The federal government’s proposed tax on resources mining has generated controversy that requires explanation to assist public understanding of the issues, according to a Charles Sturt University (CSU) economics professor.

 

“Central to the current public debate is the concept of taxing the ‘rent’ component of profits from specific economic activity,” said Professor John Hicks, lecturer in economics at the CSU School of Business in Bathurst.

 

“Economic activity generally takes place when the return from the activity just meets the cost of the activity (including a required return – normal profits – to the investor). In the case of mining, mines would not be established unless the expected return from the mine was at least equal to the cost of establishing and running the mine.

 

“For any economic activity it is quite possible for the return to substantially exceed the activity’s costs. This is as true for mining as it is for any economic activity.

 

“Economists use the term ‘rent’ to describe the excess reward to a factor of production - in this case mineral deposits - over that which is just required to give rise to its use.

 

“A tax on this ‘rent’ has no impact on the decision to establish the activity,” Professor Hicks said.

 

“However, in practice, the imposition of a ‘rent’ tax is not this straight forward and raises several issues which underpin the current national debate about the government’s proposed tax.

 

“First, is the tax imposed taxing only ‘rent’? Mineral deposits vary significantly in their value from extremely productive to those that are just on the margin. If the tax is imposed on mines at either extreme, then for the mines operating at the margin there will be considerable doubt as to whether or not it is ‘rent’ that is being taxed. If in fact it is the return that keeps the mine viable that is being taxed, and not ‘rent’, then there will be an adverse impact on mining operations at marginal sites, and on potential investment in sites that are currently regarded as marginal.

 

“The second issue relates to the equity of a tax on ‘rent’ from mining activity. If the tax is justified on the basis of the ‘rent’ being generated, then why do we not impose a tax on all activities in which ‘rent’ is present. For example, Ricky Ponting would play cricket for Australia for much less than he is currently earning. Part of his income is ‘rent’, so why don’t we tax it away from him?