ECONOMISTS are supposed to appreciate the beauty of a rent tax as a solution to the distorting impact of extracting a nation’s natural resources.
ECONOMISTS are supposed to appreciate the beauty of a rent tax as a solution to the distorting impact of extracting a nation’s natural resources.
But Mike Nahan is one economist who believes the federal government’s proposed Resources Super Profits Tax is flawed at several levels – being introduced in the wrong way, at the wrong time, on the wrong industry.
Mr Nahan, now the state Liberal member for the marginal seat of Riverton, said his exposure to the concept of a resources rent tax went back three decades when he was at the Australian National University and then as a Western Australian bureaucrat involved in introducing such a tax to the petroleum industry.
He argues that the theory of resources rent tax suits different circumstances to WA's diverse mining sector.
“There is an argument in economics that there is a limited availability of ore bodies and oil and when people discover it it’s a huge windfall profit,” Mr Nahan said.
“In theory, you can tax that windfall and that will not distort decisions.
“It’s like a great big magic pudding that you can rip off mining companies and redistribute it to the rest of the population without distorting decisions. That is crap.”
He said it was a mistake to focus on non-renewability of minerals, especially iron ore, which is a major target of the federal government’s tax proposal.
"It is not that scarce," he said.
"I think iron ore will be in WA for centuries."
In contrast, Mr Nahan said the tax was first developed by Ross Garnaut to deal with the impact on Papua New Guinea of the Ok Tedi development, which was likely to create a huge surge in government revenues for a relatively short period of the copper and gold mine’s anticipated life.
“An underdeveloped country like Papua New Guinea might have to have something like this to adjust,” Mr Nahan said.
However, the concept also gained currency in Canberra in the 1980s and was adapted for the petroleum industry by Craig Emerson, now a federal minister but also an adviser to the Hawke federal Labor government in the early 1980s, whose doctorate on minerals policy was supervised by Professor Garnaut. Coincidently, Mr Emerson and Mr Nahan both studied at ANU.
However, Mr Nahan said WA was the first to introduce a resources rent tax on petroleum when it changed the royalty regime governing the WAPET oil venture on Barrow Island.
While this was a successful outcome, he points out that the oilfields were in decline and that the operators sought the resources rent tax as a way of making costly extensions to the development financially viable.
Mr Nahan said that during this period the Brian Burke-led state government examined the idea of introducing a similar tax regime to replace minerals royalties, but rejected the idea for much the same reasons he believes exist today.
“They decided not to do it because it was very complex,” he said.
The issues the state grappled with then remain the same today, Mr Nahan said. There were the complicated calculations involved, the differences between existing and future developments, the fact that not all commodities could be treated the same, and the sovereign risk.
Mr Nahan said he was involved in the WAPET negotiations as an employee of the WA government. He said he was also with the state bureaucracy when the Commonwealth brought in its Petroleum Resources Rent Tax, from which the giant North West Shelf project was excluded.
Mr Nahan said the PRRT’s introduction was very different to what the federal government had proposed for minerals and onshore gas. In the mid 1980s there were relatively few oil and gas projects, existing tax rates were very high, the rent tax was only on new developments, and it was offering a more generous discount on capital expenditure.
He points out that the operators of existing fields in Bass Strait only opted in to the PRRT some time after its introduction, when the rent tax became advantageous to them as the cost of extraction rose.
Importantly, the former Institute of Public Affairs chief said the PRRT was introduced in a different era, when there were major changes in taxation and market regulation.
“The petroleum tax is significantly different from the one proposed today,” Mr Nahan said.
“I am quite shocked given the debate that has been had that they would think of introducing a 40 per cent rate without considering past capital.”