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Economics Legislation Committee
21/02/2012

MORAN, Dr Alan, Director, Deregulation Unit, Institute of Public Affairs

[10:05]

CHAIR: I welcome Dr Moran from the Institute of Public Affairs. Do you have an opening comment?

Dr Moran : I will make a few brief remarks. I was listening to the testimony of Professor Ergas; some of ground that he has covered I will skip through. We all know that one of the reasons why we are here is that the harnessing of the Asian economies has been behind the comparative success of Australian resource development and that we have an edge in these resources. Not only have we got a lot of them, but we have a fairly stable political economy, we have certainty of ownership, low crime and we do not have internal schisms and so on. So, an outcome of that has been that Australia has done rather well. If we look at the front end of resource development—that is exploration—we have 12 or 13 per cent of the world’s exploration money spent here, which is far more than you would expect, given the size of our land mass. Twelve or 13 per cent does put all of this into some sort of context; it is 12 or 13 per cent and it is 87 or 88 per cent elsewhere.

The mining industry is very profitable, which is one reason why we are here today, but if we look at the annual rate of return on mining since 1973 to 2009, it is 14.7 per cent. It is only slightly above the industry average of 13.6 per cent. If you go back two decades—and this goes to some of the conversations that you have had already—mining was far less profitable than the industry average and, of course, it could again experience low profit levels. If we look in terms of what tax mining pays at the present time in tax terms, it pays about 40 per cent—that is including royalty rates—of net income, compared to about 27 per cent for the industry average. Though Australia’s current taxation rates on minerals are similar to major competitors like the US and Brazil, they are rather more than other competitors such as South Africa, Russia, Canada and a lot of African countries.

The RSPT was going to push our tax rates to something like 50 per cent above those in the US and even more than that of other competitive producers like South Africa. It was estimated to raise $9 billion. MRRT is set to raise between $3.7 billion and $4 billion just on the coal and the iron ore sectors. The additional cost advantage of these is, of course, further amplified by the carbon tax, which none of our competitors will introduce.

In bringing in this tax we have seen two related features argued in favour of it. One is that the taxes would capture economic rents and the second is that they constitute a return to the owners of the resources, which are the Australian people. The issue of economic rent is one that has plagued economics for a long time. It is very rare—I have difficulty finding a case of genuine economic rents anywhere in the world. You could argue something like the Chinese have some sort of monopoly over rare earths at the present time and they may be able to do some price gouging with economic rents in terms of that, but then again there are other people, including Australian firms, developing in competition to that.

It is very, very difficult to pinpoint an example of when we have an economic rent. We certainly have examples of firms earning high profits, but these are normally called quasi rents in the economic profession. If you tax them they have adverse secondary effects. You can certainly heavily tax a firm which has found—luckily or by skill—a good find and makes a lot of money, and that tax might not have any adverse effects in terms of that firm’s behaviour, but it would certainly have clear adverse effects and the additional tax would be factored into investors’ plans.

The other aspect is that although the resources may be owned by the Australian people, for all practical purposes, mineral deposits only exist if someone actually discovers them, and a special tax on them will seriously dampen the search for the hidden wealth that they represent. Unlike diamonds or gold or oil, maybe, coal and iron ore are not particularly rare minerals and the deposit itself only becomes valuable once the owners supplement the find with injections of capital and know-how. Taxing such unfound wealth in the ground would be like taxing new technology before it is invented. Australia imposing an additional rate on mining is like the US placing punitive taxes on the intellectual property that is the foundation of firms like Apple, Google and Cisco and so on.

CHAIR: Dr Moran, can you bring your introductory remarks to a conclusion, please?

Dr Moran : Okay. In terms of the adverse effects of this, this would be quite clear. I would just make two points. The MRRT is said to provide increased certainty, but in doing so it does disturb a relatively stable environment and this is unlikely to enhance certainty. Of course, it does so in two ways. It creates an ambiguity over which level of government holds a right to exact royalty type legislation and the possibility of competitive enactments of taxes that would markedly increase overall rates. Secondly, because there is a phase-in to exclude businesses earning profits of $75 million to $125 million it is likely to bring about some artificial and inefficient changes in corporate structures as firms seek to avoid tax payments.

So, I would just finally say that the MRRT does discriminate within the mining industry. It imposes a $4 billion a year tax on the mining industry and in doing so it does have a major risk of throttling the industry which has been the key to living standards for all Australians over recent years.

CHAIR: Thank you. I just have one question before I hand to my colleagues. Towards the end of your remarks you suggested that the imposition of the mining tax would have a deleterious or harmful effect on new projects and, by implication, exploration for the first stage of new projects. Did I hear you correctly?

Dr Moran : Yes.

CHAIR: Ten or 15 years ago there was a huge surplus of geologists and associated trades in Western Australia rising out of proposals then for the gold tax and other matters. I can remember attending a large number of public meetings because those men were unemployed. At the moment in Western Australia, Queensland, New South Wales, South Australia and the Northern Territory, you cannot find a geologist for love nor money. Second-year geology students doing science degrees at Curtin University on holiday exchange are earning $75,000 a year as second-year students, so the mining companies can get to know them and hire them when they graduate. You cannot get a geologist, a geologist assistant or an exploration team for love nor money, notwithstanding the fact that we are importing them at a rate of knots, as you know, through various immigration channels.

That suggests to me that in the exploration industry—as opposed to the development industry or the infrastructure industry or the mining industry—there is huge demand, that there is full knowledge and full information as to what is going ahead in terms of this tax and this tax is going to have little immediate or medium-term application to the exploration industry. You cannot get them now and you have not been able to get them for the past five years for love nor money. Do you have a comment?

Dr Moran : Certainly, we have 12 or 13 per cent of world hard rock exploration going on. It was seven or eight per cent 20 years ago, so it has risen quite a lot. Some of our schools of geology and so on have been run down over recent years, as you would be aware. We have got 12 per cent; why should we not have 20 per cent? Why should we not have more? In the end it takes three or four or five years to train a geologist, and that is an important investment that we could make or the people themselves could make. Certainly, I would not see the supply of geologists as being a constraint on our potential income levels, because we can actually increase that supply quite regularly. Whether, in fact, this has had a dampening effect already; I think it is unlikely it has had a dampening effect already. We have various things in the pipeline which these geologists are being used for.

To argue that it would not have one is really to defy the laws of gravity. You put a new tax on something; I think everybody would agree that you are actually going to do less of it. How much less is difficult to say, but you are going to do less.

CHAIR: Senator Cormann.

Senator CORMANN: Just an initial question in terms of the process; as a matter of principle, is it appropriate for any government to negotiate the design of a new tax exclusively, and in secret with, the three biggest taxpayers, excluding all of their smaller competitors from the process?

Dr Moran : I think that is unusual, but I am not sure how taxes are usually determined. It would seem to be unusual, and that is alleged to have been the case.

Senator CORMANN: It is a matter of record that that is what happened.

CHAIR: There is no record. It is your interpretation; it is not a matter of record.

Senator CORMANN: Who else was involved? I do not want to enter into a discussion with the Chair. The record is that the mining tax deal was negotiated between the Prime Minister, the Treasurer and the Minister for Resources and Energy on one side on behalf of the government, and the managing directors of BHP, Rio and Xstrata on behalf of supposedly the mining industry, but presumably on behalf of themselves. Are you aware of any other example where tax policy was developed that way?

Dr Moran : No. I think that the normal process—and the government argued that this is the way it did it—is that you have a big powwow, a big debate, you call all parties in, then you call some selected parties in, and then you make a decision. The way you characterise it may well be the accurate way it is done but—

Senator CORMANN: When you develop tax policy, should the process not be open and transparent all the way through—

Dr Moran : Yes.

Senator CORMANN: so that all stakeholders have an equal opportunity to contribute rather than to give preferential access to some? Presumably, if you give access to some, you would expect that they would look after their own interests rather than the broader public interests, would they not?

Dr Moran : Yes, you would. You would expect them to do that. Companies basically only have one goal, which is to improve the wealth of their own shareholders, and that is a legitimate and quite appropriate role.

Senator CORMANN: It all started with the Henry tax review, which was supposed to make our tax system simpler and fairer. Do you think that the MMRT and expanded PRRT make our tax system simpler and fairer?

Dr Moran : It clearly does not make it simpler. There can be no contention about that. We have introduced a new layer of tax and we have introduced it for just two industries, so it certainly is not simpler. It is not fairer in the sense that one should treat all corporations in a similar way, which is why we have a flat rate of income tax on all corporations, so it is not fairer in that way. Others would say, ‘Well, we need a fairer distribution of the revenues coming through’, and that is another matter.

Senator CORMANN: The current resource taxation arrangements, for want of a better word, are based on the states imposing royalties on iron ore and coal, so given that there are implications from the mining tax on state royalty arrangements and on GST sharing arrangements, do you think it would have been appropriate for the Commonwealth to sit down with the states and territories and discuss the implications of the mining tax on GST sharing arrangements and state royalty arrangements before pressing ahead, particularly given that they had pretty high level discussions with the three biggest mining companies?

Dr Moran : I think it would have been certainly prudent, and probably appropriate as well, to have contacted the parties that are presently levying those taxes, to say, ‘We are going to supersede and override your own taxation powers.’ They may have even done that; I do not know.

Senator CORMANN: Have you had a look at the net fiscal impact of the mining tax package; that is the likely revenue over time minus the likely cost of all of the related promises attached to it over time?

Dr Moran : Yes, we have seen that. I think, as Professor Ergas has said, some of those numbers are very difficult to actually come to; we need to make some very heroic assumptions on future commodity prices. But to the degree that Treasury has got these numbers in at $3.7 billion to $4 billion a year additional revenue it is expecting to raise, that seems to me to be a relatively small amount of revenue for the risks that it imposes on what has been basically the industry which has catapulted our economy to its present level.

Senator CORMANN: Do you think we take the mining industry for granted in Australia?

Dr Moran : I do not know.

Senator CORMANN: A final question; in terms of the international competitiveness implications, have you had a look at how the mining tax, the way it has been designed and the way it is before us, will impact on our international competitiveness in terms of attracting investment in the future?

Dr Moran : Yes, we have looked at some of the rates in this country and other countries as well, for both the RSPT and the MRRT, which is about 40 per cent of its level, and clearly we are at the present time not particularly competitive in terms of international tax rates, but we go backwards quite a lot as a result of the MRRT on those two industries.

CHAIR: Thank you, Senator Cormann. Senator Ludlam.

Senator LUDLAM: You were concerned, I think, at the late stage of your opening statement that this tax had the potential to throttle the mining sector. Do you think the petroleum resources rent taxes throttle the oil and gas industry?

Dr Moran : No, I do not think it has; obviously it has not. I think there are several aspects of minerals which are different in terms of there are some minerals which have been the traditional minerals that we have had royalties on. We have had gold and platinum and diamonds and so on, and oil as well, because once you find oil, you are going to find an awful lot of it. But when we are talking about iron ore or coal, we are talking about dirt. We are talking about stuff that actually is one or two per cent at best, in the case of iron ore, of the actual soil in which it is dug up in. It has to be processed; it requires a great deal of skill and it is not rare.

Senator LUDLAM: The iron ore in the Pilbara is up to 30 or 40 per cent; I am not with you at all.

CHAIR: It is up to 60 per cent in the better sites. They blend it.

Dr Moran : Yes, it is 60 per cent if you find an absolute lot in there, but 60 per cent of iron ore in the middle of the Pilbara is worth very little until you actually get it into a port and into China. It is 60 per cent, of course—

CHAIR: It is not one per cent. There is not that much refining going on. You and I both come from Perth; we know what is going there, mate.

Senator LUDLAM: Do you have a geological background?

Dr Moran : No, I do not have a geological background.

Senator LUDLAM: I still do not understand the difference. You have not made the point very clearly, because the oil is also of no use until it is refined and brought to market. What is the difference that you are trying to point out?

Dr Moran : Oil is extremely valuable once it is found. Iron ore is not valuable once it is found. It is only valuable once it is processed, once it is developed at the port and once it has actually gone to a customer. Oil, as soon as it is found; there are fairly straightforward ways in which you can actually pipe it to a refinery and refine it and convert it into various products which are very valuable. Oil also is different in so far as if you find oil, say, in the North Sea or whatever, or anywhere, it is likely that you are going to find additional sources of oil nearby. You find iron ore, there may be additional sources but when we are talking about nearby, we are talking about hundreds of miles away.

Senator LUDLAM: I do not understand how this has any relevance at all to the tax question.

Dr Moran : The issue is if you are going to tax something, traditionally we have taxed things which have been very valuable, which has been gold, which has been silver, and this is why we call them royalties; the royal people taxed them. This has been extended to oil because oil became very valuable.

Senator LUDLAM: We have royalties on iron ore, copper and gold and—

Dr Moran : But essentially the original royalties were on things which were very valuable. We have extended it to iron ore and coal and to other things as well. That is okay; we have done that, but we have done it at relatively low rates.

Senator LUDLAM: But coal and iron ore are our two largest bulk commodity exports and we will hear the mining industry later telling us that it is the backbone of the economy. Are you running an argument that it is not valuable enough to require a resource rent tax?

Dr Moran : I am not running an argument about that. I am running an argument that we have a resource rent tax called royalties at the present time.

Senator LUDLAM: No, we do not. That is what you pay for access to the common wealth, if you will—to the natural assets. It is not a tax.

Dr Moran : It is a tax.

Senator LUDLAM: Do you think the mining industry should get those resources for free?

Dr Moran : Having been put in place, the answer is no, not at this stage, but to say it is not a tax is absurd; it is a tax.

Senator LUDLAM: It is actually not a tax. It is what you pay for access to the common wealth, to the public’s resources.

Dr Moran : No you do not. You pay a tax on the amount of ore or coal that you mine. It is a tax. We just call it a royalty; it is a tax.

Senator LUDLAM: That is very, very interesting. So, that takes my second question as well. You have provided the committee with a number of different estimates of the taxes that the industry pays, but you consider royalties to be part of the tax. So, that is how you have provided us with a range of numbers ranging between, I think, 38 per cent and 43.6 per cent or thereabouts, but you add royalties to those. In your estimates of the amount of tax paid by the mining industry, do you net out tax concessions and so on that the industry receives from the taxpayer?

Dr Moran : There are two different ways in which they are examined there, if you look at our data. We look at the annual return on capital and then we look at the actual net royalty payments included that they pay. What is included in that is you take out whatever the government has given in depreciation payments; is that what you are talking about?

Senator LUDLAM: Yes. Without diesel fuel rebate or various other handouts, do you net those out in your calculations, or not?

Dr Moran : Yes.

Senator LUDLAM: Could you maybe provide a break-up of how you have done that for us?

Dr Moran : Okay.

Senator LUDLAM: Just aggregate the figures for us. I think that would be greatly appreciated. You also said at the outset that you do not necessarily agree that there is a resource rent apart from, you used the example of, rare earths in China. You do not agree with the basic principle that this tax is premised on, that there are economic rents at the moment above and beyond the cost of bringing these resources to market?

Dr Moran : They are certainly very profitable companies, there is no question about that, and they are very profitable mines, but if you look at the aggregate number—and if you accept my numbers—the annual return on capital for mining in that 20-year period is 14.7 per cent, which is slightly above the rest.

Senator LUDLAM: That was the point that Professor Ergas made, but we are not proposing to tax the entire industry; just those that are making abnormally large profits.

Dr Moran : Yes, but if you tax those making what you call abnormally large profits, then you are taxing the whole lot, basically.

Senator LUDLAM: No, we are not.

Dr Moran : Yes, you are.

Senator LUDLAM: What do you mean?

Dr Moran : The thing is about mining is that most holes that you sink in the ground—you are from Western Australia, you would know—nine out of 10 hit nothing, one out of 10 hit something and maybe one in 100 hit something really big.

Senator LUDLAM: But you are aware that this tax would allow loss-making enterprises to carry forward those losses against—

Dr Moran : Yes, but it still imposes a net additional tax, otherwise there is no revenue raised.

Senator LUDLAM: It does, but only on the most profitable operations. That is the basis premise of the tax.

Dr Moran : Yes, but if you have got a portfolio of holes that you are sticking in the ground there and if somebody is placing an additional tax on the one in 100 that actually does make some sense, then it reduces the overall rate in which you earn the profits, because you are interested in what you are spending on all those 100. You are delighted if you have got one that is great, but if you actually hit that one pretty hard then you reduce the overall level of your portfolio.

Senator LUDLAM: Do you concede that profits in the mining industry have expanded? I do not know whether you have had time to look at the ACTU’s submission. They are appearing tomorrow. They have data that show that the nominal gross profits made in the September 2011 quarter were more than five times the level made in the March 2004 quarter—so 5.26 is the multiplier—whereas for all other industries the profit increase was 1.56 times. So, the industry is doing very, very well and maybe it is not just one in 100 holes in the ground; maybe it is significantly more than that. So, let us start there. Do you concede that the mining industry has rapidly increased the share of profit that it is taking out of the ground?

Dr Moran : I not only concede that, I welcome it; it certainly has done. It has increased the level of its profit considerably, but like I said before, this has happened over a period of 10 years or 20 years, even, but if you go back another 20 years, of course the mining industry was basically facing bankruptcy.

Senator LUDLAM: Yes, so a super profits tax would not apply. The premise behind this tax, as imperfectly drafted as it has been—and I am sure you share some of the criticisms about the imperfection of the drafting—is that the public deserves a share of those increased profits, because royalties do not track profits, they just track tonnage. Do you understand the premise of the tax?

Dr Moran : I understand the premise of the tax. I understand the issue about a royalty as a flat rate and a profits tax. I would readily agree with you that the normal economics profession generally would say a profits rated tax is better than a royalty.

Senator LUDLAM: The professor just told us you could have it either way—

Dr Moran : You could do it either way, but I think that most people would argue that if it is a rate on profits, it is better than a fixed rate, just like most people would argue that a rate on profits for companies is better than a fixed rate, for the same sorts of reasons.

Senator LUDLAM: Are you for the tax or against it?

Dr Moran : I am against an additional tax on this industry because I think these industries are industries which show the greatest promise. What those people who want the additional tax are saying is that we ought to take it from these industries and give it to these other industries or to these individuals. In doing so, you will take it from those industries which have got the most promise, the most potential in terms of driving our living standards, and at best giving it to other industries which are unlikely to be as successful.

Senator LUDLAM: What about giving it to people who are being displaced by the impacts of, for example, the huge movements in the exchange rate over the last 10 years, who are being displaced from tourism, education and manufacturing sectors? Do you think there is some role in redistributing from the super profits to help support people who are being displaced out of industries that are actually really suffering from the impact of the mining?

Dr Moran : I think that is a recipe for saying we ought to reduce our living standards generally.

Senator LUDLAM: No, we are trying to improve people’s living standards.

Dr Moran : You are trying to increase their living standards, but you are reducing the overall living standards of people in the economy, and I think that would be not a sound sort of policy.

Senator LUDLAM: I am not sure how you arrived at that at all.

CHAIR: Thank you, Senator Ludlam.

Senator LUDLAM: Can I put one final question?

CHAIR: You may.

Senator LUDLAM: Does the mining industry fund the IPA? Do you need to declare an interest in any way?

Dr Moran : The IPA is an organisation with about $2 million of funding.

Senator LUDLAM: $2 million or $2 billion?

Dr Moran : It is not $2 billion; it is $2 million. We are a very small outfit. We have funding from a variety of sources. I am not familiar with them all. We do not reveal our funding levels because some MPs in the past, having had that information, have targeted firms and told them not to give us money.

Senator LUDLAM: Are you supported by the mining industry?

Dr Moran : We get money from mining, manufacturing and service industries. As I understand it, most of our money comes from what we now call ‘high worth individuals’. Going back 20 years it used to come from corporations.

Senator LUDLAM: Are some of those high worth individuals those that would be impacted by the implementation of this tax?

Dr Moran : I do not know.

Senator LUDLAM: Would you be able to find out for us?

Dr Moran : I would not tell you. That is confidential information.

Senator LUDLAM: That is a great shame.

CHAIR: I would like to go back to the point that you made that mineral deposits are not assets. You said that an oil field or a gas field is an asset because it can be immediately realised. You instanced that the costs for a mineral field, perhaps out in the middle of nowhere, with rail, port and shipping, led you to the view that it was perhaps at best a potential asset as opposed to an actual asset. How is that different to an oil field or a gas field 1,000 or 1,500 kilometres into the Indian Ocean or into the Southern Ocean in deep water? Pipes have to be put down and they have to be put across. They have to be shipped to the coast, to Perth. It has to be put into a refinery. It has to be condensed down, put on to a ship and sent off to Korea or Japan. In principle, how are those two deposits different—one 1,000 kilometres inland in the ground and the other 1,000 kilometres out into the Indian Ocean under the ocean?

Dr Moran : In principle, they are not markedly different, but in practice it is clear that an oil discovery and some gas discoveries, but not all, once they are discovered are bonanzas. Government’s cupidity is such that they will seize some of that. Every time they do that it reduces the incentive to go looking for it. In the case of oil, it is so valuable and has increased in price so much that that incentive clearly would not be negated, except in some of those places that you have addressed, that is far offshore and so on.

CHAIR: They are far offshore.

Dr Moran : In those cases when they are far offshore then there is a disincentive, but then technology starts catching up and makes it cheaper—even though they are far offshore—to actually sink wells and to tap that resource.

CHAIR: I accept that there is a lot of technology used, there is high cost and difficulties in accessing an oil field or a gas field 1,000 kilometres out into the Indian Ocean, but how, in principle, are those constraints on development different to a hematite field, a magnetite field or an iron ore field 1,000 kilometres inland?

Dr Moran : They are not different.

CHAIR: The second point you make is the issue of cost. The cost of production of a tonne of iron ore, depending on the field, is somewhere between $40 and $80 at the moment in Western Australia—that is in a primary ore producing area. The spot price for a long time has been somewhere between $140 and $180. In recent months that has trended downwards, but that is the spot price, so there are huge returns being made. It is those returns that manifest themselves in net earnings that the government is targeting in terms of the iron ore industry and coal. How do you come to the conclusion that those abnormally high returns currently being received, and likely to be received in the future, should not be the subject of this particular taxation?

Dr Moran : Let me ask you a question based on that. If, in fact, you as a legislator were to say, ‘When the price is very high we’re going to increase your taxation levels’, are you then going to say, ‘When the price is very low we’re going to reduce them’? The answer is no, you are not. Basically, that is why we have a flat rate of tax. It is very difficult to judge what is going to happen in the future. We know what has happened in the past. We know in the past that the $40 to $80 was pretty similar to what they were actually receiving.

CHAIR: Follow that train line. If your argument is correct, that means that what I would characterise as abnormally high earnings from either iron ore or coal should never, ever be the subject of this type of tax by government.

Dr Moran : That is my contention. The alternative view is what the Henry review was talking about, which was called the Brown tax, which I am sure you are familiar with. That was, as I characterised it, that the government almost becomes a shareholder, if you like; it takes a high share, but then pays for the losses. The problem is nobody would believe the government. The government would renege on those deals.

CHAIR: So you maintain that proposition that if iron ore and coal prices are maintained reasonably close to current levels, not for the next five or 10 years but for 20 or 25 years, they should never, in any of that time, be subject to this type of taxation?

Dr Moran : It would be impossible that that would happen. It would mean that nobody is attracted to this industry. We know that iron ore is relatively common around the world. If, in fact, these sorts of prices are maintained for the next 50 years—and nobody suggests that they are going to be maintained—that would defy all economic logic. It would mean that people are blind to opportunities, that they are not going to search.

CHAIR: Or the cost of alternative opportunities is too high.

Dr Moran : But iron ore is not something that is rare. There is a lot of it around the world. People will uncover other lodes of it and will develop the quantities such that nobody will think that these sorts of prices are sustainable. Our terms of trade is 140, and by definition 100 is the norm.

CHAIR: Understood. Senator Eggleston.

Senator EGGLESTON: I have a quick question that is related to this. You questioned the proposed revenue stream being maintained. Relating to what we have just been talking about, I went to the Bao conference in Perth last year. That was a Chinese industrialists conference held in Perth because Perth was the centre of the iron ore province of Australia. One of the sessions was devoted to the high price of iron ore. They had overheads showing the price going up quarter by quarter and the Chinese were clearly displeased with this. We also know that there is a very large investment in African iron ore mines going on with Australian money as well as Chinese money, co-investments in fact. Are you alluding to the fact that other sources of iron ore will come on stream and that these very high prices which the Chinese have complained about for a very long time are unlikely to be maintained and therefore some of the basic presumptions underlying the revenue from this tax may not be valid?

Dr Moran : That is the point that I was making with Senator Bishop. We all agree that iron ore is not particularly rare. We all agree that these prices are very high. We all agree that the Chinese, or the customers, have a vested interest in finding additional sources. On top of that we have the issue that you are raising that a lot of countries would want the development and are conscious that we have assets that they do not have in terms of stability and so on. They are, in fact, putting in place very competitive regimes and lowering their royalty rates to attract this sort of capital, at the very time that we are talking about imposing punitive taxation on our own companies.

Senator EGGLESTON: In fact, in Africa the Chinese are building the mines and selling it back to themselves. Obviously the cost of development will be lower because they are putting in the workforce and they will sell the iron ore at a lower level than the Australian prices, so the Australian prices will have to fall.

Dr Moran : If they increase the supply, then the prices will fall. That is the sort of mechanism by which the supply increases. There are many countries in Africa—Angola, Botswana and South Africa itself—which basically are anxious to invite that capital over which will, in the end, suppress the price.

Senator EGGLESTON: That is contained in the MYEFO on page 4, where the Treasury states:

The medium term outlook is for Australia’s terms of trade to decline as the global supply of iron ore and coal increases.

It would seem that the basis of this assumption, that these prices will be maintained and the revenue stream will be what they claim it will be, is perhaps questionable.

Dr Moran : Treasury are acknowledging that there are dizzy heights at the present time that cannot be maintained, given what we know about these resources and their abundance throughout the world, and the ability of the Chinese and other entrepreneurs to go and find these and to finance their development.

CHAIR: I have also referred the committee and the secretary to the same discussion you had last week on this identical point in estimates, Senator Eggleston, where the secretary of the Treasury effectively rebutted that proposition.

Senator EGGLESTON: I did not think he said that at all.

CHAIR: We will incorporate that in the discussion in this committee’s report. Senator Thistlethwaite.

Senator THISTLETHWAITE: Does your organisation do work for mining companies? In other words, do you work with them?

Dr Moran : No. We are not a consultancy.

Senator THISTLETHWAITE: Would you agree that some form of super profits tax in the mining industry has been talked about for quite some time in Australia. There has been the Henry tax review. There is the Resources Super Profits Tax, now the MRRT. Many of the miners have known that this has been coming for quite a while, haven’t they?

Dr Moran : Ever since I have been in Australia. We had the Garnaut resource rent tax back in the seventies, so yes. There have been rumours, innuendos and proposals about a resource rent tax for a long time.

Senator THISTLETHWAITE: You said earlier that you have a view that it could adversely affect exploration and development—in fact, it says that in the executive summary to your submission—and diminish incentives to invest and expand production capacity in Australia. I take issue with that for a number of reasons. There was some data published last week by Geoscience Australia which indicates that coal exploration spending in Australia rose by 62 per cent last year, at a value of $520 million, but the point that I think is crucial is that it is now growing at a greater rate than gold exploration. That would seem to refute your argument that this tax is going to have some sort of distorting effect on exploration, because you have coal growing at a greater rate than gold and the tax is not going to apply to gold.

Dr Moran : There is quite a simple reason why that is the case, and that is because the gold price has not risen as fast as the coal price in recent years. Basically, the tax must have a dampening effect on that. It is just the laws of gravity. If you are to impose an additional cost on something then there will be less of it done.

Senator THISTLETHWAITE: Does that highlight the fact and the philosophy that levying this MRRT at this time on those industries is affordable?

Dr Moran : Affordable, but basically anything is affordable. If you increase the corporate tax to 50 per cent, then that is affordable in that sense, but you would actually see less activity. You are suggesting that we are going through a process now of very strong activity in these areas, which is accurate and true. In fact we have some numbers that more than 40 per cent of capital expenditure at the present time is in the mining sector. That is terrific. That is there because this is the area of greatest prospectivity for income growth for Australia. It is not in tourism or manufacturing, because they do not produce as big a payoff and they do not make the companies or us as wealthy.

It is great news that there is a lot of expenditure going on in coal exploration and also in iron ore, but do we then say, 'We ought to have less of this,' because if we have less of this we will have less growth and less income.

Senator THISTLETHWAITE: I suppose an analogy to your argument is that if we did not have income taxes then people’s incomes would grow at a greater rate and if we did not have company taxes then company profits would grow at a greater rate, but we have those taxes to fund services in our economy. The Australian voting public accept that, yes, income levels will not be as great for individuals or particular companies, but the wider utility economy-wide is greater.

Dr Moran : Quite so. That is what people make a decision on. We are going to have 30-something per cent of our gross national product taken up by government. If we had less, if we had 20 per cent as in China, we would have faster growth. We are sacrificing growth.

Everybody really agrees that the flatter the taxation the better. We do not want distorting taxation. We do not want to be picking winners, putting a tax here at this rate and a tax there at that rate; we want a flat rate and then entrepreneurs can make decisions as to where they make their investments based on how they make the most profit and how, in fact, we then enrich ourselves.

CHAIR: I have two quick points to conclude. You concede, of course, that the proposed MRRT is a profit based tax, so that if profit levels drop so will the tax. You do not quarrel with that proposition, do you?

Dr Moran : No.

CHAIR: In that context, do you feel that the MRRT is more responsive to changes in profits than royalties?

Dr Moran : Senator Ludlam was basically making that point. If we were starting on royalties anew, I would suggest that royalties placed on a profit basis are better than on an output basis. They are both taxes. One is based on profits and one is based on output. There is a case against it, but the conventional view, which I subscribe to, is that is the way that we should impose these taxes.

CHAIR: So a tax that is more responsive to changes in profits and royalties is preferable in your perspective?

Dr Moran : That would be my view.

CHAIR: Thank you for coming in and sharing your views with us. I now call officers from the Australia Institute to come forward.