More Evidence That The Mining Tax Is Seriously Flawed

Writing in today's Australian, renown economist Henry Ergas discusses a paper he and Jonathan Pincus are presenting at the Australian Conference of Economists being held in Melbourne next month.

Ignoring the damaging effect of a tax hike on the industry, Henry Ergas notes that the claim made by the government for such a switch is that the MRRT raises revenues at lower economic cost than do royalties.
Those claims are highly questionable. In practice, the MRRT only offsets royalties on what are effectively infra-marginal projects, i.e. projects that have sufficient net income and associated MRRT liabilities to offset royalty payments. At the same time, the MRRT is itself highly distorting, as shown inErgas, Harrison and Pincus 2011, because it taxes normal profits on high risk projects. Moreover, it creates incentives for states to increase royalties, as on infra-marginal projects, these are effectively paid by the Commonwealth. As royalties rise, the result is to increase whatever distortion they create on marginal projects, and especially on those approaching the end of their life. As a result, the Commonwealth’s MRRT has likely significantly increased, rather than reduced, the distortion to mining induced by taxation.

Henry Ergas concludes his op-ed by stating: " The entire discussion of mining taxes has therefore been premised on claims that are questionable in themselves and seriously lacking in transparency."

Click here to read the Australian piece (paywall-protected) and here for further details from Henry Ergas.

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