Thursday, February 28, 2013

Mine tax didn't add up

Lord Kelvin famously said that without numbers ''your knowledge is of a meagre and unsatisfactory kind''.  Unfortunately, even with numbers your knowledge may be unsatisfactory.

Late last week the Treasury released its review into its macroeconomic and revenue forecasting.  As everyone knows Treasury has made significant errors over the past decade.

Before the financial crisis it underestimated revenue and since it has overestimated it.  This is important — the government has taken to spending revenue that will never eventuate, generating deficits and debt.

Of course, Treasury doesn't see things quite that way.  Readers are assured its forecasts have been unbiased and reasonably accurate.  But Treasury has had particular problems with company tax, capital gains tax, and the minerals resource rent tax, meant to net $2 billion this financial year, and raising only $126 million so far with little prospect of more.  That's not a forecast error, it's a disaster.

Yet it worked precisely as designed and delivered exactly the result critics had predicted.  Only the government and Treasury seem surprised.

The MRRT experience has been so bad that there is now some nostalgia for the ill-fated resource super profit tax.  Unlike the MRRT, we're told, this tax had teeth and would have raised substantial revenue.

Yet this revisionist view of history invites us to believe that Treasury could accurately forecast revenue for a complex RSPT when it struggles with company tax and was disastrous on the MRRT.

Indeed, this government has generally struggled with economic modelling.  The basis for FuelWatch was a dodgy regression model.  The 2010 budget papers featured a dodgy model showing that the stimulus had saved Australia from the GFC.  The argument that Australian miners only paid 13 per cent tax was due to misunderstanding an unpublished American paper.

The problem is the government has been too eager to accept the results of complex modelling at face value and then impose poor policy.  The RSPT was a particularly complicated tax that failed the common sense test.

Documents released under Freedom of Information in early 2011 reveal that Treasury didn't understand that miners would have to finance the government's share of investment at their own cost of capital while the government only paid the risk-free rate.  And Treasury seemed to think financial markets would value the 40 per cent rebate the RSPT promised.  They didn't.

The bottom line is that elegant theoretical proposals don't always translate into sensible practical policy.  The taxing of imagined mining rents is one such proposal.

No comments: