Tax grab highlights mainstream angst about super

RUDD'S taxation of mining company profits has raised more concerns than it has solved.

KEVIN Rudd's super profits tax on mining companies can be explained very simply: it is a tax grab with the aim of improving the budget bottom line targeted at a section of the economy he thought couldn't possibly receive community sympathy.

Our timid Prime Minister only likes to pick fights he thinks are likely to win him popular support. And given the public spending in the wake of the global financial crisis (worthwhile or not), the government needs more revenue coming into its coffers to balance the budget in the decade ahead.

The only problem is that neither of the assumptions Rudd based his tax grab on appears to be holding up to the growing scrutiny the new tax is receiving.

Let's go through each of the twin pillars of Rudd's reasoning for pitching the new tax.

It turns out there is community concern about the tax hike -- a 40 per cent tax on profits above the government bond rate.

That concern is partly stimulated by the opposition's scare campaign, and partly stimulated by the miners' robust showing of anger about the new tax.

More importantly, however, community angst is being stimulated by the fact Australians are increasingly investment conscious, given that compulsory superannuation contributions mean most of us have future income for our retirement tied up in shares in the top end of the resource sector. Rudd's great big new tax, as Tony Abbott will increasingly refer to it, will dramatically lower the returns of super investments. The old-fashioned politics of envy associated with taxing the big end of town has been replaced by a heightened awareness by voters about what they need for retirement.

It is ironic given one of the changes Rudd wants to enact as part of the government's response to the Henry review is the worthy aim of lifting the superannuation guarantee from 9 to 12 per cent.

Rudd thought he was picking a fight with greedy mining companies, with large foreign ownership structures. Instead he has picked a fight with greedy mainstream Australians who like to track the performance of their super investments. And they vote.

Rudd's rhetoric on foreign ownership has been as xenophobic as it is irrational. If foreign ownership had anything to do with the super profit tax decision (as though earnings above the government bond rate of 6 per cent are somehow super), Rudd should also institute the tax on the many other companies similarly structured operating in other parts of the economy (banks, telcos, insurance agencies and so on). And he should lay off particular companies such as the predominantly Australian-owned Telstra, which is being squeezed by the introduction of the national broadband network.

The other assumption, that the resource super profits tax would save the budget, is also more questionable than the government would like to think. While you won't see its own projections of revenue intakes reflect this point, if the tax causes mining companies to downgrade their operations in Australia, as many have suggested it will, the revenue to be derived from mining will also fall, perhaps dramatically.

Further, Ken Henry's review recommended a resource rent tax, but it did so as a replacement of current mining royalties, which go to the states, in conjunction with a host of concessions that have not been taken up by the government.

And the point at which it would kick in was somewhat open ended.

One of the benefits of replacing royalties with the super tax would be to streamline the tax system, reducing the cost of double collections. But Rudd has shied away from this sort of commonwealth takeover, probably because he knows he is already on thin ice with the premiers after his health reform negotiations.

So Rudd is allowing the states to continue to collect royalties and the commonwealth will refund those same royalties to mining companies as a rebate when collecting its profit-based tax -- you don't get a more complicated and cumbersome system than that. I would love to know what Henry personally thinks about such politically jelly-backed compromise.

The law of unintended consequences is something politicians rarely pay heed to but often get caught out by. The changes the government is planning with respect to the so-called super profit taxation of mining companies has had the unintended consequence for Rudd of raising yet more concerns about his approach to governing, on the back of a bad two weeks' worth of polling.

The new resource tax idea is not necessarily without merit -- the reason Henry recommended it as part of more sweeping reforms to the tax system in his independent review.

But when the tax is pulled out from the overall plan for root and branch reform of the tax system, not backed, for example, by the generous cuts to company tax rates Henry also recommended, and when it applies to all profits above the government bond rate instead of genuine super profits, it becomes a political fix that doesn't have policy purity.