Peter Martin reports this afternoon from the Tax Summit that:
Former Treasury boss Ken Henry has conceded he mishandled the selling of the mining super-profits tax the former Rudd government proposed last year.
Addressing day two of the tax summit in Canberra, Dr Henry said his review took for granted that Australians understood the difference between normal profits and super-normal profits.
“The tax on the former should be expected to affect the pattern of real economic activity while a tax on the latter – that is a tax on super-normal profits should not,” he said.“Our review took for granted that this point was well understood. The authors of the Mirrlees tax review in the United Kingdom appear to have made the same judgement, the distinction between normal returns and above normal returns is fundamental to several of their more important recommendations. But I have to say, in retrospect in the Australian setting, rather less should have been taken for granted.”
The former Treasury secretary counselled against announcing big visionary ideas without prior discussion – the approach the government took to introducing the mining tax.
“Good policy outcomes are more likely where there has been high quality debate,” he said. “Good policy outcomes are much more difficult to secure where visionary ideas, big challenges, and creative approaches are floeted for the first time in the announcement of a policy decision.
“The better outcome will usually be achieved when the visionary idea is so well accepted that it seems banal – where the challenges are so broadly accepted that everybody is worried sick by them and when approaches to dealing with those challenges appear merely natural.
I feel sorry for Ken Henry. He was visionary enough to see Dutch disease coming and had the cojones to do something about it. And he’s right, it was always going to be difficult to push a policy through vested interests in advance of much of the problem.
But, there were also legitimate problems with his design of the tax that made it a sitting duck for vested interests. The primary being that the tax was extremely complex, even to experts. It’s core was a kind of weird-ass rebate system that handed a virtual 40% ownership of every covered mine to the government. This had the practical problem of markets somehow having to value (and probably undervalue) the tax credits that formed the basis of the rebate. And the political problem that, given those mines were largely owned by such private Australian icons as BHP and Rio, it was always (and rightly) going to be compared with a kind of psuedo-socialist grab.
Saul Eslake has since illustrated just how unnecessarily complex the tax was in his suggestion that you simply toggle corporate tax rates:
Surely a better and simpler way of procuring for the Australian people as a whole a larger share of the value created by the exploitation of the finite resources of which they are the ultimate owners would be for the federal government to legislate that, for as long as the prices of prescribed minerals are above some level (such as their average in 2004-05), the tax rate paid by mining companies will be, say, 33 per cent, while (for example) the tax rate paid by other companies will be, say, 27 per cent. (This would be a mirror image of the income tax exemption which used to apply to gold mining companies from 1933 – another concession to WA – until 1991.)
It might be necessary to apply some kind of grouping provision to prevent mining companies from diverting income into affiliated entities in order to avoid the higher rate of tax. But that would surely be simpler than the bureaucracy required to establish a brand-new tax – and probably less vulnerable to political criticism on that score as well.
Ken Henry is right, the tax was poorly sold. But it was also unsellable. In the end it’s probably not his fault. Someone with political nous should have been on the Review board.