Three points on RSPT

Three points about proposed "Resources Super Profits Tax" that I wish people would talk about more:

1. Dutch Disease
Dutch disease starts when you build a mine and start exporting your resources. If you are a miner, this is great news because you're making money. Importers go to foreign currency markets, trade their own currency for Australian dollars and use the AUD to pay you. Fantastic. If you're a miner.

However, if you're involved in farming or manufacturing this whole transaction is a whole lot less attractive. As demand for Australian dollars increases, the currency appreciates. You have nothing to do with mining and there's been no change to your business model. However, the cost of your produce from the perspective of your overseas customers may have just gone up 20%, and now they don't want to buy as much from you.

This phenomenon is not restricted to Australia - it's a critical issue with respect to the developing world. However, I have never heard anyone use it as a justification for the RSPT. It is important because it means that when the case is presented for other states to benefit from the natural resource wealth of WA and Queensland, it's not just a 'cash grab'. It actually reflects the fact that mining has made material inroads into screwing up the earning potential of non-resource rich states.

2. Mining and Manufacturing Are Different
I have heard arguments protesting against this tax on the basis that it sets a dangerous precedent for other industries. Undoubtedly, rapid changes in tax law may increase the perceived sovereign risk of investing in Australian assets. However, it's drawing a long bow to suggest the RSPT sets a precedent across industries.

The theoretical underpinning for this type of tax is that the capital used to produce resource profits is derived from a common resource. That is, stuff in the ground is owned by the government (and by extension, citizens) until it is dug up and sold. This is not an issue for most industries. In manufacturing you buy inputs, add value through labour, capital and technology then sell them. In banking, you buy money, add value and sell it.

Seen in a different light; the argument about the RSPT is not so much about thinking about how to tax profits, it's about negotiating how much mining companies should pay for their inputs. The government just wants to use profits as one of the factors in setting the price.

3. A Fair Tax Rate
There seem to be two sides to this debate; those who think mining companies should pay more and those who think they already pay too much. Surely, the issue should begin with the question of what constitutes an appropriate level and structure for mining taxation?

The failure to answer this question cuts both ways. Those who support the tax say that miners
should pay "more", but their failure to quantify a limit suggests they would be happy to raise the tax rate to the point of removing all profits and making the industry unviable. Those who argue that current tax rates are already too high fail to present any objective economic argument as to "why?".