Tuesday, May 04, 2010

Why a Resource Tax is Resource Theft

Australian mining is currently keeping the Australian economy afloat (and by extension, ours), and Australian mining stocks are among the largest resource stocks on the London stock exchange.  So K.Rudd’s plan to “soak the miners” affects more than just Perth-based industrialists and shareholders in BHP.  Kris Sayce from Money Morning Australia explains why the K.Rudd’s resource tax is a resource theft.  Gerry Brownlee, take note.

Why a Resource Tax is Resource Theft 

by Kris Sayce_Kris_Sayce

There’s a lot of noise flying around about the publication of Emperor Ken Henry’s Australian tax review on Sunday.

But let’s get one thing straight. Behind all the sound bites about “helping battlers” and “ensuring the rich pay their way” and “closing loopholes” and “making tax returns easier”, the ultimate objective is for the government to increase the amount of tax it takes from you.

When the government says it wants to make the tax system more efficient, it means that it wants to make it more efficient for it to take your money.

When the government says it wants you to be able to lodge your tax return with the click of a mouse, it means it wants to make it easier and quicker for the government to take your cash.
There is zero chance of the tax burden on Australians being reduced as a result of the Emperor’s tax review.

Unfortunately we don’t know what’s in the review yet, that will be released on Sunday. But one of the hot topics is the supposed resource rent tax. It’s the idea that mining companies could be taxed up to 40% of their profits. And that this would replace state royalties and the corporate tax rate.

What will that mean to Australia’s resources companies? According to Digger’s & Drillers editor Dr. Alex Cowie:
    “Miners currently have a 30% corporate tax rate, with state production royalties of 2-8% on top. The theory goes that the review would scrap both taxes, and replace them with a single 40% tax rate. Those companies already paying higher royalties, such as coal producers, would be less affected by the change than those companies paying lower royalties, such as gold producers.
   
“We will hopefully get better clarification on how this works on Sunday. More tax on mining companies would clearly be a disaster for investors. One analyst at Merrill Lynch estimated this would reduce Rio’s profit by 30%. However this big effect is mostly due to the low (mates-rates) royalties Rio currently pays.
   
“Looking on the bright side, there are a few obstacles in the way of the proposed tax changes. Realistically, the state governments would first all need to agree to give up their royalties, which would be about as easy as rounding up a room full of cats. WA’s premier, Colin Barnett, is getting ready to defend his state’s royalties with a good punch-up with Kev if he has to. The resource sector is not taking the proposed tax very kindly either.”
But not surprisingly, the collectivists such as the trade unions think a resource tax is a wonderful idea. As Tony Maher, the top commissar of the Construction, Forestry, Mining and Energy Workers’ Union (CFMEU) told the ABC:
    “This is a tax on the super profits, the profits above and beyond a normal or generous rate of return… They should share some of the billions they are making with the community.”
He goes on:
    “Everybody knows that no-one likes to pay tax, but they have to pay a tax on the resources that are owned by the Australian people that they make squillions [sic] out of. It is only fair and it is the smart thing to do. Other countries have sovereign wealth funds. This is the opportunity for the Australian people to have a sovereign wealth fund that can pay dividends after the minerals are gone.”
We’ve chosen these quotes because they contain everything that is wrong about the socialist and mainstream approach to economics.

We’ll look at the key points that Commissar Maher raises. Although we’ll point out that he isn’t the only one with this view. And we’ll also point out that it isn’t just the ’socialist socialists’ that adopt this view either. It’s the ‘conservative socialists’ that take pretty much the same line.

So, let’s take a look at the first point, the idea that “This is a tax on the super profits, the profits above and beyond a normal or generous rate of return.”

Our simple question is, if current profits are “above and beyond” what the socialists determine to be a normal rate of return, what level do they consider to be a normal rate of return?

Is a profit of $1 billion too much? What about $990 million? Or $826 million? Would that be OK?
And who determines what that profit level should be? Do these control freaks envision a panel of [hehem] experts setting profit levels for specific industries?

Retailers can make X amount of profits. Miners can make Y amount of profits. And chemists can make Z amount of profits.

But then what happens to a diversified company such as Wesfarmers?

It’s clearly a lot of nonsense.

What Mr. Maher and others fail to appreciate is that there’s no such thing as a “normal” rate of return. There’s no such thing as a “normal” profit. “Normal” profits only occur in the mythical world of a planned economy.

Except that in those circumstances, the profits aren’t real anyway.

A profit only occurs if consumers are prepared to pay more than what it costs the company to produce the product. A profit level can’t be arbitrarily set by a Profit Tsar.

If consumers don’t believe a certain product is worth the price set by the company then consumers won’t buy it. The company will have to reduce its price. And sometimes it may have to reduce the price so much that it makes a loss.

Maybe in the world of trade unionists they’d prefer that companies didn’t make any profit. But then of course what would be the incentive for the entrepreneur to go into business in the first place?

These so-called super profits merely indicate that buyers are prepared to pay up for something they want. It’s a bit like housing right now. Buyers are prepared to pay ever higher amounts for a house.

There isn’t much different as far as we can see. Except one – resources – has an end use, whereas the other – housing – is bought simply in the belief it can be sold at a higher price to someone else.

But in both cases the boom won’t last. The housing market will crash and burn. And China will crash and burn too.

Both are inevitable. But that’s a different story…

So, the fact is, there’s no such thing as a normal profit level.

What about the next part of Commissar Maher’s statement, “They should share some of the billions they are making with the community… they have to pay a tax on the resources that are owned by the Australian people…”

Sayce001
We have to say that those comments are the biggest load of hogwash there is. But again, Maher and the union movement aren’t the only ones to say it. The idea that all Australians own the natural resources in Australia is engrained in people across the country.

But is that really the case? Do you really own 1/22,000,000th of BHP Billiton’s Olympic Dam project in South Australia?

Do you really own 1/22,000,000th of Bow Energy’s coal seam gas fields in Queensland, or Woodside’s gas fields on the North West Shelf?

Of course not. You no more own 1/22,000,000th of the natural resources of Australia than do you own 1/22,000,000th of your neighbour’s backyard.

Just because Western Australia has a whole bunch of iron ore and copper several hundred metres below the surface doesn’t make it the property of the nation.

I mean, what have you or I done about all the natural resources buried deep underground in Western Australia? It’s not as though we’ve been in any hurry to raise millions of dollars in capital, pick up a shovel and head west. Well, maybe you have, but your editor hasn’t.

The fact is, the natural resources that are underground are owned by no-one. They only become someone’s property when an individual or an organisation invests the capital to recover them.

At that point it’s their property and they should reap the rewards of taking the risks. After all, how many explorers spend millions and billions searching for a resource only to strike dirt or water? The Australian Stock Exchange is littered with zombie miners perennially searching the outback for one big find.

Think about it, why should your editor take a 1/22,000,000th stake in Fortescue Metal’s iron ore mine when we’ve not done one single thing to earn it?

But let’s look at it this way. Let’s say a 40% tax is introduced on resource company’s profits. That means the “nation” supposedly gets 40% of the profits and the company and its investors keep 60%.
If we’re talking about having a fair tax system, how is that fair? The resources explorer only gets to keep just over half of the returns yet it’s the resources explorer and its investors that have taken all the risks.

The explorer will have spent millions of dollars searching for the resource. It will have spent millions more trying to recover the resource and then processing it. And then when all that’s done, the government steps in and says, “Thanks, we’ll take 40%. And if you don’t hand over the cash we’ll send you to jail. So pay up sucker!”

What has the government done for the money? Nothing. And what have you or I done, each as 1/22,000,000th owners? Nothing.

And as for the idea that resources companies should share the bounty with the community. Well, they already do that. They employ people to work at the mines. Those people don’t offer their labour for free, they demand a wage in return.

Then there’s the allied services that benefit from the exploration of the resource. And we’re talking real investment here, not a sham investment of building a school gym or a new hospital wing.

Not to mention other beneficiaries in the community. Such as steel makers who need iron ore. Or construction firms who need steel. Or electricity installers who need buildings to install wiring.

That’s what real investment provides to a community.

Of course, we suppose the nanny-staters wouldn’t get that. They’re too busy believing that money can just be printed to build stuff rather than wealth being created through real investment.

And don’t forget, you can draw a straight line from the mining sector all the way through to personal taxation. The government does the same with your income.

It would seem that if we use the same standards applied by Maher to the mining industry then the same standards must apply to your income. That is, that each Australian owns 1/22,000,000th of your income.

That’s why at the end of each week you only get to keep about 60% or 70% of the money you make. The rest is syphoned off to be shared by the community.

Finally, what about the idea of a sovereign wealth fund, “This is the opportunity for the Australian people to have a sovereign wealth fund that can pay dividends after the minerals are gone.”

Sayce002Again, it’s the idea that money should be taken from you and given to the government to invest. Supposedly on your behalf. In reality it’s on the behalf of the government and its cronies.

Unfortunately, a sovereign wealth fund is undoubtedly on the cards. It’s the next logical step for Australia’s superannuation system. As we pointed out yesterday, it’s all about taking away control from the individual and placing it in the hands of “experts” and bureaucrats.

Make no mistake, Australia and all Western nations are heading down the same path of self destruction. It’s an economy where entrepreneurialism, initiative and effort are despised, frowned upon and penalised by coercive governments.

And where the mainstream view decrees that entrepreneurialism, initiative and effort are surplus to requirements because as Prof. Kriesler from the Australian School of Business reminds us, “printing money as a way to increase demand is a good move.”

Why go to all the trouble of exploring for minerals in the middle of a desert when the government can just print money and use coercive means to take it from its citizens instead.

I don’t know about you, but it’s pretty clear which one provides a real benefit to the economy and which one is a money printing, inflation loving parasite.

Cheers.
Kris.

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8 Comments:

Blogger Shane Pleasance said...

Gulch fodder.

5/04/2010 02:02:00 pm  
Blogger K said...

This comment has been removed by the author.

5/04/2010 06:21:00 pm  
Blogger K said...

Becuase they are increasing taxes on one of the few indusries that can't just move off shore, this tax does in part recognise the ability of most businesses these days to take their business elsewhere.

5/04/2010 06:23:00 pm  
Blogger gregster said...

I like this guy Sayce.

Who watched Princess Xena against Gerry Brownlee last night?

He failed to make any principled argument against her juvenile bile.

We're fucked.

Vote Libz, and make your way to the Gulch, if you can find a way.

5/04/2010 09:21:00 pm  
Blogger ZenTiger said...

Of course not. You no more own 1/22,000,000th of the natural resources of Australia than do you own 1/22,000,000th of your neighbour’s backyard.

What a great comment.

However, it also cuts the other way: Why should some-one "own" the mineral wealth they extract from my back yard, even if they use the logic "well, you didn't take advantage of it, so it's mine".

Nominally, the property belongs to the Australian people, through it's administrative arm, the Australian government.

Anyone who wants to "extract the wealth in the ground" at their risk, still needs to pay for access to the property.

The government could charge access up front, or offer an easier payment option of skimming the profits.

At some point, skimming the profits becomes a rip off and there will be no deal done. But perhaps that's their property right?

5/05/2010 05:28:00 pm  
Anonymous LGM said...

ZenTiger

"Nominally, the property belongs to the Australian people, through it's administrative arm, the Australian government."

That statement menas the Australian people own no property. Think on it.

Worse luck for Australians is they certainly do not own the government. They sure don't control it either. It controls them.

By the way, government does not have rights. Rights are a principle that applies to individuals only.

LGM

5/05/2010 07:17:00 pm  
Blogger ZenTiger said...

I don't follow your line of logic LGM.

Governments might not have rights, but they can still own property.

Otherwise, corporations representing shareholders cannot own property.

If entities cannot claim ownership of property, and then have that entitlement respected in the form of rights to the property, we can take back all the land owned by trusts, and corporations.

And corporations have no legal rights, because they are not people either, yet they are treated like people under law.

So your point is just a diversion.

The land and mineral rights have been claimed by the government, who then has the authority to sell or lease those rights.

They are currently wanting to put a price on it that mining companies don't like.

All they are talking about is instituting a progressive taxation system for companies just like they do for individuals.

I do not like big government, and I don't like progressive taxation, but they are separate issues to the notion that mining companies don't have to pay something to take land considered owned by another entity. They can't walk into my back yard and start drilling without paying me for the privilege, and they can't walk into the Australian outback and declare they own the land and start drilling without checking to see if a prior claim on the land exists, and then negotiating with the owner for access. That owner is currently the Australian Government, or some lucky landowner.

5/05/2010 09:23:00 pm  
Anonymous LGM said...

Zentiger

"Governments might not have rights..."

That's your position undermined right there. The Individual Right of acquiring, owning and disposing of one's own property does not pertain to collectivist government (such as the ones that persist in Australia presently).

"Otherwise, corporations representing shareholders cannot own property."

No. Wrong. You are treating collectivist government and voluntary association, through corporations/companies, as though they were the same. They are not.

Corporations do not "represent" shareholders, they are OWNED by shareholders each of whom holds ownership in a share of the assets (hence the term "shareholder"- share holder).

The shareholder is able to voluntarily purchase shares in agreed conditions (constitution of the company, articles of association, contract of sale and purchase, limitation on liability, etc.). He is able to exercise his property rights in the assets which he partialy owns according to the voluntarily agreed conditions he accepted at time of purchase. Most important, he may dispose of his property, his shareholding, should he decide. He can even decide to sever all future association, trades, collaboration, co-operation, transactions with those assets, the other shreholders, the staff/management of the company etc.

That is not the case with government.

Government and corporations/companies are not the same.

--

"The land and mineral rights have been claimed by the government"

And that government claim can be employed arbitraily to include any and all property at any time, such as "your" back-yard. In other words, the system you promoted in your initial post means that you, as with other residents of Australia, do not have the Individual Right to your own property recognised by government. That brings us back to my original point (written in reply to your 1st post). In practice, you do not own anything.

"All they are talking about is instituting a progressive taxation system for companies just like they do for individuals."

Which means they are talking about theft, a destruction of Individual Rights, again.

LGM

5/06/2010 07:33:00 am  

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