Labor and angry miners look set for a blue of epic proportions

THE 2010 election is now ignited by a fresh policy and ideological clash between the Rudd government and Abbott opposition over how Australia manages its resources boom mark II.

This looms as a fundamental chasm between the parties. It concerns tax policy, income redistribution, economic philosophy and national resources strategy. The stakes are huge, with the proposed resource super profits tax raising $9 billion from 2013-14 onwards, a powerful revenue vehicle.

A new concept for Australia, the tax is a marriage of Treasury advice and Labor instinct. Again. It follows Labor's fiscal stimulus based on Treasury advice that divided Labor and Liberal over its magnitude. This resources tax split, however, is sharper and will resonate at home and on global markets. The Treasury, as well as Rudd Labor, has bet its reputation on this move.

The government has cherrypicked the Henry tax review. The upshot, combining company tax and the resources tax, is a new estimated 57 per cent tax rate for the mining industry compared with 40-43 per cent at present. It is high by global standards. In a chaotic week, mining stocks fell, a class brawl erupted between miners and Labor and the government revealed a split personality between old-fashioned Rex Connorism and a new brand of economic reform for the resources sector.

All complex policy is reduced to elemental politics. The essence of Labor's position was put by Kevin Rudd: "About a decade or so ago, for every three dollars in mining profits about a dollar went to the Australian people through taxes. Now for every seven dollars earned in profits by the Australian mining industry, one dollar comes to the Australian people in taxes. We believe the time has come for the Australian people, for small business and for workers and their super to get a fair share of the natural resources of this country, which are owned by the Australian people." It is a populist call for re-distribution based upon a justified principle.

In its submission to the Henry review, the Minerals Council of Australia endorsed the principle of a new regime based on taxing profits. But it is aghast at both the design and 40 per cent resources tax rate and it warned against "sudden and retrospective actions" threatening investment conditions.

The Coalition's rhetoric has been febrile. Tony Abbott said last Sunday the new tax was "a plan to kill the mining boom" and by Wednesday the shadow cabinet, in Abbott's words, had decided to vote against the "next great big new tax on everything". Escalating the political stakes, Abbott said it was a tax not just on foreign shareholders but on investment, jobs, on 500,000 Australians who worked in the industry, millions of superannuants whose retirement fate fluctuated with resource stocks and ultimately energy prices for Australians.

Shadow finance minister Andrew Robb said: "This decision looks superficially attractive. But the intelligence and views of senior analysts in New York and elsewhere suggests they are totally nonplussed and that there will be a flight of capital over the next six months. A lot depends upon how much and how quickly the capital disappears. It is a degree of financial risk we have not seen in this country since the 1970s. This decision is naive. It is a tax on profits, not a super profits tax at all. Australia's reputation is being trashed by Kevin Rudd's irresponsible action and this government is out of its depth. "

Such remarks seem surreal compared with Wayne Swan's reformist rhetoric. For Labor, this is both an economic policy and a re-distribution. Rudd and Swan have diligently taken the Treasury line. They argue that resources have been undertaxed for too long; they quote with approval a KPMG Econtech study that their new tax will promote mining, investment and jobs in the long run; they say it reduces production costs for marginal projects and that it will boost gross domestic product overall. Swan argues the new tax will improve management of the resources boom after the failures of the Howard government by promoting a more balanced economy, checking the two-speed economy and redirecting excess profits into infrastructure, savings and a lower corporate tax rate.

These are big claims and Rudd and Swan, clutching their Treasury documents, cast themselves as economic heroes. Rarely has the gulf between Canberra and the mining industry been so stark.

The shock effect has been lethal. The miners, misjudging Labor, didn't expect a hit of this dimension. But Rudd Labor has misjudged and didn't expect retaliation of this intensity or the campaign it now confronts. There was no discussion between the government and the industry over the rate or the tax design. The message from the Minerals Council was to finalise the rate and design down the track in talks with industry. Yet the Henry review was always going to be specific.

However, BHP Billiton chief executive Marius Kloppers told the government beforehand the industry would not accept tax retrospectivity. Kloppers now has authority from the other companies to lead this campaign and calls himself the "shop steward". The initial target group is more than 500,000 BHP shareholders and the message is that Rudd's tax threatens Australia's investment reputation, competitiveness and wealth creation. Consider the situation: Labor is now at war with the world's biggest resource company. Surely this is not the way tax reform was supposed to begin.

The government looked unconvincing as Rudd and Swan struggled to explain how the new tax would work. After meeting protesting mining chiefs in Perth, Rudd kept saying the 40 per cent rate was "about right". The industry has several core complaints: the rate is too high and damages Australia's competitiveness; the tax applies to current projects and has a retrospective impact on current investment; the definition of super profits is too low and under-estimates capital costs over the life of the project; the tax does not replace state royalties but involves instead a rebate for them; and the complex design that involves government as a silent equity partner to 40 per cent of every resources project via a new tax allowance that also means government bears a share of the risk. This is the origin of Fortescue Metals' Andrew Forrest's inflammatory remark that Canberra was engaged "in a nationalisation of 40 per cent of the mining industry".

Rudd knows for political reasons he cannot backtrack on the 40 per cent rate. But there is obvious scope down the track for changes to the design. Having acted on Treasury advice Rudd and Swan feel their decision is economically legitimate and based on the national interest. The trap they face, however, is succumbing to a populist anti-business campaign that typifies the retail political style at the heart of this government. If they pull this lever they defy the orthodoxy of the past generation and pit the politics of envy against the politics of aspiration with an Australian public more geared to share ownership and superannuation accounts.

Having cast their fortunes with this decision Rudd and Swan should make the economic case: that this is about more national savings, better infrastructure and lower corporate taxation across the board. They must locate this decision within their economic narrative. This is Swan's intent.

The shame is that this argument should have been stronger. Rudd Labor accepted Ken Henry's recommendation for a 40 per cent resources tax and it should have accepted in principle his recommendation for a 25 per cent company tax rate instead of only cutting the rate from 30 to 28 per cent. Labor didn't get the optics right in its package.

The politics defy prediction. There is mounting anger in Western Australia towards Rudd Labor. Might such sentiment spread to Queensland, the second most important resources state, heavy with marginal seats? Will the non-resources states applaud the redistribution Rudd has unveiled? And the biggest question : is the Rudd government more about the future or the past? Swan has some good news around the corner, next week's budget is guaranteed to show Labor's fiscal credentials. It is exactly what he needs.