failure, collecting a rent on the returns from the natural resources and making further investments using the resource rents. The government also needs to assess the efficiency of the ongoing policies, for example, if a policy is such that it puts considerable administrative burden, then the potential return to the nation may fall because of increased industry cost and therefore lower resource rent. If a government can make use of revenue originating from resource taxation by investing it, the future generation of that nation gets the benefits of extraction of the nation’s non-renewable resources. Here basically one form of asset (natural resources) gets converted into another form of asset which broadly benefits that nation. In many countries, “sovereign wealth fund” has been created which has its basis in the revenue collected from the mining activities. Most of these funds are funded from the earnings arising out of petroleum; it is very rare that such a fund has its origin in minerals. The aim of these funds is to stabilize revenue of the government and other expenditures and not just maintaining long term return from the assets. (Hogan & McCallum, 2010, p. 1) The economic rationale behind natural resource taxation is mainly dependent on the size of the revenue earning from the resource. This earning is often calculated by deducting the costs incurred from the total revenue. If this earning is sufficiently high, then imposing resource tax is justified. Brown Tax, a popular resource taxation method is the concept behind the super profit tax. Here the tax levied is a flat tax. A constant percentage of the yearly cash flow is the tax amount. Here, if in a particular year, the investor has got negative cash flow then the government gives them cash payments to make up for their losses. Economic Costs and Benefits of Mining Super Profit Tax By introducing mining super profit tax, the central government of Australia had wanted to shift the taxation system of non-renewable resources from royalty to rent. The main reason behind this shift is that the government’s revenue from these resources has not grown proportionately with the profits of the mining companies (past few years have seen substantial increase in the profits of these private mining companies). This is because output-based royalty system was prevailing in the nation as this tax is the easiest to collect. But these taxes are known to be inefficient which results in huge amount of welfare losses. On the other hand, the resource rent suggested by the government is a very efficient taxation system which can generate higher revenues and make the mineral extraction sector more efficient. (OECD Economic Surveys: Australia 2010, p.69) The benefits arising out of this taxation system are many. In fact, it is more efficient than the now proposed Mineral Resource Rent Tax. Calculations show that MRRT would yield lesser revenue than RSPT over the first two years of coming into being (OECD Economic Surveys: Australia 2010, p.69). Going by “Hartwick’s Rule”, in order to manage a sustainable natural resource efficiently, the amount of the declining stock of a non-renewable resource should be compensated by future investments so as to preserve the society’s net present and future welfare. These non-renewable resources belong to every individual in a nation and therefore the benefits should also get distributed among everyone from the present and the future generations. The proposed tax system by the government is also expected to raise the national savings. The higher resource rents can pave a way for complementary policies like increased retirement savings, more of investment in small and medium enterprises, more of infrastructure spending etc. As per the proposal of the government, the increase in the rate of contribution towards superannuation from 9% to 12% will result in a direct increase in household retirement saving. Again, a tax discount on the earnings arising out of interest payments will increase the rate of return to savings. (OECD Economic Surveys: Australia 2010, p.72) The government also plans of diverting some of the obtained resources for financing infrastructure by creating a fund called the “Regional Infrastructure Fund” where 2/3rd of the net assets from these funds will be allocated to the two prime mining states of Australia, namely, Western Australia and Queensland. In order to reach the level of expected development of these two states, in terms of the population and livelihood activities, they will need substantial infrastructure development at a much faster pace than the rest of the nation. (OECD Economic Surveys: Australia 2010, p.73) This tax would also have been beneficial for the small miners as the present royalty regime would be removed. If a person does not make super normal profit, then he/she will not have to pay the tax and in case of losses the government would have paid for it. The costs which could have aroused out this taxation system are the problems of tax evasion and reduction in investments in mining sector in Australia. Conclusion Given the huge mining boom in Australia it is suggested that the benefits of this boom be distributed among all Australians and taxation is the way. Super profit tax policy is a good framework. It can lead to higher savings for future generation; reduce the negative externalities attached with mining, avoid market failure and increase the welfare of the nation on a whole. Recommendations: It is recommended that this tax should be applied in its original form because it will generate more revenue than the recently proposed framework. Figure (c) in the appendix shows the amount of tax revenue that would have been generated had this super profit tax been applied. Is Mining Super Profit Tax Good? I would therefore recommend that the Mining Super Profit Tax is a good policy measure. Reasons for my saying so are- a) Resource prices are now very stable at very high levels. The profit that the miners are earning is pretty high and it is in no way related to the cost of production. This tax also has the provision that in case a miner is not earning super profit, then the tax need not be paid. b) The earnings out of these taxes can be used for the welfare of the nation. As mining is similar to selling off national resources, it is only fair to distribute its benefits in the community. c) Going by the trends of the economic growth in India and China, the demand for these resources have increased many folds. Time will soon come when we’ll see that the production will not be able to keep pace with the demand. As a result of which market prices will see a huge variation with the production cost and the competitive market framework will break down. Government intervention becomes important in this case to avoid market failure and this proposed rent tax is the solution. d) Mining has externalities attached to it. In case of externalities, it is seen that the market price of the good is no indicator of its true cost. By imposing tax on miners, the revenue generated from the tax can be used to address the negative impacts of mining on the environment. (Perkins, 2010) My only suggestion in this regard will be additional introduction of marketable permits which will help the government to control the rate of extraction as well. Appendix: a) b) c) Read More