Like many contemporary political issues, everyone has a very strong opinion regarding the proposed Resource Profits Super Tax (RPST). But as it was with the proposed emissions trading scheme (ETS), very few of us have a comprehensive understanding of how exactly it works. Fewer still are able to appraise the situation from a perspective that does not relate specifically to their own self interest. But such is the nature of these things.

Rather than get lost in the detail of the proposed tax, let us instead evaluate the situation from a broader perspective. The first thing to appreciate is that the current tax regime for mining companies is in dire need of reform, something both sides of the debate acknowledge. A tax based on the principle of economic rent is one that most experts agree is not only fairer, but also encourages investment (in essence, economic rent is the level of profit in excess of the bare minimum required to make a given economic venture worthwhile). Here too both sides are for the most part on the same page.

Where opinions start to differ is with the detail. Essentially, the miners argue that the rate of tax that is levied is too high, and the level it kicks in is too low. The Government maintains that this is very reasonable and that the miners have just gotten used to paying very low taxes for too long. They also argue that the proposed system will provide significant benefit to those projects that turn out to be unprofitable, or not highly profitable.

As is often the case, both sides have some valid points, but both are guilty of exaggeration and spin. I tend to think that a rent based tax is a great idea, and that although the details may need some adjustment, it will be of great benefit to the mining sector over the long term. Especially so when the resource boom eventually and inevitably starts to wind down.

The point I want to discuss though is the broader issue with Sovereign debt. Australia is lucky enough to have escaped the worst of the GFC, and indeed we are the envy of the western world. But the fact remains that, like so many countries, we need to ensure that our debt levels remain reasonable and under control. If we don’t we will eventually end up like Greece, and of course no one wants that.

However, there are essentially only two ways to reduce budget deficits and Government debt: cut spending or raise taxes (or both). Neither is politically palatable, as we have seen with the reaction to the European austerity measures. But be that as it may, it is unavoidable.

The Government of course knows this, and knows it needs to act sooner rather than later. The Henry review seemingly provided an answer on a silver platter: tax the super profitable miners and avoid the angst of the general population. Well, obviously it hasn’t played out like that, but only because the Government has been very bad at explaining the issue, and the facts have been tainted by very powerful and well resourced interest groups.

People opposed to a higher tax regime for the miners must understand that if it doesn’t go ahead, the Government will need to raise money elsewhere, and that could well be in the form of higher personal tax. No one will be happy with that and it will be political suicide. Otherwise the cuts to Government spending will need to be far more aggressive. Again though, voters probably won’t appreciate significant cuts to hospitals, education, welfare, infrastructure and the like.

So let’s all take a step back and understand that although the RPST is far from perfect in its current form, it has the potential to reform the mining tax regime and raise significant funds in one stroke. The miners will always and should always do what they can to maximize returns for shareholders, so we can expect them to fight tooth and nail against this, but the fact is that they can afford to pay more tax and still remain very profitable. Even in its current form the RSPT will not decimate the Australian mining industry, despite claims to the contrary.

Let’s not forget too that what they are profiting from are the natural resources that are collectively owned by every Australian, and we need to extract a decent return for ourselves. One day this boom will be all over and we will ask ourselves who reaped the lion’s share of the benefit. Most likely it will be corporate interests, and indeed they are entitled to make a decent return from their hard work. But citizens should understand that the current regime means that the country itself is not getting anywhere near its fair share.

Somewhere between the two ends of the spectrum of this debate the truth lies. Rather than get hysterical over the extremes, let’s debate the issue in a calm and objective way. This issue is a big one and requires strenuous debate, but let us first establish the facts before we all go off half cocked.

But before we get on to today’s Money Morning, a brief announcement…

The guys and gals at the Melbourne Adam Smith Club have been crazy enough to invite your editor to be the guest speaker at their May dinner function.

You can download an invitation to the event by clicking here. So, if you’re in Melbourne and you’ve got $45 to spend on a curry dinner and listening to your editor waffling on for half an hour or so then feel free to sign up for it.

We’ll look forward to seeing you there.

But for today, this…

“Greece on the edge of abyss as riots turn deadly”

So says today’s The Age newspaper. Perhaps now the mainstream commentators and finance professionals might start taking things seriously.

For weeks we’ve seen “experts” telling us that Greece will be an isolated event. That it could have an impact elsewhere in Europe, but it shouldn’t have any bearing on the US or Australia (Australia’s different you see).

Then at the start of this week talk of contagion started to do the rounds. But again, maybe Europe and the UK will go pear-shaped, but that’s all. We’ll be fine. Our lovely banks don’t have any Greek exposure.

But now today we’ve got “abyss” being used.

That’s hardly surprising considering the deep mess Greece and the European Union is in. And quite frankly it’s something that should be taken seriously.

We’re not talking about common-all-garden riots here. We’re not talking about World Economic Forum style riots with a few bags of flour being thrown and the odd urine water bomb splashing across the old bill.

It’s not the type of riot where the participants turn up for a bit of copper baiting and argy-bargy, fully expecting to return to their day job in the call centre on Monday morning. From what we can see it’s yer proper lootin’ and a killin’ civil unrest.

But we’ll see. You never know, it could all blow over before you know it. However, we’d want pretty decent odds if we were going to place a bet on it.

So who’s to blame for the Greek mess? Are the Greeks behaving like spoilt brats? Do they deserve the punishment that’s being dealt to them? Haven’t they received all the benefits of government largesse?

It won’t surprise you to learn that we firmly place the blame on the government. Sure, the Greek public aren’t completely innocent, thinking they could have something for nothing. But when it comes down to it, the prime reason for the current mess is the politicians and their insatiable appetite for power.

I’m afraid it’s the nature of the political beast. And it’s why we believe in a minimalist government.

The more powers that politicians are granted, the more they’ll want. The more they get to control things, the more they’ll want to control other things.

Eventually it reaches a tipping point. The government ends up having its fingers in so many pies its actions have the biggest impact on the fortunes of the economy. You can see that in Greece, and you can see that in, er, Australia…

Just look at what the Fairy Ruddfather has done to the markets this week. The impact has only been this big due to the excessive influence of government.

And it adds further evidence to support our claim that Australia does not operate a truly free market. In a free market with limited government, the government would not have this kind of power and could therefore not make these decisions.

As we’ve pointed out all along, it is the excesses of government that is the overwhelming negative influence on the economy, not free enterprise.

The front page of today’s Australian Financial Review (AFR) has political hack Laura Tingle leading with:

“The war of words over the resource super profits tax has overshadowed how the Henry review has presented the government with a new fiscal policy lever to control the economy. The lever is a new tax which, as a macro-economic policy, could reweight the way the economy works.”

To free-marketeers that kind of statement is enough to make you drop your copy of The Wealth of Nations into your bowl of cornflakes of a morning.

We love the last part especially; it “could reweight the way the economy works.”

See what I mean about the obsession for hapless bureaucrats and politicians to control things? They just can’t help themselves.

The idea that the Resource Super Profits Tax is a new lever to control the economy is just plain madness. But again, it’s the overconfidence of bureaucrats who believe they saved the Australian economy from disaster.

We’d love to hear from Ms. Tingle her explanation of how economies work. Our guess is that she believes it involves politicians and bureaucrats pulling and pushing levers like an old signalman.

Clearly Ms. Tingle and other government and tax lovers have some bizarre idea that economies can be directed at the whim of bureaucrats just as a child can control a toy train set.

In fact, in a Money Morning exclusive, below is a photo we secretly took this morning of a government bureaucrat in action – not surprisingly he’s sitting down on the job (probably an occupational health and safety thing):

Obviously the lever that’s been pulled right forward is the Australian housing market! “Full steam ahead Gordon…”

Anyway, the Keynesian hordes are still blindly pushing on with their crazy ideas. Not content with getting the global economy into the current mess they are determined to press ahead with even crazier ideas.

Page 71 of today’s AFR has John Freebairn writing:

“The RSPT could be much higher, close to 100 per cent without deterring the investment.”

What is he going on about? Can he seriously suggest that if you impose a 99% tax on something that investors will still pile in?

Apparently Mr. Freebairn holds the Ritchie Chair in Economics at the University of Melbourne. Based on his attitude to taxes we can only assume it must be the Ritchie Benaud chair, because whatever this Ritchie is, he or she can’t have anything to do with economics.

But at least he’s man enough to admit to the charge we levelled earlier this week. That the Super Profits Tax was nothing more than a backdoor to nationalisation:

“The RSPT plus corporate income tax collected will rise with booms, when capacity to pay is greater, and fall in slumps, when capacity to pay is reduced. In effect, government, on behalf of the citizens who own the basic resources, becomes a shareholder in the mining industry.”

The mistake the prof (if he is a prof) makes is that there will be boom times to begin with.

Who in their right mind will invest capital when they know the government is snatching a load of the profits, and where there’s no guarantee the government won’t take a bigger cut when it feels like it.

Companies and entrepreneurs will only invest capital if they believe the return will justify the reward.

All businessmen and women embark on a business in the full belief they have the nous to make money from it (unless it’s property investing of course, where the idea is to lose as much money as possible). Now, that isn’t to say that all will make money. Some will fail spectacularly. But the point is, they have the belief from day one that in the long run they can earn a buck from the venture.

And obviously some business ventures have more risk than others.

It’s pretty unarguable that opening a little coffee shop on Fitzroy Street here in St Kilda requires less capital investment, less risk and lower returns than someone exploring for gold or iron ore in the Australian outback.

But according to Mr. Freebairn, the return on a coffee shop in Fitzroy Street and a gold mine in Western Australia would be virtually the same, if as he suggests, miners’ Super Profits were taxed at “close to 100 per cent”.

Anyone with an ounce of grey matter can tell you that if the returns are the same or similar, it’s only natural that an investor will opt for the investment with the lowest risk of failure.

But aside from all this, there’s potentially an even bigger concern on the horizon. And that’s the impact government meddling will have on your retirement savings. But that reader, we’ll have to leave for tomorrow…

Cheers,
Kris.

We have to admit to laughing out very loud indeed after listening to the Fairy Ruddfather’s interview on Perth radio yesterday. But more on that in a moment…

First, the Australian mainstream press can only be described as pathetic.

We’re quite serious when we say they should all just resign.

The mainstream response to the government’s tax review was amateur-hour. Now, I’ll be honest, I’ve got no idea what goes on in these media ‘lock-up’ events. Our guess is that the press are given advance copies of the report, probably a Powerpoint presentation, and the opportunity to ask a few questions.

Oh, and a choice of tea or coffee and a few Arnott’s biscuits.

Then they get to write the news and send it back to their editors as soon as the embargo is lifted.

In other words they’ve had a lot of time to filter through all the info. But if that’s the case, how come they completely ignored the fact that this new Super Profits tax isn’t really a tax on Super Profits at all?

And how come it took your editor less than an hour yesterday morning to realise that the Resource Super Profits Tax was a fraud. That it was nothing like the tax on big profits the leaks from last week and yesterday’s reporting would have you believe.

The worst offender has to be the so-called premium business newspaper, the Australian Financial Review (AFR). If Standard & Poor’s gave ratings on the media it would surely downgrade the AFR from business newspaper to comic book.

No wonder the mainstream news media is going down the toilet so fast if that’s an example of their crappy workmanship.

And today’s effort from the AFR isn’t much better. In ten pages of further review it doesn’t mention the Super Tax fraud once. The only place you’ll find an admission of what the Super Tax really is is if you read the Editorial on page 70:

“[T]he RSPT has been mis-sold as a super profits tax. It’s really just another tax on profits.”

Which is uncannily similar to what we wrote in yesterday’s Money Morning:

“There’s nothing in that worked example about normal profits and super profits. It’s just a tax on profits.”

Maybe the AFR editor subscribes to Money Morning! Who knows.

But anyway, the fact is there’s nothing special or super about the tax apart from the fact that it’s a brazen attempt to rob investors of capital they’ve put at risk, and a brazen way of partially nationalising Australia’s resources sector through the backdoor.

Remember, if BHP Billiton is correct in its estimates, the Australian government will hold the equivalent of a 57% stake in the big miner’s Australian operations.

It makes you wonder how much effort BHP will go to to generate profits from this part of the business if it knows 57% will be expropriated by the Fairy Ruddfather and his parasitic chums.

But before I go on, click here and make sure you listen to the Fairy Ruddfather’s lame interview on Perth radio. Just be warned… it’s embarrassing. Actually I’ll rephrase that, it’s embarrassingly funny.

Anyway, make up your own mind. Take a listen and I’ll still be here when you’re finished…

We loved this quote from him:

“If for example they were investing their funds in um, long term bond markets. In other words what would constitute a reasonable rate of return on an investment.”

He’s serious as well. What the Fairy Ruddfather is saying is that if highly speculative mining companies earn profits that are in excess of the risk-free interest rate (Government bonds) then this is deemed to be a Super Profit and should therefore attract a higher tax rate.

We’re speechless.

Only a pen-pushing coercive sector bureaucrat could come up with such an idea. Based on this theory, we’re guessing that 90% of all profitable Australian companies would be earning Super Profits.

What’s stopping the government from expanding the scope of the Super Profits tax to those businesses as well?

But let me put it simply. Here’s a worked example of how the Super Profits tax would work…

Let’s say a mining company starts up with $8 million of capital. Which it invests in searching for raw materials.

Then let’s say the mining firm generates $10 million of revenue.

Now let’s minus $9 million of operating costs. That gives a gross profit of $1 million.

Then under this new Super Profit tax the mining company gets to earn a “normal” rate of return which is set at the10 year government bond rate. For example, 6%. 6% of $8 million (the starting capital) is $480,000.

So, the mining company’s net profit, is $1 million, less the $480,000 deduction which leaves a Super Profit of $520,000. This is taxed at 40%.

What a joke.

In our example, the mining company makes a 10% gross profit and this is deemed to be in Super Profit territory.

Have you ever come across a bigger bunch of fools in your life than the chumps that came up with this idea? I know we haven’t. It’s clear that these sad little socialists don’t care much for profits. As Chalpat Sonti in WA Today writes:

“It’s been around since the days of Karl Marx, but Kevin Rudd’s explanation of what constitutes the key part of his tax reforms might have more people reaching for Das Kapital.”

But going back to the Fairy Ruddfather’s interview, what’s most obvious is his struggle to explain what a profit is, let alone a Super Profit. Then again, that’s not surprising.

You see, we’re not surprised a coercive sector servant doesn’t know what a profit is. Because profits don’t exist in the coercive sector. That’s because there’s no need to make a profit.

When you’re in the coercive sector you’re given a budget. It’s then expected that you spend all of that money.

If there’s any left over, well that’s not good enough, clearly you’re not serving the ‘communidy’ properly.

Coercive sector departments don’t generate revenues or profits. They’re given your taxpayer dollars which they then spend. And having spent his entire adult life sponging [Reader's voice: Don't you mean working?] in the coervice sector, it’s not surprising he doesn’t know the definition of a profit.

By using the risk-free government bond rate as the benchmark, it’s clear they’ve fallen for their own spin, believing that government is just like a business. Therefore, in their minds the interest on a government bond is comparable to the profits made by a private business.

Seriously, I can barely contain the laughter as I write…

What these numbskulls are trying to say is that businesses – especially mining businesses – should only make reasonable profits. With a reasonable profit being the equivalent (ha, ha, ha) of the interest rate on a 10 year government bond. Anything in excess of that is – apparently – a Super Profit.

As an aside, if this isn’t another opportunity for the government and central bank to manipulate interest rates I don’t know what is. The higher the interest rate, the greater the ‘normal’ profit resource companies can make, and the lower the Super Tax liability.

On the other hand, the lower the interest rate, the less the resource company can deduct and therefore the higher the Super Tax liability.

Anyway, it makes you wonder why you’d bother with the hassle of running a mining business in the Western Australian desert if you know there will be an extra penalty if you make more than a 6% return on your capital.

Why not just shut up shop and buy some lovely government bonds instead. It’s certainly less risky!

The whole reason for taking big risks such as convincing investors to give you millions of dollars, and then paying geologists to find certain types of rock, and then paying other guys to dig the stuff up, and then maybe even building a railway to cart the stuff away, and perhaps even funding port facilities… is that you hope to give your investors a big return.

Investors aren’t after a “normal” return on a mining investment. Who in their right mind would invest in a speculative mining stock just on the off-chance they’ll make 6%?

They’d need their head examining.

The incentive to invest in these risky stocks is that the company could make a big wad of cash. And if it does then you’ll share in the bumper payday.

But if the parasitic government is coming in and swiping nearly 60% of the gains, it makes the whole rationale for the investment a lot less attractive.

It’s clear the Fairy Ruddfather and his coercive sector cronies can’t grasp the idea of making profits. Or rather, they don’t like profits. In their mind no one should make a profit, instead profits should be redistributed to the government.

At the beginning of this article we suggested all mainstream journalists should resign based on their pathetic coverage of the Super Profits Tax. We’ll make one exception, and that’s for Chalpat Sonti of WA Today who we mentioned above.

At least Chalpat made the effort to give a scathing report of the Fairy Ruddfather’s radio performance.

I mean, seriously, with all those resources (excuse the pun) behind them, the mainstream press just couldn’t be bothered reading past the government summary document. Instead, it was left to your editor and a Perth radio host to pick apart the fraud that’s going under the name of the Resource Super Profits Tax.

The Super Tax policy is a clear example of how government forcibly takes money from the productive part of the economy in order to give it to the unproductive part of the economy – namely, itself.

There’s no better example of that than the recent Comsec ‘State of the States’ economic report – apologies for not referencing the Money Morning reader that sent us a copy, it’s just that we can’t find your original email!

Anyway, here’s the chart that paints the picture of how lopsided the Australian economy has become:

Isn’t that an interesting picture? The territory that wouldn’t exist if it wasn’t for the presence of the national bureaucracy was the fastest growing state or territory in the December quarter.

We seriously wonder where the pillaging of private wealth will end.

In our opinion, the Resource Super Profits Tax is nothing more than a sneaky attempt by the government to increase taxes while demonising and punishing Australia’s most productive and valuable industry – the resources sector.

As we write this morning, the government ‘owned’ BHP Billiton [ASX: BHP] is down another 1.4% in early trade. Meanwhile the money creating banks are travelling upwards quite nicely.

It’s funny isn’t it? One industry spends billions of dollars to recover useful and tangible resources. The other spends nothing to create money from thin air in order to ensure the continued expansion of credit, the property bubble, and the terminal indebtedness of the Australian population.

And the mainstream insists on telling us Australian banks are something to be proud of. That’s an even bigger joke than the Fairy Ruddfather’s radio performance.

Cheers,
Kris.