Source:  The Financial Times.                 Date: 06 July, 2010

Mr. Kevin Rudd lost his job as Australian prime minister last month because of his maladroit handling of a planned supertax on the country’s mining companies. It was not just the proposals that enraged the miners, Australia’s most powerful lobby; it was the prime minister’s refusal to consult them. So ferocious was their resistance that Labor started to bleed support from voters in mining areas, nervous about the economic fallout.

Ms. Julia Gillard, Mr. Rudd’s successor, moved fast to resolve the standoff. She has preserved the principle of restructuring mining taxation, but has reduced the tax’s reach and rate. It remains an advance on the status quo, but the miners have been rewarded for their truculence. The government has given away too much.

The purpose of resource taxation is to capture for the nation the “economic rent” of its natural resources – profits in excess of normal rates of return, caused by selling prices far above the cost of extraction. Yet Ms. Gillard’s tax will apply to just iron ore and coal. While it makes sense to exclude low value mining such as gravel, it is unclear why it should not apply to, say, gold or rare earths.

The tax is structured so the government takes a share of the profits in return for bearing the same share of costs, making it a silent equity partner with carried interest. This is a common arrangement used in the global oil industry. But while Mr. Rudd wished to take a cut of 40 per cent (the same as for the oil industry) Ms. Gillard is only proposing a headline 30 per cent (and an allowance may reduce this further). It is hard to explain why open cast miners deserve a more generous tax regime than offshore oil exploration.

This is especially the case given the other concessions Ms. Gillard has made. Some of these recognize legitimate concerns. The hurdle rate for the tax has been lifted from the government bond rate by adding a 7 percentage point premium, reflecting more closely the real rate at which private miners raise capital. Existing production can now be put under the revised regime at market rather than book value.

Ms. Gillard has satisfied the miners and relieved a public alarmed by the noisy suspension of mining projects. But there is a cost. General corporation tax will now be lowered to 29 per cent, rather than the 28 per cent in Mr. Rudd’s plan. Ms. Gillard has therefore allowed the miners to capture more of the economic rent from their activities than Mr. Rudd would have. That is the price of his mishandled reform.