The RSPT could cost Rudd at election time: Gottliebsen

The surge in global share markets, commodities and the Australian dollar comes partly because China appears to be moving in behind Europe’s efforts to contain the crisis. The rise also takes some heat out of the mining tax debate but, if anything, the resolve of BHP and Rio Tinto to maintain their capital strike has been doubled by the attacks from the union-backed industry superannuation funds and Treasury.

Some of the wiser heads in the cabinet are now looking for a way to compromise because it is clear that the mining tax is an issue that could devastate the government in Queensland, WA and South Australia come election time.

A compromise is possible because there is widespread agreement about the main principle behind the mining tax – a resources profits tax is a better system of taxing than the current one. The argument is about the implementation. Unfortunately, the current tax proposal is so flawed structurally that changing a detail here and there is not going to break the capital strike on most new mining development.

What is required is for the government to step back and say “What is the maximum level that high mining profits should be taxed at?” The proposed system has BHP profits taxed at about 57%, on BHP estimates, and it looks like Fortescue might get to 80% because the tax cuts in before interest.

I would suggest that any tax that takes over 50% of profits is going to substantially reduce mining investment. So, if I was in cabinet I would set a maximum tax rate of 49% on before-tax profit after interest. And that 49% would include royalties. That would still stop some projects going ahead because of the anger over retrospectivity. But it will break the capital strike and substantially reduce the mining tax as an election issue because of its fairness.

There would then be months of negotiation as to the best way of implementing a resources tax but whatever was done, miners would keep 51% of the profits they generated. There are two problems with this approach. First, Treasury as the designers of the flawed tax and one of the key groups publicly attacking the miners has lost its public service independence. Under the Westminster system it is the politicians who should do the attacking and the public servants should implement polices. The position of Ken Henry as the head of Treasury is not sustainable.

The second problem is that the black hole in the budget that the mining tax was designed to fill will re-emerge and the forward estimates will be wrong. My suggestion is that the government take up one of Tony Abbott’s cost cutting measures or pick one of its own to fill the gap.

The greater danger is that the government will believe its own rhetoric and not understand that you can’t expect investment when you introduce retrospective taxation and start taxing companies between 57 and 80%. This has become the corporate equivalent of the insulation debacle – a good idea badly implemented.

This article first appeared on Business Spectator.