Friday, June 4, 2010

Don’t Mention The Super Tax

One of the wealthiest blokes I ever met, a fellow long since gone to the great country club in the sky, once said “Don’t complain about paying tax: if you’re paying tax it means you’re making a profit.” It’s a piece of advice which might sound a little old fashioned in a world where everything that cuts into the bottom line is considered evil, regardless of whether there is any benefit attached. But it might be worth remembering when considering the current argument over the proposed Resource Super Profit Tax.

The mining company Xstrata has made front page news by claiming to suspend two projects in Queensland at the cost of more than 3000 jobs. The fact that the vast bulk of those jobs do not yet exist has been bypassed in much of the argument which has ensued, and the 60 contractors who were due to start have all reportedly moved on to other jobs without any problem. Such is the demand for workers in the mining sector, which is a pretty good indicator of the strength of activity in the sector.

But while nobody is actually lining up to claim the dole just yet, this announcement has been represented by the mining lobby as an example of the impact of the proposed new tax. The government on the other hand insists that the decision to suspend the projects was driven by other factors, and that Xstrata and the rest of the mining lobby are using it as a tactical ploy in their battle against the tax, using the jobs of hard working Australians as nothing more than pawns in the process. You don’t have to be too cynical to see that this could be the case.

The biggest problem the Prime Minister seems to have is his apparent propensity for imagining that he can run everything himself, without fully consulting anyone else, and expecting that everyone will just do as they’re told. The fact of the matter is that even the mining lobby wants tax reform, but the way the government has pushed the proposal onto the sector has been counter productive. It’s not the idea of a profits based tax that is the problem, but the questions of how much, who pays, and to whom.

Properly designed, such a tax would actually help the mining sector operate more efficiently, while also delivering a realistic share of the so called “super profits” to the government. If you only pay the tax on windfall profits it should be self evident that it is not going to send the big miners, or anybody else, broke. The real argument should be about the definition of just how much is a super profit, meaning where to set the threshold, and how big a slice is fair, while relieving the miners of the burden of the state royalties which they currently pay.

Of course, a big part of the problem has been the terrible way in which the government has presented its plan. If they paid any marketing or public relations consultants they should ask for their money back, because it should never have been referred to as a new tax. Nobody wants a new tax because we already have to pay far too many taxes. Instead, it should have been described as a new tax system, just as the GST was when it was introduced. And it should never have been called the Resource Super Profits Tax, because everyone is just referring to it now as a “Super Tax” and nobody likes the sound of that.

If taxes are bad, then you could be forgiven for thinking that a “super tax” must be super bad. It so easily gives the impression of being such a monster tax that it will suck all the money out of the industry, when the truth is that there is zero impact on operating costs. In fact, when you take into consideration the reduction in company tax, the rebates on royalties and the rebates for investment, it should actually help reduce operating costs, leading to bigger profits in the long run.

In the end, if you’re paying a lot of tax, it is only because you are making a truck load of profits, and who in their right mind would complain about that?

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