The Mineral Resources Rent Tax Siphon

Green and Gold Greed…

The financial world gets more complicated (and fragile) by the day. Australian investors were sorting out what to make of China’s official and unofficial Purchasing Manager Indexes. Both showed expansion. But one (the non-official HSBC) went from contraction to expansion while the other (the official government one) declined but still showed expansion.

The last thing Australia needs right now is to worry that China’s manufacturing economy is sputtering. After all, that Chinese engine of growth consumes huge amounts of Australian resources, like coal and iron ore. The government is keen to siphon off revenue from mineral and energy exports in order to do what it does: take from one party in order to give to another, while sounding self-righteous and looking important.

Maybe this was all running through the subconscious of Aussie investors. The ASX/200 fell 1.5% yesterday, this despite the Reserve Bank of Australia (RBA) rate cut from 4.75% to 4.5%. It was a grim day. And it’s about to get grimmer…

In Australia, things certainly won’t be helped as the Mineral Resources Rent Tax (MRRT) takes centre stage in parliament this week. Green’s leader Bob Brown wants gold added to the list of resources that gets taxed, along with iron ore and coal. And independent Tony Windsor says he’ll refuse to vote for the tax unless a $200-400 million fund is set up to research the impact of coal-seam gas.

What a great example of people who think something can come from nothing. The Greens want to tax coal, iron ore, and gold because those are the exports generating the most revenue for Australia. If you rob banks because that’s where the money is, then you can understand why the Greens are after money from these commodities: it’s where the money is.

There is an element of pure greed to the tax. Parasites don’t consider how the host organism got to be big and strong enough to support them. They just take what they want. In this respect, the MRRT isn’t novel.

What we find novel – maybe because we’re a greedy, soulless, elitist, gold-eating, profit-seeking, tree-hating American – is how many Australian politicians take wealth creation for granted. What’s worse, they seem to believe they are entitled in some moral way to take what they want from anyone on behalf of “the public”.

This gets back to our discussion of communal property, war, and the State. The State – in this case Bob Brown and Tony Windsor – feel entitled to tax miners because they are making money from “public lands”. Nothing is said about the risks borne (consensually) by private capital, or the private expertise it takes to find and extract resources at a profit. It’s as if those in government assume people will do all this anyway, and that there’s no special skill, talent, or value in it.

Perhaps Australia is just cursed. The Pilbara is a good example. There is iron ore there. Lots of it. It’s just lying around. True, there are obstacles to getting it to market. BHP Billiton and Rio Tinto and Fortescue have had to invest in railroads and ports to get their ore to China. But for the most part, the ore is so red and so obvious that it makes it look easy. The apparent ease of mining coal or iron ore and selling to China is what makes it tempting to take the public’s “fair share” of that money.

But creating wealth isn’t easy. The mining companies aren’t just “extracting” resources and profits. They are creating goods and jobs and revenues that wouldn’t otherwise exist. It’s Australia’s curse that it’s made to look easy.

This apparent ease leads to pinstriped totalitarians like Bob Brown and Julia Gillard to make populist arguments that justify taking what isn’t theirs. This is pure parasitism, which as we said, is nothing new. It is, though, amazing how nakedly greedy this kind of out-and-out theft has become.

And to be fair, Tony Abbott is no friend to private property and individual rights either. In the debate over coal-seam gas (CSG), he initially backed the rights of farmers to have a say over what happens on their land. He then changed his mind once he realised billions of dollars had already been invested by industry. Politicians who last know where their bread is buttered… and who butters it.

But the issue here is not political. The issue is whose rights come first: the State or the individual?

The CSG debate baffled us until we understood that farmers in New South Wales and Queensland don’t have private property rights the way we’re used to understanding them. It is perfectly legal for a company, with the government’s permission but not the landowner’s consent, to come and drill for gas underneath a farm.

That is, of course, outrageous. That companies would do so without being more sensitive to public attitude is surprising. That the government would sell exploration leases, bank the money, and then howl about the process is not surprising at all. That Australians don’t really have full private property rights is a shocker.

Of course, we know nothing about Australian law. So maybe there is a very sensible explanation of why the Crown (the State or Commonwealth government) has more say over what happens over your property than you. But in the absence of such an explanation we’d say the problem is pretty obvious: the State is more important than the individual under Australian law.

If this is the case, it would explain a lot of things that have previously remained a mystery to your American-born editor. It would explain the high-handed manner in which Australian politicians act. It would explain the lack of legal protection for other rights, like free speech. And it would explain the confusion of whether the government gives you rights it can take away, or whether you have them to begin with.

Those are all political and legal issues. But it has something to do with the cosmos, too, or the order of the financial universe in which you live. If the rules in that universe are simple – low taxes, rule of law, free trade, private property rights, and sound money – the universe expands in an orderly, fair and just way.

If, on the other hand, the rules are based on getting something for nothing (Greek Debt) or on the idea that the State is more important than the individual and can take what it likes (Australia), well then, it’s going to be a profoundly unfair and unjust universe. And it won’t expand forever. It will probably blow up.

Dan Denning
for Markets and Money

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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5 Comments on "The Mineral Resources Rent Tax Siphon"

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Noting the cost per tonne and minimal fixed infastructure spend estimated to get at the offshore iron ore in NZ, and the point at which we are in the commodity cycle, no wonder big players like BHP supported the MRRT. When the commodity cycle dips they will pay less tax after deducting input costs than they would have paying existing state royalties. By the time before the start of the next bull market they will have had plenty of time to organise a campaign to lower the MRRT based on competitive pressure, and governments will have seen plenty of capital… Read more »
Rod Campbell-Ross
The MRRT, which you attacked to heavily in this article is a perfectly legitimate tax if used correctly. According to Resource economics 101 the proceeds should be hypothecated for the development of replacements of the resources in question so that in the longer term income (“utility” if we are sticking with economics) remains constant. I personally would be satisfied if the money was hypothecated simply to infrastructure generally. Unfortunately, being government, (of either stripe) the money will likely be blown on current expenditure. Even so, I still support it. Why shouldn’t Australians benefit from the sale of their own resources?… Read more »
Patrick Donnelly

Ross has a point.

The owner of the ore is each state, yet the Fed government is the one imposing a tax? There is neither logic, nor morality to tax.

As the price of these items increases, so does the profit and thus the tax including royalties. So that suggests no need for this dreaded tax.

But, starting a para with a disjunction, once it is so obvious that infrastructure is available, no matter by whom built, and that the ore provinces are so large, then the risk attaching to mining is obviously lessened. Diod that point escape DD?

Mining is the only industry in which Australia IS THE GLOBAL LEADER, even with our high labour costs, this advantage was being transmitted into other globably competitive high paying value added industries such Engineering & Construction / Mining Services / Manufacturing of mining equipment etc. I work in in north america and have witnessed several australian mining service/engineering companies coming in and buying out north american companies, I love seeing north americans answering to Aussie bosses, how the times area a changing, nobody at home seams to acknowledge this. All due to the strength of our home mining industry and… Read more »

You’re an idiot.

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