Ken Henry revisits the RSPT debacle

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.

Houses and Holes
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Comments

  1. The way things are going, the tax may only capture the tail-end of the mining boom. It’s a shame it didn’t work out though as even that would be good.

    I think the real tragedy is that corporations were allowed to openly fib and basically take control of the nations politics. Democratic power of free speech should be biased towards numbers not dollars.

    • “Democratic power of free speech should be biased towards numbers not dollars”.

      100% True Tomek – But no one believes that anymore – if they ever did. The ‘system’ has always been bent – it’s just not even a ‘secret’ anymore.

    • Democratic power of free speech should be biased towards numbers not dollars.
      .
      I agree with you, but that train left the station a long time ago.
      .
      Now, it seems even people power does not matter. For a recent example, look at the corporate media coverage of the OccupyWallSt protests. In cases where the MSM has covered the event (most have simply ignored it) the description of exercise of free speech by ordinary people is massaged by the corporate MSM in such a way that it appears the people are a violent/loony/extreme/lefty/commie/union thugs.

      • I have noticed that. It is absolutely disgusting. It is a combination of two things though. One may be MSM captured by corporate interests but I think its also largely laziness on the part of people and governments no longer listening to them.

        Firstly, more people should be out there in those Wall Street protests. Secondly, as one commenter in NYTimes wrote, you cannot achieve anything these days with peaceful protests. How many people were against the war in Iraq? How about the 75% of Germans opposed to further bailout money for the PIIGS? The trouble with today’s democracy is that you can have majorities agreeing to a policy but the government just has to applaud the wonder of a free democratic society and then ignore their demands. The examples of this are everywhere.

        I hate to sound looney myself but it seems that the most successful democracies at the moment have been in the middle east “springs”. If people simply answered a questionnaire, or marched peacefully they would have been ignored (or shot). Only when they forced victory through physical numbers and revolution did things change.

        I don’t condone people voting through violence but that is the only true ballot box left. The issue is that people shouldn’t have to resort to lynch mobs when there is a majority consensus for a right cause. Democracy means that governments should listen to the people, particularly when there is a majority consensus. It is when this rule breaks down that revolution is required. But who can be bothered?

        • I agree, but at least for now Australia is not America.

          A macrobusiness blogger was the front page of business day today. Sure the article was spruiked up a bit, but it is not the first time this superblog has been available in the MSM.

          At least for now, independent media still has a voice in Australia. I genuinely hope that lasts and Macrobation continues !!!!

          • “I agree, but at least for now Australia is not America.”

            That is right, but it is only a matter of time and when it will become like America, not whether it will. There is a very long way to changes, because people have to starve to take their destiny in their hands. It won’t be through peaceful protests, because there are only very few cases in human history when the power and the people rights were taken back through peaceful ways. And the history and necessity are the best teachers of all.

      • If this thing happened in China, what would the Western Media including Australia Media like to say. They will say: China, no human rights.

  2. It’s a tough job if you’re getting political pressure like he did, but the tax like you say was very poorly sold ;that’s a recurring theme IMO.

    If you look at the guy’s face (I don’t think he hides his disgust very well), and I don’t think he’s recovered from the office, so I can’t see why he took the job as Julia’s economic adviser after all he’d been through. Still he might have a better chance in that role than some professional body or academia to influence policy.

  3. 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.
    .
    It seems Paul Howes of AWU is reading up on Saul Eslake’s suggestion – he suggested something similar during an ABC 7:30 report panel discussion with Heather Ridout (AiG) and the lady founder of Boost Juice (LFBJ).
    .
    But more importantly, there’s an issue at the moment where you do have large sections of the economy, large sections of industry that should probably have a cut in their taxation – the manufacturing sector, the retail sector, the tourism sector – those trade-exposed sectors which are doing it very tough at the moment. But I don’t actually believe that the mining sector or the financial services sector needs a cut in their tax rate.
    .
    In response, Ms Ridout babbled some gibberish and LFBJ changed the topic to industrial relations!! And I felt like banging my head against the wall.
    .
    http://www.abc.net.au/7.30/content/2011/s3332282.htm

  4. Ken Henry visionary??? Because he saw Dutch Disease coming???
    What a load of tripe. This bloke was an active part of the sort of ‘Dutch Disease’policies that saw the destruction of the social fabric of rural society and the hollowing out of the whole of inland Australia. He didn’t give a damn about it nor the people so badly affected by it. Dutch disease had been happening in Australia for 50 years before Henry had the slightest inkling of it.
    He didn’t see a damned thing!! Even after the GFC hit he still couldn’t see the problem.
    Now he is portrayed as some badly wronged ‘visionary’ Give me a break!

    Lastly Henry did NOT propose a Super-Profits tax. He proposed a particular confiscation of the proceeds of a particular sector.

      • You don’t think your constant sloganeering and total lack of consideration of anything outside your resentful beliefs is repetitive?

        • Atleast my “sloganeering” has variety — I railed against Ken Henry being hired to write up a report on Asian trade.
          .
          You seem to have a single point agenda here – Mining tax bad and anyone who is for it is evil. Do you think Saul Eslake is evil too?

  5. Mining companies pay enough tax. Go peg ground bust your gut for 10 years and go earn your own “super profit”. Any australian has the opportunity. Too hard you say? Then invest in one on the share market, plenty around. You can even buy the big guys, BHP or RIO and share in the rivers of cashflow. If you did, then you might be agrieved that after analysing the prospects of your investment, the Government decides it needs money and takes 40% ownership of your investment. Whats more it wants you to fund their 40% share out of capital on day 1. Then it issues a trust me, if there a losses I will provide refunds on my 40% share. You think an investor now trusts a government to do this? You guys are just aggrieved you didnt have the foresight to invest in minerals when others did. Risk and return.

    • There are bigger issues than simply making money.

      Mining booms are extremely disruptive. Beyond the ‘Dutch Disease’, the sudden inflow of money into the mining towns can make life extremely miserable for the anyone who is not a miner. Furthermore, it puts a lot of strains on infrastructure like ports, road and rail, and these projects are very capital intensive. This is why Australia is still running a current account deficit despite the record export numbers.

      The foreign ownership of mining companies also pose a problem with collecting taxes. It make more sense to put a tax on the amount of mineral that is extracted, and then offset that against the company tax. The revenue should be shared between the States and the Federal government, and the tax should replace the royalty system currently in place.

      It may all become academic if commodity prices crash like 2008. Let’s hope we won’t have another episode of a mining company selling the farm to China for a song this time.

      • Yes, it may all be academic. Nonetheless, mining has been undertaken for most of this country’s history, with little interest or concern displayed by the wider populace. Royalties remain the recompense, if you want change challenge the Constitution. Don’t forget that in normal operating circumstances many projects are marginal at best. A boom is a boom – something in Australia we are only to capable of decrying rather than celebrating (no matter how shortlived). At present many other nations would love a boom – any boom. Here we can only muster the enthusiasm to look for the pitfalls, the flaws, the inequities and seem to genuinely lack the ability to enjoy it while it lasts. Rather we seek to blame a raft of economic conditions on the mining boom – tall poppy cutters we remain. Without the boom our current position would be considerably more dire.

        Mining boom towns in WA seem to be affected differently from those on the east coast, fewer obvious ‘miseries’ – after all, generally you are in these remote locations for one reason only (excluding absconders from the law).

        As for selling anything ‘for a song’, as Flawse often reminds us, this has happened for decades. No ‘this time’ about it.

        It would be most unfortunate if global economic forces aligned to end the resources boom any time soon. One thing you can count on, it will resume.

        • Selling for a song! Yep this isn’t new. Xstrata probably have a yearly laugh at Australia party as the directors fly into Switzerland in their private jets.

  6. Eslake also spoke about the nonsense of negative gearing – would be keen to see MB follow that up with an article as well.

  7. Let’s cast our minds back to the release of the H review (and I’m not picking on one side of the sludge that is the party system here because my distain spreads fairly). From the review we ended up with a pretty reasonable summary of the opportunities to improve the tax transfer system…and then the politicians got to it.

    First they held on to the report for as long as possible (and gave it a bit of a tweak) then in one of the most sickening spin jobs I have ever witnessed they released a response that all but ensured the failure of any resource rent tax by spinning it into a ‘super’ tax while trying to hide the fact they were doing nothing about the other 130 or so issues.

    Henry may have couched the report and the resource rent tax in complex terms but then it was a tax review by experts. At the release H looked a broken man. H is not really a fair target for what was yet another massive political system failure.

    • He shouldn’t be too despondent. Over the last forty years we have had around half a dozen reviews of the tax system. Most of them suffered the same fate.

      • True – it appears to take about 10 – 20 yrs from report release to idea implementation in the aust tax system. The viable options both politically and commercially eventually gain traction.

        But that is not why I think Henry looked broken – he looked broken because he had to sit there and be associated with some of the smarmiest spin ever. Arguably spin of such mind-numbing banality that it set a new benchmark for Australian politics.

  8. ““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”

    And this is precisely why the super-profits tax is a completely ridiculous notion. Henry is using arguments originating in Ricardian times that “economic rent” exists as a differential between the productivity of a piece of land versus the productivity of the most marginal piece of land in use, and can be taxed without consequence.

    What he is saying here is that you could apply a 100% tax on super profits (which are defined as the excess of profit over the profit attributed to using marginal land) and not affect the investment decisions of a company. In Henry’s version, rather than being based on the marginal land in production he is using an arbitrary rate of return as the “correct” level of profit with everything above being “rent”.

    It should be immediately obvious why the entire concept is stupid. The theory says that you can tax away everything above marginal profit without affecting the economy. In Henry’s case, marginal profitability is arbitrary, so immediately his argument is flawed (if i drop the accepted margin rate, can i now tax even more “super profits” without effect?). Using the classical definition, the use of ‘marginal land’ sets the rent because its assumed that the most productive land is utilised first. So the “normal” level of profit is set by the worst land, and can be clouded by prices, land availability etc.

    It only takes a little bit of thinking about the concept to see how ridiculous it is. There is no way that policy should be set based on such a stupid piece of economic thought.

  9. As has been noted by the man himself I think or was it Eslake, nevertheless the point remains nearly everything said was predictable.

    We all knew this before and we all know it now.

    So it is completely understandable to me that the RSPT was simply announced. Consultations and forums are just a waste of time when we all ready know every party’s answer.

    We forget that those in power in politics job is to act, not to talk us to death – which ironically we seem to prefer.

  10. It’s easier than that. You just tax the resource itself the exact same way petrol is taxed.
    Renewable/recyclable resources get a low price, non-renewable resources get a higher price. Exports too.
    Carbon and mining tax rolled into one simple package.