Taxing Resource Rent

An effective comparison of a royalty with a resource rent tax on the mining industry should be made applying tax rates which are approximately revenue neutral. The comparative rates depend primarily on the higher cost mines with less favoured natural deposits relative to the cost advantage of mines with the most favoured natural resource characteristics. For example, for a 7 per cent royalty rate, to raise comparable government revenue, the resource rent tax rate would be about 25 per cent if the more favoured mine had a 50 per cent cost advantage; but, the rate would need to be about 50 per cent if the cost advantage was only 20 per cent because of the smaller resource rent tax base.

Given wide swings over time in commodity prices, a royalty generates a more stable stream of special taxation revenue than the resource rent tax. On the other hand, mining industry revenues and profits are more stable under a resource rent tax regime. State Government royalties have featured significantly in the deliberations of the Commonwealth Grants Commission concerning the interstate division of federal GST revenue in the horizontal fiscal equalisation process in the Australian federation.

Given this, and the direct effects of volatile revenues on State budgeting, the greater revenue stability of a royalty has an advantage. What about the relative efficiency effects of royalties and resource rent taxes?

This involves a trade-off between the larger distortion of the royalty to production decisions on mines to develop and the extent of mining a particular natural resource; and the potentially larger distortion effect of the resource rent tax on the level of investment of mobile inputs in exploration and the development of technology, management and work practices to lower production costs. Because the resource rent tax base is much smaller than the royalty base, as noted in the table above, in order to collect about the same revenue the resource rent tax rate has to be severalfold times the royalty rate.

Both the royalty and the resource rent tax reduce the after-tax return from mobile investments allocated to the Australian mining industry, but as it must be levied at a higher rate, the resource rent tax imposes a larger disincentive to investment in exploration and cost reduction technology. Ultimately, the relative efficiency cost of the two options is an empirical question, and currently only limited information on key parameters is available. Further, the trade-off will vary across products and over time. Both options will collect similar revenues from non-residents, taken as an aggregate of buyers and investors.

Of secondary importance, the resource rent tax will collect a larger share of the aggregate revenue from investors, and more from investors in the mines with more favourable natural resource deposits. Simplicity favours the royalty system, relative to a resource rent tax, especially as the fiscal equalisation process of the Commonwealth Grants Commission must be sorted out for the States in any change of policy for mining special taxes.

There is not an unambiguous case for superiority of a resource rent tax versus a royalty in Australia. Detailed information about the relative costs of different mines, the importance of investments in exploration and in cost reductions over time, and the mobility of these investments across countries and other industries is required to quantify the trade-offs. It cannot be assumed that the ideal efficiency of a resource rent tax will be translated in practice.

Simplicity, together with similar effects in collecting revenue from non-residents, favours staying with the status quo until more specific and believable data on key parameters becomes available. This article is based on Freebairn J , Reconsidering royalty and resource rent taxes for Australian mining, Australian Journal of Agricultural and Resource Economics. John is an applied microeconomist and economic policy analyst with current interests in taxation reform and environmental economics.

Thanks John for the article. The first comment that I have is that you have suggested that a tax with stable revenue from year to year is a positive attribute, and hence an advantage of a royalty based system. In other circumstances we are told that anti-cyclical taxes are good i. Is there something special about mining taxes in this regard, or are you against automatic stabilisers in general? The second comment is that there appears to be more scope for simple royalty rules to act in a way that captures more of the pricing rent.

You point out that royalties are often paid as a percentage of sales price, meaning that they already increase when world prices increase and capture some of this windfall gain.

Could you not set up something that responded more to the world price. Australia is missing out on tax revenue from gas projects Em News. Surely given the complexity of taxation and its inevitable rorting by multinational oil companies, australia would be better off with a norwegian state ownership model.

As it stands, a very small percentage of extraction and sale value will ever be delivered to australian tax payers. I dont fully grasp the endless complexities which seem to be in place for the purpose of tax evasion, but would like your opinion and rationale on whether we are just allowing big oil to just loot our house.

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Regards duncan Australian citizen. Australia is missing out on tax revenue from gas projects - Pigs Fly Newspaper. Your email address will not be published. Sign up to our newsletter. Website by Osky Interactive.

The Tax and Transfer Policy Blog. Royalties or Resource Rent Taxes? The business of mineral production Mineral production requires the natural resource deposit plus labour, capital and other inputs. International cost curve for alumina and impact of carbon pricing per tonne of alumina Source: The tax was passed by the Senate on 19 March by 38 votes to 32, with support of the Greens. The tax was calculated separately for each mining project interest, [20] according to the formula. Where a mining project interest's mining profit was negative, it was deemed to be nil for MRRT purposes.

Allowances were available for deduction against mining profits in the following order: Additional compliance costs for the mining sector reportedly ran into millions of dollars. Opposition to the tax was cited by many commentators [ who? Soon after the latter's appointment as leader, the government reached an agreement with several of the largest mining firms, including BHP Billiton, Xstrata and Rio Tinto, [8] on changes that were announced on 2 July The changes led to a reduction in the amount of revenue expected to be raised by the tax and offsetting reductions in the tax breaks the MRRT would have funded, for example; the proposed company tax cut was halved due to the reduction in revenue to be collected from the tax, along with reductions in other areas.

On 12 February , Rudd, one of the authors of the tax, stated that "Wayne Swan and Julia Gillard must bear the responsibility for Labor's mining tax and deal with the consequences [of] its near non-existent revenue" [31] as the expected revenue has not materialised. The tax also proved to be complex and expensive to operate. In , Fortescue Metals Group and several of its subsidiaries launched a lawsuit challenging the tax's validity under the Constitution of Australia. On 7 August , the High Court of Australia unanimously rejected the claim, [34] [35] declaring that the tax did not:.

The Coalition had promised at the and elections to repeal the tax. After winning the election, it introduced the Mining Tax Repeal Bill. After failing once, and following Coalition negotiations with the Palmer United Party , the bill passed both houses of Parliament on 2 September , and received Royal assent on 5 September Its implementation took place over several dates:. From Wikipedia, the free encyclopedia. Australia portal Mining portal. Retrieved 2 July Retrieved 17 January Archived from the original on 27 February The Sydney Morning Herald.

Retrieved 16 February Retrieved 19 November Retrieved 10 September