The Federal Government’s response to Ken Henry’s tax review has been more about what won’t be done than what will be, which is why it would be a shame if one of the few recommendations actually adopted is killed by a mining lobby scare campaign.

Dr Henry seemed to know what was coming.

Back in January he warned in a speech that: “Tax reform is always difficult, even the things that are most obvious. That’s probably because it almost always confronts sectional interest.”

The Federal Government must have compiled a list of those sectional interests that were too broad, too large or too powerful to confront when it decided which proposals to reject outright in its response to the review.

This list must have included: home owners (including owner-occupied homes in means tests and land tax ruled out); families (return to work requirements for parents ruled out); investors (reduction in capital gains tax discount, change to negative gearing and changes to dividend imputation ruled out); pensioners (reduction of pension indexation ruled out); rich dead people and the beneficiaries of their wills (bequests tax ruled out).

The mining industry must have been deemed an easier target – there are certainly less people directly employed by miners than included in any of the above groups that were exempted from tax changes.

For example, only 26,887 people nominated their job as coal mining in the 2006 census, and 8,296 people said they were iron-ore miners.

Of course, there are engineers, builders and service providers that also rely on mining for their living, but other industries are far less mechanised and more labour intensive, such as banking and retail.

However, as Ken Henry pointed out in January, the big (and small) miners can certainly put up a good fight.

Back then he related a tax reform tale about how long it took to remove a total tax exemption for gold mining.

“The Australian gold tax exemption lasted nearly 70 years, despite its having absolutely no support in tax theory,” he observed.

“Long before its removal, it had become a source of embarrassment for Australian officials attending international tax policy conferences – we were the only OECD country that accorded a whole industry an exemption from tax. Even so, its removal was highly controversial.”

Scare campaign

As with the gold miners, the broader mining industry is putting up a strong fight to resist any increase in their current levels of taxation.

One commonly bandied argument is that mining companies already pay substantially more tax than other companies, because they pay state royalties in addition to the current 30 per cent corporate tax rate.

However, there is a reason why mining companies pay more tax – that is because their profits come from goods they did not manufacture and usually do not even own.

Laws passed by the states and Commonwealth mean they own most of the minerals located in and around Australia.

Effectively, mining companies are granted licences to dig up resources owned by the Australian community.

Therefore, unlike other types of corporate profits, they are being taxed not only for the benefit they receive from government infrastructure and legal systems, but also for the non-renewable, community-owned resources they are digging up and selling.

A resources tax or royalty can be more appropriately viewed as the price mining companies pay to buy the commodities from the Australian community. In this case, the Federal Government simply believes it’s been selling those commodities too cheaply, as illustrated by the large profits made by some mining companies.

The profit the company is allowed to keep can thus be viewed as a reward for the time it spent looking for the resources, the risk it wouldn’t find any and the expense and trouble of digging the commodities up and marketing them.

Not ‘the beginning of the end’

Another argument put forward by the mining companies is that a super profit tax will discourage investment in developing Australia’s resources.

Many industry sources would have you thinking that the mining industry will pack-up en masse and ship off to lower-taxed mines in Africa, Asia and the Americas.

This may be true in some cases, but it is clear that the main impact of the tax falls on companies that have existing mines that are already making profits.

The tax will not fall on a mine until it becomes profitable – the miner can off-set previous expenses so that the tax will not kick-in until a new mine has paid for its own exploration and development – and, if the mine later becomes unprofitable it won’t be subject to tax until it returns to the black.

All the tax does is reduce the profits of profitable mines, rather than making them suddenly unprofitable.

It may make some overseas destinations look relatively more attractive, but there are still some compelling reasons why mining companies look to operate in Australia.

The first is the quality and quantity of many different types of resources.

The second is the closeness of Australia to strongly growing Asian economies such as China and India, which makes transport costs a lot lower.

The third is Australia’s extensive existing infrastructure in many mining regions, and high levels of local skills and expertise in mining and related industries.

The fourth, and perhaps most important, is the relative stability of Australia’s governments and legal system – unlike many countries in the developing world, there is little chance that a new government will come in and nationalise your mine, or arrest your staff.

None of these factors are significantly altered by the proposed tax changes, meaning most companies will still want to mine Australian resources.

Just ask Fitch Ratings, which has left the ratings and outlooks of the major miners (BHP Billiton and Rio Tinto) unchanged after the tax announcement.

While the senior director of Fitch’s corporate ratings in Sydney, Julian Crush, says the proposal “isn’t good news” for the miners, he concludes: “This news does not mark the beginning of the end for the Australian mining industry. Demand for their product is simply too strong.”

And even if some marginally profitable mining prospects are ignored in the short-term, they will still be there in the long-run when supplies are short and prices are higher still.

Mining companies want the profits immediately, but the resources are going nowhere and will probably be worth even more to Australia in the future than they are now.

Interest rate impact

There has been much discussion about how the Federal Government’s stimulus package may have pushed up interest rates, by propping up consumer demand and putting pressure on inflation.

There’s certainly some economic logic that Australia’s better-than-expected economic growth, largely fuelled by the Government’s spending, has prompted the Reserve Bank to raise interest rates to match.

However, in recent months, the RBA has actually been far more concerned with the impact of the commodity boom on Australia’s national income and inflation than it has been about consumer spending (which has been pretty stagnant since the stimulus payments faded).

The Reserve’s governor, Glenn Stevens, again noted the inflationary impact of the resources boom in the statement explaining this month’s interest rate rise.

“Australia’s terms of trade are rising by more than earlier expected, and this year will probably regain the peak seen in 2008,” he wrote.

“This will add to incomes and foster a build-up in investment in the resources sector. Under these conditions, output growth over the year ahead is likely to exceed that seen last year, even though the effects of earlier expansionary policy measures will be diminishing.”

In this context, the Federal Government’s move to impose a higher tax on the mining sector, if it does actually reduce investment in that industry, is likely to take a little heat out of the boom and reduce some of the pressure for more rate rises.

Furthermore, a reduction in the pace of mining investment might free up some of the construction workforce tied up in building new mining projects to build more homes, potentially increasing supply and decreasing the cost of new housing (another area of concern for the RBA).

Taxing the booming resources industry more heavily than the struggling manufacturing and service sectors is one way to counter the return of the two-speed economy that saw many business and some households go to the wall at the hand of high interest rates in early to mid-2008 – high interest rates that were largely caused by the mining boom.

The mining super profits tax would help redistribute the benefits of the mining boom across the country, reducing the need for the Reserve Bank to use blunt interest rates to smash demand in all sectors, and keeping Australia’s economy more diversified.