On Thursday 27 May 2010, Dr Ken Henry fronted the Senate Economic Legislation Committee before heading off on an international holiday.
Dr Henry has a number of interesting things to say regarding the recent Tax Review. The following a extracts from the Committee Hansard available here.
Dr Henry—No. We tried to avoid, as much as possible, putting specific parameters on those directions for reform that I referred to earlier, but in some cases we thought it would be desirable to provide guidance on rates that tax reform should target over time. So, in respect of the company tax rate, we thought that over time Australia should move to a 25 per cent rate. With respect to the taxation of non-renewable resources, we considered that for a profits based tax, a rents based tax, the appropriate rate would be 40 per cent.
Dr Henry clearly states the review wanted to provide guidance on what tax rates should target over time – Company Tax 25% and profits based tax 40%. The Rudd government obviously agreed on the ‘over time’ scenario with the Company Tax by starting out at 28%, but they jumped straight to the end of the time gap by starting at 40% with the profits tax. I could only assume that Rudd Government wants to grab the difference a 1.6% higher statutory tax rate provides in revenues.
Senator ABETZ—I understand what you are saying. Recommendation 45(a) recommended that the rent tax be at a rate of 40 per cent, that company tax be at 25 per cent, and then ‘to achieve a combined statutory tax rate of 55 per cent’. So it seemed to me—and I think possibly to others—that you had in fact interlinked the two because, right or wrong, the desirable outcome was to be a statutory tax rate of 55 per cent. You would not achieve a combined statutory tax rate of 55 per cent if the company tax rate remains higher than 25 per cent.
Dr Henry—That is correct. Using the same methodology, a 28 per cent company tax rate and a 40 per cent RSPT delivers 56.8 per cent rather than 55 per cent. As you know, that 56.8 per cent is a maximum rate. Obviously if a company is not actually earning any super profits then the tax rate is 28 per cent. This may sound curious but, in fact, you only get to 56.8 per cent if the company’s rate of return is infinitely large. The combined effective rate of tax—the technical term is ‘asymptote’—is 56.8 per cent. Most taxpayers obviously do not have infinite rates of return, so no taxpayer, we would expect, would actually pay the 56.8 per cent.
I suppose every now and then someone gets caught out by a graph or a pie chart, probably created by someone else say the ATO, and Treasury seems to have been caught as well in this exchange:
Senator ABETZ—The Treasurer’s economic note of 9 May contained a chart which showed that mining royalties, resource taxes and company taxes are 27 per cent of mining profits. Is this correct?
Dr Henry—This is in 2008-09. I have the economic note in front of me about royalties, resource taxes and company tax as a proportion of mining profits.
Senator ABETZ—Yes, there are two pie charts on top of each other. There is a comparison between some years on the left hand side of the page and 2008-09 on the right-hand side of the page.
Senator ABETZ—And the top pie chart tells us that royalties and resource taxes amount to 14 per cent and the lower chart tells us that royalties, resource taxes and company tax is 27 per cent.
Dr Henry—Yes, that is what the chart says.
Senator ABETZ—To your knowledge is that chart correct?
Dr Henry—To my knowledge it is.
Senator ABETZ—So could I undertake the basic calculation and therefore say that if we were to take royalties and resource taxes from the 27 per cent that would suggest a company tax rate of 13 per cent?
Dr Henry—Is that how it is calculated?
Senator ABETZ—In other words, can I take the 14 per cent from the top pie chart off the 27 per cent of the bottom pie chart?
Dr Henry—I suppose that is right, yes. That seems right.
Senator ABETZ—You say that is right. I assume the calculation of 27 minus—
Dr Henry—No, that cannot be right.
Senator ABETZ—No, that is what I was thinking.
Dr Henry—Royalties and resource taxes are deductible for company tax purposes, so there is an interaction between the two components. So when you combine—
Senator ABETZ—Can you then explain to us how, on the left hand side of that page, that interaction is disclosed in the 1999-00 to 2003-04 pie charts? Do you say that that interaction is disclosed there as well?
Dr Henry—It should be there as well, yes.
Senator ABETZ—Are you able to tell us what the tax paid and the level of profit is that gives us the result of 27 per cent?
Dr Henry—No, not right now I am not, although obviously those numbers could be made available to the committee.
Senator ABETZ—Once again, I ask if Dr Green and other Treasury officials could be made available. I understand that there are some Australian Taxation Office figures suggesting that if you were to combine the royalties and resources tax with company tax you surprisingly get a figure of 41 per cent or thereabouts— which would suggest that the 14 per cent should be added onto the 27 per cent to make 41 per cent, which is the Australian Taxation Office figure. Or is that just a coincidence?
This next piece is extracted here simply because I have sequentially moved through the document, rather than jumped all over the place. But I will place it here and come back to it later.
Dr Henry— … Obviously taxable income is usually less than economic income, because the tax legislation contains various tax deductions which are designed to provide incentives for particular sectors. The mining sector, in particular, is a very significant beneficiary of some very large tax concessions, and these relate mainly to accelerated depreciation provisions. The mining industry being very capital intensive—it does not employ a lot of people; it employs a lot of capital—these provisions of the tax code have a very marked impact on the mining industry’s effective rate of tax: that is to say, they have the effect of reducing taxable income to a fraction of economic income which is a long way below 100 per cent.
Now I really like this next bit, simply because it demonstrates how an economist’s view of the world is essentially different from that of an Accountant, Banker, Funds Manager, Investor or CEO of a mining company!
Dr Henry—As I have just said, or maybe I did not say it, maybe I only implied it, an RSPT at the rate of 50 per cent would have no different economic impact from an RSPT at the rate of 40 per cent. There would be no different economic impact. It should not have an impact on the level of mining sector investment.
Senator ABETZ—You are convinced that the sensitivity and accuracy of the modelling is such that the conclusions that are being drawn are sufficiently robust?
Dr Henry—Yes, I think so. In any event the modelling is as good as one can do. I repeat, the RSPT by its design should not have an impact on economic activity. Of course it does shift revenue, there is no doubt about that, it raises revenue obviously but because it should not affect the calculation of whether a project is profitable or not—it affects the amount of profit I accept that, but it does not affect the question of whether it is profitable or not—it should not have an impact on the pattern of economic activity. You get the increased investment, as I said, not because of the tax obviously—it is not the tax that does it—it is the removal of royalties which are distorting and impeding some resource investments.
Yes Ken, you are absolutely correct any level of RSPT does not affect the question of whether a project is profitable, because you are taxing profits and therefore the tax only applies to profitable projects. And you are also right it does affect the amount profit, and guess who is interested in profit?? Those people who are interested in dividends are very interested in profit levels are they not??
Dr Henry—I have heard it said on a number of occasions, in fact I have lost count of the number of times I have heard people say, including senior commentators, that the mining industry saved Australia from recession or, even in less extreme versions of the statement, that the mining industry contributed strongly to Australia avoiding a recession. … In the first six months of 2009, in the immediate aftermath of the shock waves occasioned by the collapse of Lehman Brothers, the Australian mining industry shed 15.2 per cent of its employees. Had every industry in Australia behaved in the same way, our unemployment rate would have increased from 4.6 per cent to 19 per cent in six months.
Now I am not certain just exactly where Dr Henry gets his numbers from, it would appear that it is not the Australian Bureau of Statistics. The following extract is taken from the Australian Mining Indicators, September 2009.
By my reckoning with 173,900 people employed in December 2008, which then fell to 159,800 in June 2009 (i.e.. the first 6 months of 2009) that is a fall of 14,100 or 8.1%.
Now in June 2009 there were 10,772,500 people employed (see here), in January 2009 there were 10,811,300 (see here) a fall of 38,800. Now that’s a little confusing because if you use the same references you will see that unemployment went from 4.8% to 5.7% and the number of unemployed from 543,900 to 655,800 or 111,900 additional unemployed. However, if the mining industry, as Dr Henry said, shed 15.2% of its employees in the first 6 months of 2009, then they would have lost, from the 173,900 employed in December 2008, a total of 26,342 and would therefore have comprised 68% of the fall in the total number of all people employed at June 2009. Someone get Dr Henry a calculator, please! But of course the mining industry, according to Dr Henry, “… does not employ a lot of people”, well at 1.5% (June 2009) of the total people employed I’d say they are a pretty significant employer.