As the chorus of criticism surrounding the federal government’s proposed Resources Super Profit Tax continues to reach a powerful crescendo, perhaps it is also worth paying attention to the major area in which the revenue would be used. That is a reduction in the company tax rate.

While few experts and mining figures believe the present royalty system is working well, even fewer agree that the government and treasury’s solution to the problem is remotely a good idea.

There are five pretty glaring reasons why the RSPT was a poorly thought through policy.

First, there is apparent confusion at government levels about the concept of a business’ cost of capital (given the rate at which the super profits tax kicks is critical, one would have through that someone at treasury would have bothered to open a first-year business finance textbook). Second, there is the bizarre “refund” mechanism, which may end up costing taxpayers billions, and that the miners don’t want anyway because an illusory refund doesn’t help them finance new projects. (The RSPT effectively forces taxpayers to invest in mining projects that they would have no interest in and forces mining companies to accept this investment which they do not want).

Third is the substantial risk that otherwise viable projects will no longer proceed because the government has created a massive distortion to the market (Alan Kohler noted in Business Spectator today that a KMPG report found “the application of the RSPT results in negative net present values for nickel, copper and gold mines, and it reduces the NPV for iron ore and coal projects by 46% and 57% respectively.”

Fourth is the probability that a Chinese slowdown may weaken commodity demand, meaning that it is not unthinkable that the tax will raise no where near the revenue the government and treasury are predicting (and worsening the “refund risk” mentioned above). Finally, there is the fact that mining companies pay a fair bit of tax at the moment — BHP paid an average tax rate of 30% between 2004 and 2009, compared with only 18% for Wayne Swan’s good friends at Macquarie Bank. So it seems strange that Rudd and Swan are placing a super tax on fairly taxed miners, while at the same time offering billions of dollars in taxpayer funded guarantees to the tax-minimising Macquarie.

The main argument proffered by the government in its botched attempt to sell the RSPT is that mining companies (especially the likes of BHP and Rio) are largely foreign-owned anyway, so the super-profit tax will mainly affect non-Australian shareholders. Leaving aside the sovereign risk attaching to such a decision, politically speaking, the government makes a reasonably good point. So what if the dividends paid to a bunch of American institutions are reduced — so long as we can use the money to build an overpriced and unnecessary broadband network for rural Australia?

However, that argument is rendered meaningless when you look at what the government plans to do with the super tax revenues.

According to the Future Tax website , the government will use the revenues from the RSPT to “reduce the company tax rate to 29 per cent for the 2013/14 income year and to 28 per cent from the 2014/15 income year”.

A reduction in the company tax rate will allegedly have several benefits, including:

[Improving] the international competitiveness of Australia’s company tax rate, moving Australia from 22nd to 17th among similar-sized OECD countries. Presently, Australia’s company tax rate is high relative to other similar-sized OECD countries.

By reducing [the company tax rate] we can reinforce that Australia is a good place to invest. Over time, this will lead to an increase in investment, particularly from overseas. Increased investment means a larger capital stock, higher productivity and higher wages. More investment will also mean more innovation and entrepreneurial activity.

So on one hand, the government is creating a new big tax (the RSPT) that will discourage investment, only to give that money back by reducing the company tax rate on the basis that it will encourage investment.

Australia already has a lower company tax rate than the United States and Japan (see graphic below). And even more ironically, the only real winners from a reduction in the company tax rate are foreign investors. Most local shareholders, especially those who own small and medium-sized businesses, need to pay dividends/salaries to owners anyway. These payments are taxed on an individual basis at the recipient’s marginal tax rate. Presently, with dividend imputation, the company tax rate is almost irrelevant to Australian shareholders (with the exception of timing benefits).

100603_schwab

Source: Australia Government Future Tax website

So to clarify, the government is taxing an industry on the basis that it is owned by foreigners, and using those revenues to reduce the amount of tax paid by other foreigner investors. All the while distorting investment away from a productive industry (mining) into all other sectors of the economy. Meanwhile, Rudd is back-tracking on election promises and using taxpayer money to sell the entire fiasco.