Mining small but big, Dr Dennis smart but du....?

Gary Knight critiques Dr Richard Denniss 's attack on the mining industry:

Dr Richard Denniss was at it again today, if he is not embarrassing himself by being academically crippled by Lord Monkton at the National Press Club Climate debate, he is busy releasing reports designed to wage a business class war against the mining industry.

The gist

The report is a basic factual account of some figures regarding the size of the Australian mining industry and where the profits go. The interpretation and moral argument that Dr Denniss spins from the facts are truly remarkable and need to be examined.

Dr Denniss argues that 82% percent of  Australian mining profits head overseas and considering that  foreign ownership of Australian mining is 82% that makes a lot of sense. When I invest in a company regardless of geographic location I expect the return from that investment to flow back to me, otherwise I would sell those shares immediately. 

Dr Denniss advocates that this large percentage of profits flowing back the the people who put up the capital in the first place is immoral and as a country we should seek to claim a greater share with the mining tax. It seems to me leftists cannot avoid the temptation to lift even more money from the hands of private individuals. 

Dr Denniss likes to deliberately frame his  call for state sponsored theft in the coat of nationalism, suggesting that mineral wealth belongs to all Australians. People ignorant of mining and investment in general would easily miss the faux logic of his argument.

The catch cries of returning the profits of Australia's mineral wealth to all Australians is a great way to stir up xenophobia and class envy in the mob against the high paid and profitable mining industry, but the policy consequences morally and economically are conveniently evaded by Dennis and his ilk.


Got Values?

Perhaps I am to brazenly right wing economically, but there are two moral principles I hold that make Dr Denniss' arguments invalid.

The first value is that profits belong to the investor and the company undertaking the mammoth task of bring minerals to market.

If I or anybody else invests money in a venture, the profits of their speculation should return back to them; no government has the right on foreign ownership grounds to raise taxes. 

Economically it sends a sovereign risk message to the foreign investors whose money provides so much economic activity to the regions of Australia. Dennis of course claims mining is only a small part of the economy, but clearly he has not heard of Western Australia and North Queensland. The mining tax would be a tax on regional Australia and unlike Denniss, miners do not have a back up job with a left wing think tank cooking numbers for governmental propaganda.

Profits belong not to Australia, but to investors, they risked their money they are entitled to the rewards, unless the government intends to give them a bailout when and if their investment turns a loss? The mining tax removes investment incentive from a source that cannot be replaced domestically; we loose jobs and potential economic activity as a result of a punitive policy such as the mining tax.

Those who express the view that it is Australia's mineral wealth are not understanding the role of roylaties, which is a state tax levied on the ore regardless of profit. Company tax then sits of top to take a sizeable cut of the profts and what is left gets distributed in dividends to the shareholders. When the left make the call to share Australia's mineral wealth they seem to forget how much investment, intelligence and sheer hard work is involved in bringing minerals and ore from the earth and processing them into a profitable form.

Perhaps iron ore is some parts of the country is an exception with buckets of red dust being loaded onto trains and tankers, but a sizeable fleet and billions of infrastructure still need to be built and maintained even to scoop up pilbra red dirt onto trains. Dr Denniss likes to decouple minerals in the ground from minerals processed on the back of huge investments largely from foreign sources. If you want a bigger share of the mineral wealth you need to go work in a remote town and start pulling 12 hour shifts!

The second value is flat company tax. We might still perform the barbaric practise of teired taxation for incomes, but it has been a long and stable principle of both sides of government that company tax should be flat. The reason being productivity, we want Australian companies who work hard and innovate to be rewarded with the only thing that can reward a company, profit. More profitable companies equates to better emloyment opportunities for our workforce, and general econmic wellbeing. Once you start punitively attacking companies for their profits or what industry they are in you start to send a moral message.

This moral message is that if you do well, you will be punished; this is a meritocracy in reverse. The left try to alienate the mining companies by branding them foreign and their Australian contribution as minor, but its smoke and mirrors for a partial takeover of mining.

Do we really want the government to have more money to waste; it would no doubt be better left in the mining companies coffers to fuel the next stage of investment in Australian jobs.

The Government thinks they know best how to spend money, the reality of consequences of their spending programs suggests otherwise.



 The mining tax has toppled the first term leader Kevin Rudd and it is set to do the same to Prime Minister Gillard. The ALP and press gallery will cry about the salesmanship and the leadership turmoil, but it is pure and simply an immoral policy of the most shameful order.



A precedent set, next victim please!

The mining tax sets the precedent that if your a high performing industry in Australia, the government is coming to get you. Theoretically what stops this line of argument being used to justify a tax increase on any high performing sector? Are the banks next with their soaring profits from lending out foreign capital? The mining tax argument is attempting tp  apply the progressive income tax arguemnt to the business world. I hate to think how this would affect productivity and alter invesment patterns. 

Why does the government dare not attack the super profits of banking? Perhaps the answer lies in the truth of Dr Denniss' recent study. The mining industry account for around 2-3% of the economy directly, therefore it is easy for the government to try and wedge a small workforce of 200,000 away from the general  population. 

Operation: Wedge Politics

The tactic is clear alienate 200,000 high paid miners and their foreign paymasters and simultaneously claim they are wrecking the rest of the economy by driving up the Australian dollar whilst not being that large a contributer to the economy.

So we are told by Dr Denniss Mining is having a large negative affect whilst having a small benefit! I wish he would model the affects of high tax and labour regulatory burdens on the economy, but apparently profits earned by industry should be shared by all Australians regardless of who put up the investment dollars and who did the work. Sounds like Marx 'from each according to his ability, to each according to his need.' I guess Dr Denniss missed those few decades where equalising profit starved a half a continent to death.

Econmics is about inscentives, if you take away carrots and apply the tax stick your going to change investment habits. Flight of capital is a real risk but the left do not appreaciate or understand history.

Australians  in the resource states and regions are rejecting the wedge knowing how the mining boom has flowed through all parts of the economy. Flat corporate tax and royalties are a perfectly fair and adequate system to price finite resources. Lowering corporate tax would be far more affectice to help the lagging parts of the economy. The government does want to share that fact with the electorate; instead seeking to pit industries off against each other in an attempt to secure the funds to pay down their debt.

Q N A sans Tony Jones!

We are told minerals are finite, but that is what royalties are for!

We are told miners need to pay their fair share, but is that not how a percentage based corporate tax works?

The more profit you earn the more tax you pay!

Some may argue it is like a progressive income tax for business. Then why is the long held, stable notion of flat corporate tax readily abandoned for one industry only? Why does the highly profitable banking sector get a free pass?

The answer is that banks affect everybody, mining only a few (a respectable few), therefore the industry specific class war between the well paid miner and struggling manufacturing worker is established by the left in the eyes of the electorate. 


 The high dollar is great for consumers and we are all consumers?

Naturally the low cost of flat screen televisions and a whole manner of easily affordable imported goods that has underpinned high living standards in Australia is ignored by Dr Denniss and the ALP with only the convenient envy peddling message of mining as a wrecking ball being allowed to permeate the unquestioning press gallery.

If we pass on the costs of the mining tax to commodities, then the goods we buy from China must rise also, so essentially it will hit every Australian indirectly with the 'Made in China' label littering the  electronic goods of every Australian household. 

Econ 101: Attention: The Left!

Capitalism works at improving living standards because the most efficient companies are allowed to excel and take profit to reinvest in further improvements to the productive capacity of the economy. When governments start to pick and choose who to help and hinder the great machine driving innovation gets a flat tyre. It can only keep driving so long before it has to pull up and change a tyre (extended metaphor, it just happened, you love it).

Profit belongs to investors, when governments change the rules mid stream they send a warning to the sources of capital on which our mining industries so depends. The message is risk, not of company performance, but of government hostility to high performance. It is an immoral message, economically risky and the fact xenophobia and simplistic economic data is being used to justify the government shakedown makes the heist that much worse.

Australians may at times be jealous of the mining industry, they might have a high dollar affecting their business, but to support a policy which punishes success is surely a far worse transgression. Mining will boom and bust, but China will continue to out compete us in manufacturing regardless of the dollar. Productivity gains, innovation and lower taxes is the fix to that issue, not trying to lift profits away from the people who invested it.

How would you feel if you owned owned shares in BHP whose profits got walloped due to a new regime nationalizing a mine in South America? You might think that is the stuff of third world dictatorships, but this government is trying to do it, in part, very soon. Nationalizing mines is bad news, doing it partially is simply expecting foreign money to make cake but letting our government take a lions share. There are other mineral resources opening up in the world with far lower labour and tax burdens than Australia, let us not send the wrong message.

I will leave the readers with these issue to process, I must now wash my hands which are filthy with stench of excessive cliched metaphor use and distain for leftist voodoo economics.

P.S Dr Denniss is now shamed twice, his intelligence seems to lack in both climate science and for his pet area of expertise, economics. What are they teaching in universities now? Certainly not how to integrate facts or cause and affect! A is A!

If you wish to watch academic drowning see below:
 

 

 Gary Knight is a former high school teacher turned apprentice electrician in the mining industry. This piece was originally published on his personal blog, Operation Libertarianism. 

Comments

[liberal elitist]

1.

The mining tax removes investment incentive from a source that cannot be replaced domestically

The mining industry removes minerals from a source that cannot be replaced.

Those who express the view that it is Australia's mineral wealth are not understanding the role of roylaties, which is a state tax levied on the ore regardless of profit.

You're quite right. But those royalties have not responded to Australia's terms of trade reaching an all-time high, which have massively increased the industry's profitability. The increase in profitability has nothing to do with improved management or innovation. If you owned a house and its value shot up because the government built a school or train station next door, wouldn't you feel entitled to take advantage of the increased price even though you did nothing to earn it?

The problem with increasing royalties is that if the terms of trade fall again the industry becomes crippled by unsustainably high fixed costs. Hence the idea of a tax on super profits, so if the terms of trade fall again the burden of the tax will disappear.

The mining tax sets the precedent that if your a high performing industry in Australia, the government is coming to get you. Theoretically what stops this line of argument being used to justify a tax increase on any high performing sector?

The fact that most other sectors don't profit from the sale of non-renewable resources. It is also rare for other sectors to receive windfall gains from changes in macroeconomic conditions.

I'm more concerned about the mining industry's successful campaign against the MRRT, which sets the precedent that if you're a powerful industry in Australia and the government introduces policy adverse to your interests, you can change the policy (and the political leaders) with sufficiently aggressive advertising...

A mining tax is economically sound. But don't take my word for it, how about reading conservative international newspaper The Economist:

The mining companies, even had they done nothing to increase production, would have seen a fortune cascading into their pockets simply because of rising prices. As it is, BHP Billiton, a British-Australian company, announced half-yearly profits of US$10.5 billion in February, up 72% on a year earlier, and profits for the whole of this year are expected to be US$23 billion. It is now the world’s fifth-biggest company. Its great rival, Rio Tinto, also British-Australian, declared profits of US$20.6 billion last year, up 162%. And Swiss Xstrata, Australia’s third big mining company, in 2010 made profits of US$6.6 billion, up 337% on the year before. Figures like these, in circumstances like Australia’s, seem to call for a tax of some kind.

Also, you might want to correct the following errors:
Perhaps I am to brazenly right wing economically
Company tax then sits of top
iron ore is some parts of the country
pilbra red dirt
barbaric practise of teired taxation for incomes
better emloyment opportunities
general econmic wellbeing
attempting tp apply the progressive income tax arguemnt
invesment patterns
not being that large a contributer
large negative affect
model the affects
Econmics is about inscentives
your going to change investment
the left do not appreaciate
far more affectice
a lions share
these issue to process
distain for leftist voodoo
cause and affect
if your a high performing industry

[Steve at the Pub]

2.

The basis for Dr. Denniss' number of 82% overseas ownership is based upon nothing more than where companies are listed.

Actual overseas ownership could be way higher, or way lower. One thing is certain, Dr. Denniss doesn't know.

[Dante]

3.

Mr Knight is entitled to his opinion and, as someone that is employed in mining, he is pulling water to his well. There is no argument about that. For the rest of his comments … well, he could have saved himself the trouble. His logic is as futile as Lord Monkton arguments about Climate change … the climate is changing as a result of human activities over the past 100 years or so, just as we have a single go at extracting and selling our mineral wealth. Yes, OUR AUSTRALIAN ore that all of us own.

Mr Knight says that “capitalism works at improving living standards”. Agree, so why oppose the mining super tax that returns more money to provide better schools for a better prepared workforce, better hospitals so that we have a healthier workforce, better infrastructures that will improve our terms of trade? But of course Mr Knight knows best, he claims, without a shred of evidence, that governments waste money. He says CATEGORICALLY “do we really want the government to have more money to waste”? Of course not, he suggests that “it would no doubt be better left (the money) in the mining companies coffers to fuel the next stage of investment in Australian jobs”. Now there is a puzzle, “how many jobs does the mining boom create? And if it is such a good creator of employment, why aren’t they created now? The problem Mr Knight is that the huge profits and windfalls as a result of insatiable China and the high dollar will go into French champagne, caviar, Italian-built yachts, some private planes, expansive holidays and hardly any will be seen in Australia that will be left with massive holes in the ground. Mr Knight side of politics and “we shall repeal the tax when we come to government” lobby prefer rich overseas and local magnates to better schools, hospitals and infrastructures.

Mr Knight says that it is incorrect to suggest that “mineral wealth belongs to all Australians”, and he labels people that argues that as “ignorant of mining and investment in general”. Let’s put this into the correct context: (a) investment alone would not produce any mining wealth, (b) without the ore there is no mining, (c) the high Australian dollar is responsible for the very high profit in mining and mining isn’t in charge of exchange rates, (d) infrastructures paid by the Australian people are essential to mining. In short, the mining wealth isn’t solely and entirely the realm of the mining industry. All Australians are participants and co-owners of this wealth, and it should be available to all and not a restricted few. Mr Knight even labels those advocating “returning the profits of Australia's mineral wealth to all Australians” as suffering from “xenophobia and class envy”. Wow, what next? Nazi? No amount of emotive language is going to change the fact that Australian mineral wealth does not belong only to “the investor and the company undertaking the mammoth task of bring minerals to market”. Nobody denies the lion share of the windfall to miners, but in a fair and cooperative society we need to share the good fortune around. Greed isn’t a very good look and does not encourage much needed co-operation. The boom will come to an end and what will the people of Australia have to show for their good fortune?

Mr Knight says “The mining tax removes investment incentive from a source that cannot be replaced domestically; we loose jobs and potential economic activity as a result of a punitive policy such as the mining tax”. Really? Is this why, no sooner the super profit tax was announced we had a foreign company wanted to buy an Australian mine? We loose jobs? But wasn’t the argument that mining employs a small fraction of the total workforce? And where would they go to dig Australia ore? And if they went elsewhere, wouldn’t the ore stay in the ground and increase in value over time? The fact is that they are going NOWHERE and Mr Knight is being manipulated. The mining super profit tax is a small contribution that reputable and non-greedy mining companies do not oppose because they understand that they too are part of Australia, and they are willing to share their good fortune with the rest of society.

One thing Mr Knight failed to touch on, down-stream processing. Why aren’t windfall profits invested in more downstream processing? That would reduce exposure to the super profit tax, would develop more markets for Australian goods and services, would make us less dependable on foreign know-how in developing our resources, would make us smarter, would give manufacturing a boost, would add value, and would insulate us against market fluctuations. Now that would be something to advocate for instead of just ripping it off the ground, do the bare minimum of preparation, and sell it to someone that adds value to it. As it has been pointed out several times before, Japan can purchase our ore and coal, turn it into steel and cars, pay good salary to its people, and be world-leaders in cars. Why they can do it and we can’t? The answer is very, very simple. We have inefficient and lazy management interested only in the short-term, we have an industrial system of us and them, we always think of ourselves first and foremost, we want all for ourselves, and we can’t co-operate with each other because we do trust nobody.

[Michael Sutcliffe]

4.

And if they went elsewhere, wouldn’t the ore stay in the ground and increase in value over time?

By that logic African nations are actually better off when mining companies refuse to operate in their countries because, despite the development it would bring, they're sitting on their 'investment' waiting for bigger returns in the future. I feel pretty confident those nations would be better off selling their resources now and developing their country. If you took an African nation that used its resources and allowed that wealth, high payed employment and development opportunities to flow through to their people in a capitalistic way, you can be sure that country will be in another league to similar countries that either kept their minerals in the ground or tried to nationalise its mining industry through government ownership or 'super' taxes. Even though the latter countries took your advice, they'll be playing catch up to the former one for generations to come.

There is no free lunch. The resource is being sold at the price the market will bear and Australia is already exercising a lot of power in that market (iron ore among others). If you increase the taxes on the mining companies there will, over time, be less mining done here and the opportunities that flow from it will come later and in competition with even more suppliers.

[Anton]

5.

Australia's terms of trade reaching an all-time high, which have massively increased the industry's profitability

How is this so? The direct effect of terms of trade are a consequence, not cause of mining profits.

If you are referring to the exchange rate, consider the fact that most mines sell in an auction priced market, denominated in US$ while much of their cost (notably wages) are denominated in A$. A high A$ exchange rate reduces the mine's profitability. Do the maths yourself if you don't believe me.

The market distortion ("2 speed economy" to the idiot media) is a direct result of excessive welfare. The lazy can stay at home and still survive, forcing the mines to pay a premium for labour. Without welfare, many bludgers would be forced to move to regional Australia, thus increasing the supply and reducing the price of labour. In the mean time I will enjoy the higher pay provided by this market distortion. ***Another unintended consequence brought to you by the socialists of Australia***

[Gary]

6.

Thanks for the effort you took to proof read. I Sentanother copy in, hopefully it can be swapped out.

All your arguments seem to boil down to one priciple. If a company is doing well go try and take a higher percentage.

The whole point of my article is to try and point out exactly that. Its a morally viscious atitude to adopt, and as stated in my argument almost has no limits.

All the issues you raise about them doing well due to market conditions are irrelevent. All tax is a trangression by the state on private wealth. It ignores hard work be it productivity, or investing in industries that have trade exposed windfalls. It still took risk and calculation and the profits no matter how high should not be pillaged by the state.

The mark of a moral government is one that lets its citazens and private companies keep as much wealth as possible whilst still providing rule of law and the enforcement of contracts.

It does not matter if nobody other than mining benefits from their profits. They earned the profits on their investments. The mining tax is socialism for business, it sickens me.

Thanks again for your considered comments and corrections. Can i send my next blog to you for proofing! You seem to have a talent for it!

[perturbed]

7.

Dear Sir,

If you are going to post to a forum such as this, you should at least take pains to ensure that your spelling and grammar are not full of holes. It makes me shudder to read that you were formerly a schoolteacher.

I agree with your arguments, but presentation matters. Your reply to "liberal elitist" had more errors in less words than your entire article.

[John A]

8.

There is a third argument to be made in this highly charged debate:
The only source of continued investment in developing projects (and later in new projects) is the afater-tax profits that are retained by the mining companies, in the country of operation.

So the good doctor's calculation of where the profits go is going to be skewed unless he allows for re-investment.

Any additional tax on the profits of such companies will reduce the retained funds available for future investment.

Let us assume that the money raised by the MRRT is used for national infrastructure.

Then the debate may be carried on over the competing uses of the funds - national infrastructure vs mining infrastructure.

However, based on past performance of this government, can we be confident that the national infrastructure funds will be spent as effectively as the mining companies would spend it? Or would we be worried about waste of the scale of BER, pink batts, trinkets of trivia spending and so on?

Or worse still, should we put this MRRT into the political context of re-balancing a budget and repaying debt? That is, the competing demands on the cash are a) mining investment vs b) paying for past excesses?

Then it should be a no-brainer that this is a socialist money grab and nothing more!

[Pauline]

9.

Monkton is no "Lord" he is a complete fruitloop with no qualifications. Lets reap some of our rewards Australia, bring on the minerals tax. The big mining fat cats should pay more tax - especially since doubling their profits. Put it back into society. One day the mining boom will be all finished and we'll be left with nothing. Great investment in the NBN with it ever growing we don't want to be left behind. Very proud on such massive things happening in our country. Cannot wait to become a cleaner energy country with a carbon tax. Who says Labor stands for nothing lol! Great job!

[kelly liddle]

10.

Only half the moral arguement is here. The redistribution of this money to cut the taxes on other businesses by 1.5% and then it gets worse many but not all (The CEO of ANZ Mike Smith is a good exception) of these other businesses especially some retailers saying is good idea to give them a tax cut and increase taxes on others. Effectively it is part nationalisation of certain companies. I have no problem about new projects where no investment has been made having to pay higher royalties or taxes if that is what is decided but to change the tax just because profits are large is wrong and implies a large sovereign risk. So on this basis when the retailers for example start to have rapidly increasing profits after this particular mining boom collapses will we reduce miners taxes to be paid for by retailers?

[bob]

11.

Great article. I find it amazing people supporting the mining tax, with the argument that the ore belongs to every Australian. Every Australian can have a piece of pie all you have do is buy shares in a mining company. People from the city don't seem to understand the benefits the mines bring to regional areas. They sponsor all major social events in the region from football teams, rodeos and local charities. In my area they just spent millions upgrading the hospital. The mines give back to the community on a larger scale then any other business community i know. This is due to the fact all the staff from the mine manger to the TA'S live in the community. I just don't understand why people have a mind set against foreign investment or people making a profit. I hope bhp and co keep making record profits and keep our isolated communities prosperous. How about the insane idea of lowering taxes.

[liberal elitist]

12.

How is this so? The direct effect of terms of trade are a consequence, not cause of mining profits.

The terms of trade is a ratio (import price / export price) and is not determined solely by the exchange rate. Strong terms of trade are a result of cheap imports and/or expensive exports. Regardless of whether mining exports are denominated in USD or AUD there was a massive boom in commodity prices which resulted in higher terms of trade and windfall profits for the miners.

The market distortion ("2 speed economy" to the idiot media) is a direct result of excessive welfare. The lazy can stay at home and still survive, forcing the mines to pay a premium for labour. Without welfare, many bludgers would be forced to move to regional Australia, thus increasing the supply and reducing the price of labour. In the mean time I will enjoy the higher pay provided by this market distortion.

Do you actually believe that welfare recipients would seek jobs but for the fact that they're living it up on Centrelink benefits? If that's the case, why don't you take advantage of this and start collecting Centrelink? Because you earn a more even from a minimum wage job; constantly having to report back to Centrelink about your finances and job-seeking efforts sucks; and being unemployed is boring, depressing and stigmatised. Perhaps if you met some unemployed people you might gain a little empathy. However, they're not easy to find because Australia has one of the lowest rates of unemployment in the world - which doesn't really sit well with your theory.

Still, I'd love to look at the evidence that our welfare system is the cause of high mining wages. Let me know when you find some. Until then, I'll assume that your argument is based on your psychological need to blame the world's problems on a horde of lazy bludgers leeching off hardworking, morally upstanding citizens like yourself who give them the means "to stay at home and still survive." Or maybe you read it in an Ayn Rand book, I dunno.

All your arguments seem to boil down to one priciple. If a company is doing well go try and take a higher percentage.

That's not the point I was trying to make, but yes, I am saying that we should take a higher percentage of mining profits because miners are 'doing well.' Sorry, but your slippery slope argument applies to almost any government policy.
"Let's tax the mining industry!" "No - first the mining industry, then every other industry, then communism!!"
"Let's cut taxes!" "No - once they start cutting taxes, they'll keep cutting them until all public services are shut down!"
"Let's introduce Medicare!" "No - it starts with subsidised health care, then subsidised housing, then subsidised everything else, then communism!"

Yes, this is socialist policy which redistributes wealth from the rich to the poor... just like most government services, which are funded by progressive taxes on the rich and offered to the public for free. But don't worry, there are plenty of government policies that redistribute wealth from the poor to the rich as well! Low-inflation monetary policy redistributes wealth from (mainly poor) debtors to (mainly rich) creditors. Preferential trade agreements and the high Australian dollar redistribute wealth from workers in trade-exposed industries to business owners (who can get cheaper labour overseas) and people with lots of Australian dollars (who can then buy more imports). I'm afraid you'll just have to get used to wealth redistribution because that's what economics is about - the way we distribute wealth amongst ourselves. Literally any intervention in the market is wealth redistribution, so you can't just pick and choose the policies that redistribute wealth away from you and cry "socialism!" You have to explain why your chosen policy improves life for everyone (on average).

All tax is a trangression by the state on private wealth ... The mark of a moral government is one that lets its citazens and private companies keep as much wealth as possible whilst still providing rule of law and the enforcement of contracts.

I don't subscribe to your ideology. I'd say the mark of a good government is a happy, wealthy, egalitarian and therefore peaceful society. The last century is strong evidence to suggest that appropriate government intervention (progressive income tax, social welfare, and universal health care) can lead to a happier, wealthier, more egalitarian and more peaceful society.