The announcement Wednesday by mining giant BHP Billiton of record Australian half-year profits, exceeding $10 billion, has re-ignited the debate over the Mineral Resource Rent Tax. The MRRT’s predecessor, the Resource Super Profits Tax, was a factor in the downfall of former prime minister Kevin Rudd. Before the August election, current Prime Minister Julia Gillard negotiated with the biggest three mining companies – Billiton, Rio Tinto, and Xstrata – to reduce the headline rate from 40% to 30%. In addition, the MRRT only applies to iron ore and coal mining. Gillard plans to put the tax before Parliament in the second half of 2011.

Treasury figures obtained by The Australian Financial Review showed the original RSPT would have generated $99 billion in revenue between 2012-13 and 2020-21. The revised MRRT is forecast to bring in some $60 billion less revenue during that period

Each of the “big three” miners reported record earnings, as did Fortescue Metals Group, which declared its first dividend. Not everyone is happy with the proposed arrangement, however.

1.    Julia Gillard, Prime Minister

(In response to a question about the $60 billion dollar projected revenue shortfall):

We always understood that, with a mining tax that was going to tax on the basis of profits, that there would be years that there were high tax collections, but there would be years when there were lower tax collections. To give you a simple example, flowing from the disasters that we’ve seen in Queensland, a number of those mines have not been able to operate as usual. That will impact on their profitability this year.

Understanding the design of the tax we made the expenditure decisions which use that revenue to make a difference to company tax rates, to our pool of national savings, through superannuation and also to support, tax cuts for small businesses and infrastructure. We need to remember that this is about getting a fair share for Australians of our mineral wealth, but also about balancing our economic growth.

(In response to a question about whether she would be willing to change the MRRT to get the support of the Greens):

No, I’m not. We will deliver, through the Australian Parliament, the tax as I agreed it with Australia’s biggest mining companies. We will not be compromising that agreement in order to secure the legislation through.

2.    Roger Corbett, Board Member, Reserve Bank of Australia

Corbett said the government’s ongoing discussions with mining executives over a potential tax on the resources sector is the key factor for the country’s economy and central bank. ‘Resolving this issue is the number one priority for Australia in resolving the bipolar economy to a degree,’ Corbett said. Corbett said it is imperative the government put in place a policy to address concerns of a ‘two-speed economy’ by stowing away cash from a resources boom he said won’t last forever. In a perfect situation, Corbett argues the government would get revenue from miners and then distribute those funds into a stability or sovereign wealth fund aimed at boosting the wealth of the country and also saving for a rainy day. In the immediate future, Corbett said, inflationary pressures remain as a mining investment boom in the country continues.

3.    Mathias Cormann, Shadow Assistant Treasurer and Shadow Minister for Financial Services and Superannuation

Like Labor’s failed attempt to take one third of the GST away from the States, the mining tax grab doesn’t stand up to scrutiny. It was a bad tax from the start. Revelations in the Financial Review today of a $60 billion revenue shortfall prove again that the Gillard mining tax deal was never anything else other than a short term political fix. While revenue estimates over the medium and long term have collapsed as a result of her deal, related spending commitments will continue to grow. It is deeply offensive that our Prime Minister negotiated the design of a new national tax in secret with three taxpayers, excluding all of their competitors and the public at large from the process. Any serious attempt at tax reform in this area should be based on a genuine discussion with industry and State and Territory governments before spending projected revenue in the budget.

4.    Henry Ergas et al., The Economic Society of Australia

A resource-rent tax makes taxpayers forced shareholders in mining firms and imposes non-diversifiable risk on them. The extra risk is costly, and makes taxpayers worse off unless they receive an appropriate share of government spending as compensation. In contrast, private equity shareholders choose to bear the risk and receive higher expected returns to compensate.

In effect, when taxpayers “invest” in a mining project, they are taking on a degree of risk that requires compensation. The MRRT gives taxpayers a call option on the miners’ income stream. Such a call option can involve a high degree of risk.

As the risk premium is usually at least half or more of the return, a substantial portion of the revenue raised merely compensates taxpayers for the extra risk imposed by the tax. Note that the CAPM model assumes that all diversifiable risk (e.g. from having many different projects at different stages) is indeed diversified and the risk premium compensates for systematic risk, which cannot be diversified by anyone, including the government.

5.    Colin Barnett, Premier, Western Australia

”[The MRRT] is probably the most hopeless piece of public policy I have ever witnessed,” Barnett said. ”Indeed it may well be that some of the major mining companies actually pay less tax under this than they paid before. This thing is a complete shambles.”

Mr Barnett said BHP’s half-yearly profit did not support the implementation of a mining tax because the company, like all other miners, already pays company tax on the profits. ”They have made high profits because of high commodity prices and on that they will pay company tax like any other company,” he said.

6.    Bob Brown, Parliamentary Leader, The Australian Greens

The Australian Greens will raise pressure for the original resource super profits tax to be reinstated, as new figures show the deal stitched up by the Government last year gave away $60 billion in revenue, Greens Leader Bob Brown said in Hobart today. ‘The big mining companies will effectively take $60 billion out of Australian taxpayers’ pockets as they gouge profits out of Australian soil and ship it offshore,’ Senator Brown said

‘BHP Billiton and Rio Tinto will export billions at the expense of Australians, giving away revenue that could fund services and infrastructure, including the proposed $5 billion universal disability insurance scheme. The figures released by the Treasury explain why the Australian Greens were never challenged on our much more modest assessment of the amount Martin Ferguson had conceded to his mining chums,’ Senator Brown said.

“We saw BHP and its fellow companies, through a $22 million investment, save themselves from a $60 billion tax and the politicians went to water. It’s called buying democracy. It’s called buying influence, and it works.”

So the Liberals want to get rid of the mining tax, the Greens want to restore the previous tax, and the Labor Government says they won’t budge. It should make for an interesting showdown. Since all Australians are “forced shareholders,” as described in Henry Ergas’s article, the debate should arouse considerable public interest – as will the manner in which the Government chooses to spend the mining tax proceeds. However, the huge profits reported by the major miners suggest that regardless of what form (if any) the mining tax finally takes, Australia’s booming mining industry is not a bad place to invest. Next week, we’ll take a look at how recent monetary tightening in China, the biggest consumer of Australia’s mined resources, might affect the share market.