One of the more perverse aspects of the resource super profits tax is the way that it is being characterised as a kind of class struggle, with the champions of the proletariat (aka Kevin Rudd) set in an unfair battle against the mining plutocrats (Andrew Forrest, Clive Palmer and Gina Rinehart).
That is an easy caricature to draw, given the visibility of Forrest and Palmer in particular in the debate, and the incongruous sight of Rinehart shouting “axe the tax” in Perth last week.
The reality of the tax is somewhat different. While the RSPT undermines Fortescue Mining’s financing model – and indeed, if implemented, would spell the end of the project financing model used by most emerging miners – the most affected by the tax are the big long-established mines.
BHP Billiton and Rio Tinto will pay a high proportion of the tax because of their very profitable operations in the Pilbara and the coalfields of Queensland. BHP’s effective tax rate is estimated at 55% if the tax is introduced.
While the government and its supporters have tried to demonise the big miners, referring to them as greedy foreigners, corporate entities are just vehicles for collective investment. The owners of the miners are either individuals, local and foreign, or institutions investing on behalf of individuals, local and foreign. A majority of BHP’s shareholders are Australian, as would be the case for most of the smaller mining hopefuls.
The concept of the dividend imputation system was that corporate earnings would effectively be taxed once, in the hands of shareholders. With the top tax rate and the corporate tax rate misaligned, of course, that’s not entirely the case.
Across the sector, however, the underlying truth is that the RSPT ultimately impacts individuals and their savings and the industry, as opposed to a couple of billionaires, is trying to protect those savings and their future growth rather than the bank accounts of a few rich individuals.
The $9 billion a year (probably more and certainly more if China is able to continue growing at the rate it has) comes out of the savings of shareholders, directly or indirectly through their superannuation fund.
Over time, as the RSPT impacts investment decisions and brings competing investment decisions into play, it will push investment and jobs offshore.
The more immediate effect, however, is to diminish the savings and income of existing shareholders. If the RSPT were introduced as it is now constituted, the net present value of many existing mines would be ravaged and sharemarket prices would adjust to reflect that.
Australian shareholders would lose both capital (as a consequence of that one-of adjustment) and the income flowing from it.
BHP has said that its effective tax rate in Australia under the RSPT would be about 55% and Wayne Swan has conceded that some mines would pay the theoretical maximum of 58%.
That is the position of the company. For the local shareholders, to the extent that BHP’s earnings (and those of other tax-paying companies like Rio) are distributed, they receive a rebate at the corporate tax rate under the imputation system.
There will be no credits or rebates for the RSPT, which means that the effective tax rate for individuals on resource company income, particularly for those on the top marginal rate, will be significantly higher that the effective tax rate levied on the companies. The effect on personal incomes will be even greater if and when the corporate tax rate is lowered to 28% in 2014-15.
If you impose a tax as substantial as the 40% RSPT on a sector the impact is obvious. It is less profitable, it invests less in the high tax jurisdiction and it is less attractive as an investment destination. Not just for billionaires but for individuals and the institutions investing on their behalf.
If there is class warfare inherent in the debate between the miners and the government, then it is not the clichéd and anachronistic war of the rich on the poor but, given our compulsory superannuation system and the level of participation of individuals in the market, something far more akin to a civil war.
*This piece was first published on Business Spectator
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