The Commonwealth Mineral Resources Rent Tax (MRRT) on new coal and iron ore mines creates doubts over whether it is the State or Federal Government that holds the taxation rights over minerals.
This will spark competitive taxation measures.
But the MRRT has even greater consequences.
The new tax is to raise an additional $3.7-4.0 billion a year from iron ore and coal. These two sectors would face higher taxes than other industries, and taxation rates well in excess of those of our overseas competitors. This industry disadvantage is compounded by the carbon tax.
Most governments nurture their countries' stellar performing industries. Thus, US governments promote patent protection, which is vital to the success of key American industries like pharmaceuticals and information technology.
By contrast, with the MRRT, Canberra is pursuing a tall-poppy lopping exercise that will penalise Australia's most prospective industries. No economy has ever prospered from such an approach.
Canberra says its additional mining tax will provide a fairer return to the people as the owners of the resources. But to get a higher return on our resource wealth first requires the mineral wealth to be found and its development funded.
According to the government, its new tax will simply transfer profits from companies to the community and have no adverse consequences, because mining companies earn particularly high profits.
In reality, a tax having no adverse effects on incentives is as unlikely as locating the ''philosopher's stone'' that turns common metals into gold. Moreover, Australian mining companies taken as a whole earn profits no greater than average. Those firms making megabucks are counterbalanced by others with less luck or skill.
A new iron ore deposit, like a new piece of technology, must be discovered, researched and proven before it has value.
Exploration is the precursor to new mines, and Australia accounts for around 12 per cent of global exploration spending. But high taxation levels can seriously reduce exploration activity. In the past, South Africa and Mongolia have both experienced exploration slumps in the wake of new high taxes.
Placing an extra impost on miners reduces their incentives to explore and dig. An additional tax dampens the search for hidden mineral wealth and means fewer finds will be made and fewer discoveries will be developed.
The Australian MRRT's dampening effect on new development hits the very industries that have underpinned our prosperity. In this respect, the Australian Government's actions would be like the US imposing a special high tax on new ventures in its world-leading semiconductor industry.
Mining now comprises almost half of Australia's major new private investment, up from less than a fifth 20 years ago. And there have been immense spin-offs on sectors servicing this remarkable upsurge.
The MRRT's $4 billion-a-year tax grab on coal and iron ore mining firms amounts to about 1 per cent of Commonwealth tax revenue. It falls on the two sectors that have been the key to Australia's success within a troubled world economy and introduces a real risk of strangling growth in the industry and the nation as a whole.
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