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Ross Garnaut on the resource profits tax -

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Economist Ross Garnaut speaks with Kerry O'Brien about the Government's proposed super-profits tax.

Transcript

KERRY O'BRIEN, PRESENTER: Ross Garnaut, the man who gave the Rudd Government its blueprint for a
emissions trading scheme to combat climate change - a plan incidentally that is now in the
Government's bottom drawer for at least several years, has tonight weighed into the emotion charged
resource rent tax that could decide the next election.

Professor Garnaut whose early academic work on resource rent taxes became the framework for the
Hawke Government's tax on Australia's petroleum industry 20 years ago has come out in support of
the new tax on Australian mining companies but has criticised the Government for not releasing the
Henry report for discussion before announcing its new tax and has also criticised miners for he
says behaving like trade union shop stewards.

At a speech at Melbourne University tonight Professor Ross Garnaut says this issue will be an
important test for the Government's capacity to withstand the pressure of powerful vested interests
"at a dangerous time for our country in a dangerous world".

Professor Garnaut is also chairman of Lihir Gold, one of Australia's biggest goldmining companies,
although most of its mining activities are offshore.

I spoke to Ross Garnaut from our Melbourne studio.

Ross Garnaut since you co-wrote the seminal academic work on resource rent taxes nearly 30 years
ago I guess we can assume that in principle you support this tax.

The question is, is this particular tax on mining in Australia fair and is it practical? Will it do
the job required without driving miners and investors out of Australia?

PROFESSOR ROSS GARNAUT, ECONOMIST AND RESOURCE TAX EXPERT: It is the right sort of tax, Kerry, and
the Henry Review made a strong case and a good case for taxing mineral rent.

It is an elegant approach to the taxing of mineral rent. It is an approach that hasn't been adopted
in detail before and so that raises some questions which will be debated in the period ahead.

There may be answers to those questions.

If there is not then with small modifications there is no doubt that it can do the job.

KERRY O'BRIEN: You obviously believe that this could have been handled better by the Government in
the way it was introduced. In what way?

PROFESSOR ROSS GARNAUT: Well it is a very large and complex change and it would have been a good
idea to have put the Henry review out into the public sphere in advance so that there could be
public discussion of it so that when the Government made its response then there would be a context
for it.

I think the Government's announcement took a lot of people by surprise, more surprised probably
than they should have been taken.

I think that is good for public discussion to have more understanding and information. But the
important thing now is to make sure that there is a good public discussion of it now that it is out
there.

KERRY O'BRIEN: Mining is one of the highest risk reward ventures in business. If mining investors
accept the high risk aren't they entitled to higher reward when the gamble pays off without too big
a slug of taxation?

PROFESSOR ROSS GARNAUT: Yes and that's the whole idea of resource reason taxation.

Economic rent - mineral rent - is the return in excess of the return that is necessary to attract
all the factors of production.

There are a couple of ways of making sure that you don't take more than the economic rent with a
good mineral tax regime.

One is the approach taken in the old petroleum resource rent tax which is to have - allow a higher
return before you start taking anything.

The other is the approach taken in the Henry Review to effectively subsidise all expenditures at
the tax rate so that overall any investment that is going to be profitable before the tax is
profitable after it.

KERRY O'BRIEN: But to define super profit in such a high risk industry as any profit more than 6
per cent - and that is 6 per cent before the cost of interest payments is subtracted, so not really
a 6 per cent profit in the way most people understand it - surely that is unreasonable?

PROFESSOR ROSS GARNAUT: Well that is not what Ken Henry's recommended and it's not what the
Government has announced, Kerry.

What the Henry tax is about is taxing all revenues at 40 per cent and subsidising all expenditures
at 40 per cent.

Where the carrying forward of the Government's bond rate comes into it is that the Government is
not paying out as cash that 40 per cent but is instead lending - effectively lending - the money to
companies.

Now that's a new thing in taxation and it is not readily understood and I think that that... that
lack of understanding is one of the problems that the Government's got at the moment.

KERRY O'BRIEN: When a mining company commits to a new project it does so knowing what the
prevailing tax regime is so why is it fair - again after a mining company has committed to a
project and then a few years later suddenly the whole basis for their taxation payments on that
project has changed quite dramatically - might not be quite a form of retrospective taxation but is
it fair, is it a stable environment for investment decisions in a high risk industry?

PROFESSOR ROSS GARNAUT: In other areas of tax we don't tax retrospectively and the proposal here by
the Government isn't to tax retrospectively.

Just like the lump sum super tax or capital gains tax it is income going forward that is subject to
tax.

Now transition arrangements are more complicated here and I think it is reasonable to make sure
that projects are not taxed more heavily under this tax - old projects - than they would have been
if the tax had been there from the beginning.

And that rough test can be run over proposals in the discussions going forward.

KERRY O'BRIEN: But what happens with a company where it does turn out that it's paying more tax
under the new regime than it did under the old regime on an existing project?

PROFESSOR ROSS GARNAUT: Well that's not different in principle to a car manufacturer, Ford
Australia, back in the early '90s when we were getting rid of most of our protection. Suddenly it
had made all these investments and couldn't get the same income from it.

It took that on the chin because that was a change that was good for the Australian economy as a
whole.

Similarly the waterside workers, they had arrangements that were very good for them although they
were not very good for the rest of us. And when that reform was introduced there was no suggestion
that those people who had committed their lives to an industry on one set of arrangements had to
keep those arrangements forever.

KERRY O'BRIEN: When you talk about the waterside workers - you have likened the reaction of
Australia's leading miners to trade unionists and shop stewards in the way they have reacted to
this tax.

Are you suggesting all these threatened withdrawals from mining projects are like a trade union's
threat to strike?

PROFESSOR ROSS GARNAUT: I think there is some shop steward behaviour going on Kerry, and I think
that's not helpful. I think that these issues should be discussed on their merits.

It is an important question that Twiggy Forest has raised. Can he under these arrangements fund his
project?

The Treasury says that the tax credit he gets is as good as money in the bank because it's
guaranteed by the Commonwealth. If he can't borrow from the banks on the basis of that then that is
a real question that should be looked at.

KERRY O'BRIEN: As the author of the report to the Government on how best to reduce carbon emissions
you must be feeling some sympathy for Ken Henry now. Most of his recommendations are already
gathering dust.

How did you react when you heard a few weeks ago that Kevin Rudd had put his emissions trading
scheme in the bottom drawer at least until 2013?

PROFESSOR ROSS GARNAUT: I was disappointed. I think there were better ways through.

I think this is such an important issue that keeping a vacuum there is not sustainable. So I was
disappointed but what we all have to do now is to think how we can actually get a result for this
country.

It doesn't work for this country with its very strong interest in climate change mitigation to be
one of the world's laggards.

PROFESSOR ROSS GARNAUT: In fact you said on this program last October that already this was one of
the worst examples of policymaking ever seen in Australia. I would imagine you would now be saying
that in spades?

PROFESSOR ROSS GARNAUT: Yeah. Well I'm not sure I would say one of the worst now, Kerry. It's just
awful - including the terrible episode of the Government reaching agreement with the Opposition and
that falling apart.

Looking at the whole history it is just dreadful.

I think there was a basis in this country in informed public opinion for doing something solidly
and it is a pity that our political leaders haven't built on that.

KERRY O'BRIEN: Ross Garnaut thanks for talking with us.

PROFESSOR ROSS GARNAUT: Good to be with you Kerry.