Minerals in the ground are not actually worth very much until somebody comes along, digs them up, cleans them up, and sells them on the market.
It turns out that the real value-add is in the digging up and cleaning up part of the process. The people who do that bit tend to get most of the value of the final product. That's the mining corporations.
In Australia the Crown owns the minerals in the ground and gets royalty payments. Nobody is suggesting that miners don't pay royalties.
There are a number of furphies associated with the Rudd government's Resource Super Profit Tax.
The first furphy being that miners don't pay their fair share for the minerals. Actually the miners pay exactly what the Crown demands. The state governments' charge as much as they think they can get away with. It turns out that mineral wealth is not as rare as our federal politicians would like to think. Even worse, for most commodities, the supply is very elastic.
Consider gold; all the gold that has ever been mined is still in existence. If the price of gold was suddenly to sky-rocket people would sell their jewellery. Sure coal is burned as it is used, but most commodities are long-lived once they have been dug up.
An extremely dangerous furphy is being pedalled by Kevin Rudd. The miners are foreigners and the money goes offshore, so Australia is just getting its share of the money. Xenophobia has a long and disreputable history in Australia. The mining industry is an important component of the Australian economy and is fully integrated into the economy.
The mining industry doesn't just provide jobs in rural and regional areas; it provides investment opportunities for superannuation funds. Even more important; Australia has a capital account surplus. That means we are reliant on foreign investment and foreign savings to maintain and sustain our way of life. Scaring off foreign capital will be a very expensive exercise that will quickly flow through the entire economy.
The Rudd government is starting to tarnish our reputation as a safe haven for capital and investment. Last week the government threatened to expropriate the intellectual property of tobacco companies. They are an easy target with few friends.
This week, however, the Rudd government moved into serious sovereign risk territory. The Henry Report defines sovereign risk as the risk that future government policy will reduce the value of investments. People are going to start noticing that property rights are under attack.
One of the more bemusing aspects of the Henry Review occurred when it acknowledged that changes in government policy create perceptions of sovereign risk but then claimed that the mining tax would lower that risk. That's not what market participants seemed to think. It isn't really appropriate that some Canberra bureaucrat lecture investors on the incidence of sovereign risk.
Desperate cash-strapped governments with dodgy taxes are hardly new in human history.
A third furphy is that the mining super tax will lower the cost of capital for other industries in the economy. Some have even argued it would lower the cost of capital for miners! That latter argument is simply false.
The initial market reaction was to wipe billions of dollars off the value of Australian mining stocks. That means the cost of equity capital has increased for Australian mining. For everyone else the argument seems to be that by sabotaging mining we can avoid Dutch disease (the economic problems associated with a strong dollar).
But the solution to Dutch disease isn't to treat the symptoms. Many Australian industries struggle to perform on the international stage because their cost structures are too high. Government contributes to those costs through excessive bureaucracy and red-tape.
Ongoing and aggressive economic reform will do more to alleviate any Dutch disease problems than would any other government policy. Reducing the tax burden and cutting government spending would help too.
Then there are problems in the tax design itself. At present the government proposes to levy the super profit tax in addition to the normal corporate tax. But we know that mining is subject to booms and busts, why add that volatility to government finance?
The Henry Review concedes that revenue from this tax would be more volatile than the current state-based Royalty system. This increases the probability of budget deficits over the business cycle. When this type of tax was first proposed in the 1970s the idea was that miners would either pay the super profit tax or the corporate tax but not both.
A final furphy is that we shouldn't really worry about the super profit tax right now. Common sense will prevail and the proposal will be watered down.
That may well be true, but in the meantime the Rudd government with its desperate dash for cash and populist demagoguery may well spook foreign investors and undermine our ability to attract international finance.
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