Monday, May 31, 2010

Tax battle will show if reform is still possible

Look at America and Europe and it's clear Australia has benefited hugely - in a material sense, at any rate - from the painful micro-economic reforms of the 1980s and '90s.

Look at our performance in the noughties, however, and it's clear the momentum of reform has dissipated. You see that in the business community's unrelenting white-anting of Kevin Rudd's emissions trading scheme, which ended in a bipartisan rejection of the use of "economic instruments" (putting a price on carbon) to combat climate change.

You see it now in the mining industry's bitter resistance to Rudd's latest attempt at major micro-economic reform, the replacement of inefficient mineral royalties with the far more efficient super profits tax.

The big miners - particularly BHP Billiton and Rio Tinto - are doing all they can to break the back of this measure, if not kill it. The newer and smaller miners, which would benefit most, seem cowed into silence.

The big boys' first success has been the opposition's - the Liberal Party opposition's - decision to again set its face against an economic-rationalist reform, one almost all economists endorse as good policy.

Professor Ross Garnaut believes the decision the nation takes on the reform of mineral royalties will either "confirm the descent of Australian political culture into a North Atlantic malaise, or represent a revival of the capacity of the Australian polity to take positions in the national interest, independently of sectional pressures".

Just so. The big miners are doing what all sectional interests attempt to do in these circumstances, persuade you and me that their problem (the government wanting to take a bigger bite out of their profits) is actually our problem (the miners will take their money elsewhere and leave us to rot).

To this end they're using a host of high-sounding, but actually unconvincing, arguments, the first of which is that the planned change in the royalty arrangements has greatly increased Australia's "sovereign risk" in the eyes of miners.

This is over the top. The sovereign risks faced by foreign investors in many countries - mainly developing countries - constitute things like having your company expropriated by the government, a breakdown in the rule of law, or the government defaulting on its debt.

Are BHP and Rio seriously putting us in that company? Turns out their definition of sovereign risk is merely "do you trust the government not to change the rules?" And what rule would that be? The price at which we're prepared to sell them our non-renewable resources.

The contract price of iron ore has increased by a factor of more than six since 2004. The contract price of hard coking coal has more than quadrupled. Do you reckon we're going to be the only country putting up the price it charges?

Far more likely that a lot of countries follow our example - which may well be what's adding extra vehemence to the big miners' fightback.

And name one country that's prepared to give foreign investors a guarantee it won't at some stage decide to change a tax or other law affecting those investors' businesses. If that's your definition of sovereign risk then it's a risk you face in every country - and many of them would be a lot rougher about it than us.

What's more, if that's sovereign risk, the only answer to it is national governments promising to give up their sovereignty. This is silly stuff.

It's curious that BHP and Rio, which purport to be so offended when anyone calls them foreigners rather than Australian, keep on about sovereign risk. Sovereign risk is the perspective of an outsider, not a local. A company with no loyalties, prepared to go wherever in the world it can get the best deal.

Every Australian business, big and small - and every individual, for that matter - faces the continuous risk that one of our nine governments will "change the rules" in ways we consider contrary to our interests.

We don't like it but, for the most part, we accept it. One of the rules that doesn't change is that democratically elected governments retain the right to change the rules. How else could you run a country?

Allied with the sovereign risk argument is the claim the resources tax would be "retrospective". This, too, is an abasement of the term. A true retrospective change involves subsequently declaring an act that was legal at the time it was undertaken illegal. That's what John Howard did with his outlawing of the bottom-of-the-harbour tax scheme.

Similarly, it would be reasonable to say a decision to change the tax on income earned (or minerals mined) before the announcement of the tax change was retrospective. But these guys are claiming a decision to increase the price of the minerals we sell them in the future - of which we're giving them more than two years' notice - is retrospective.

Huh? Apparently, any change to a mining project that's already established is a retrospective change. Had we known you were going to do this we might never have dug the mine. Yeah sure. Nor did you know the world price of the mineral was going to quadruple or sextuple in six years.

This is silly stuff. If that's your definition of retrospective, then every tax change (or other change) affecting every existing Australian business (and every person already born) is retrospective and thus improper.

As Professor John Freebairn of Melbourne University has said, "the idea that government cannot take actions that create losers ... would have stood in the path of tariff reform and most of the micro-economic reform of the past 20 years".

And if we let the big miners' pleading dissuade us from going ahead with this reform we'll be going the same way as the morally corrupt US Congress and the effete Europeans.