Taxed to death? Will Australia's Resource Mining Supertax Destroy The Australian Economy Or Save The Environment?

For centuries, governments have taxed natural resource companies in an effort to ensure that the profits from resource development were equitably shared. Unsurprisingly, the imposition of taxes created antagonistic relationships between national governments and exploration corporations who believe the profits they make on uncertain commodity markets should not be aggressively taxed. Over the last 5 years, Australia's mining sector has surged. Companies such as Billiton and Rio Tinto PLC have pushed aggressively into West, South, and Northern provinces, hoping to capitalize on inflated commodity prices for Australian resources. Amid growing environmental concerns and profit sharing frustrations, Australia's Prime Minister Kevin Rudd recently announced a new Resource Mining Supertax. This supertax will tax mining company's profits by an additional 40%, enabling the incumbent government to invest the recouped funds in regional and national infrastructure, as well as alternative energy projects. Outraged, many mining corporations have respond aggressively. The Swiss-based Xstrata mining recently canceled a number of future Australian projects in protest against the 40% tax. To them and other mining companies, this tax represents a crude, shortsighted, slap in the face that threatens to undermine not only the mining industry, but the entire Australian economy. To better understand this situation, a number of critical questions need to be answered. Is this tax simply a political cash grab orchestrated by a desperate government eager to woo voters? Will this tax ensure that Australian citizens are provided a fair share of the profits foreign and domestic companies continue to reap from natural resource exploitation? What will the global impacts of this tax be? Finally, will the tax efficiently encourage investment in more sustainable resources and businesses or turn Australia into a global investment nightmare?

Unfortunately, immediate answers to these questions remain unclear. Leaders within Australia's mining industry continue to argue that the proposed tax will devastate both the mining industry and the Australian economy. Mick Davis, chief executive of Xstrata, argued that the tax was the biggest assault on the mining industry he has ever witnessed. Similarly, Rio Tinto's Tom Albanese continues to argue that taxing the profits of resource companies will discourage foreign direct investment. Yes, these leaders accept that their companies have profited handsomely from high commodity prices. Still, they argue that taxation, particularly at the rate proposed, is an unfair penalty. Many within the mining industry continue to argue that the cyclical nature of mining requires sustainable organizations to accumulate wealth in boom times, while re-investing that wealth as commodity prices fall. Furthermore, companies including BHP Billiton and others implore that they have already paid handsomely for the right to exploit Australia's resources. Statistics show that BHP Billiton has paid an overall tax rate of 43% over the past few years while Rio Tinto has averaged over 35% during the past decade. The imposition of the tax would push tax rates to between 60% and 70%, making Australia's mining tax one of the highest in the world.

Despite opposition, the Labour party and Prime Minister remain committed to the resource tax. Prime Minister Rudd believes that taxing the profits of companies above some risk-weighted normal rate is least likely to crimp mining development. The Labour Party further claims that the tax will help stop the unfair exploitation of Australia's great resources, enabling the Australian people to enjoy a "fair share" of the profits mining companies have been earning. As their newest advertising campaign claims, "Before the last mining boom, the Australian people received $1 in every $3 of mining profits through royalties and resource charges. By the end of that boom, the share had fallen to just $1 in every $7."

Despite this rationale, many citizens remain critical. Frustration has arisen due to the uncertainty regarding the impact of the tax as well as the implementation. While environmentalists have applauded the tax as a positive step in resource reform, others have dismissed the move as nothing more than a tax grab that threatens the Australian economy and the reputation of Australia on foreign markets. At a recent press conference, the Prime Minister remained defiant, insisting that the people of Western Australia actually own these resources. "It's not right that the regions and towns producing so much of Australia's wealth should suffer from a poverty of investment." During this meeting, Rudd repeatedly accused mining leaders of crying wolf, comparing their response to previous claims made regarding native title laws and the abolition of Work Choices. Changes to policies regarding native title laws were expected to significantly impact mining operations throughout Australia. To this point, no material impacts have been seen. In closing his most recent speech in Perth, Prime Minister Rudd compared the furor over the super-tax to the pioneering decision Western Australia's first premier, John Forrest made to impose additional mining taxes in the 1880s. While companies were initially opposed, Mr. Forrest used the proceeds of the tax to build infrastructure that set up Australia for decades of sustainable economic growth.

Regardless of the facts, it is clear that the mining supertax will have an impact on the government, industry, citizens (both domestic and foreign), as well as the environment. Whether that impact will be positive or negative remains to be seen. Industry experts continue to doubt whether the tax will encourage mining companies to invest in other, more sustainable ventures. Even more difficult to predict is the impact the tax will have on Australia's economy. The mining industry helped shield Australia from recession last year while the economies of most rich countries contracted. Business leaders continue to insist that the tax will massively dent future investment, provide scant benefits to the environment, while significantly hurt foreign direct investment. If this occurs, many of Australia's largest mining companies and foreign investors may start re-directing investment to countries such as Canada and Zambia, both whom have tax structures and resource capacity that are amenable to natural resource exploration and development.