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Australia’s Resource Tax: Size Matters

August 4, 2010

http://www.forbes.com/2010/07/14/bhp-rio-fortescue-markets-equities-australia.html?boxes=Homepagechannels

Former Prime Minister Kevin Rudd had called for a 40% tax on all resource profits.  What ended up being negotiated by successor Prime Minister Julia Gillard was a much-diluted alternative Mineral Resources Rent Tax (MRRT).  That tax officially will contain a 30% levy on iron ore and coal profits only, with an additional extraction allowance that will push the effective rate down to 22.5%.

The reworked tax is thus much smaller and also less extensive than the original proposal. “The MRRT is effectively a tax on Australia’s largest iron ore and coal companies. Mines generating less than 50 million Australian dollars ($43.8 million) in profit each year will be exempt. The reworked tax plan will affect about 320 of the country’s mining companies, down from the 2,500 that fell under the original levy.” Thus some companies are relative winners, others losers, from the new tax.  The country’s gold, copper and nickel producers are exempt from the new levy.

Partly for this reason, there has been criticism of the tax.  Some say that the tax will discourage overseas investment in the taxed sectors and cause existing investment to move overseas.  But others claim that the tax is modest enough not to have significant negative impacts.  The new redesigned tax also raises new revenue, part of which will be used to cut the corporate tax rate from 30% to 29%.

  1. Why was the original mining tax referred to as a “super profit tax”?
  2. Why would Australian miners be more profitable than other industries?
  3. Why was a separate minerals tax deemed necessary, as opposed to the normal company tax on profits?  Refer to the formula: Profits = Total Revenues – Total Costs.
  4. The article notes that the imposition of the tax will modestly reduce the value of mining companies to shareholders.  Why?
  5. Are there economic arguments for taxing some minerals differently than others?
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