UK must learn from Australia’s error

Allister Heath
IT is not just Britain that is about to shoot itself in the foot with a crippling and destructive tax hike on investors. In our case, it is capital gains that are being targeted; in Australia’s case, however, it is the mining industry that is the being subjected to a weird experiment in irrationality. It is unclear what Labour prime minister Kevin Rudd was thinking when he dreamt up his 40 per cent super-tax on mining profits but the move is likely to go down as one of the most absurd and counter-productive in fiscal history. It is right there with the UK Labour government’s top marginal tax rate of 98 per cent in the 1970s and seems almost deliberately designed to prove Arthur Laffer’s famous adage that excessively high tax rates reduce the tax take by crippling effort, work and investment.

Shocked miners have been doing their maths and finding out that it is simply no longer worth their time to start new projects in Australia if returns are cut by 40 per cent; miners, like everybody else, need to make a decent risk adjusted return on capital for their shareholders and can’t afford to work for free or for pathetically low profits (maybe someone should have told Rudd). They are already deciding that their capital can better be allocated in other, less short-sighted countries. The result is that far from raising billions of dollars a year, the tax will bring in no money at all at least until 2015, calculates Ivor Ries of Melbourne broker EL & C Baillieu. Static models of government revenues which assume that individuals and companies don’t respond to changes in tax rates are worthless – yet that is exactly the silly assumption that Rudd appears to have made.

Xstrata yesterday threatened to scrap $5.4bn of coal and copper projects, taking the industry-wide value of developments put on hold to above $20bn in just one month. Wherever one looks, previously viable projects have become uneconomic; uncertainty and chaos now plague Australia’s mining sector, which accounts for 58 per cent of that country’s total exports. KPMG has studied the impact of the tax on a typical greenfield project with average costs and found that nickel, copper and gold mines in particular would no longer be viable. Australia is one of the very few developed economies to have completely avoided the recession; this remarkable resilience is being ruined by Rudd’s stupidity.

Rio Tinto, led by boss Tom Albanese, has rightly described the tax raid as another kind of “sovereign risk.” He too has ordered his project leaders to review all its Australian investments under a “worst-case scenario” tax model. It is not as if companies such as Xstrata or Rio aren’t paying plenty already: they are financing much of the Australian welfare state. Rio alone paid corporate taxes worth A$14.6bn and royalties of A$5.7bn to the Australian government between 2000 and 2009, making the firm one of Australia’s top taxpayers. The firm’s effective tax rate is about 35 per cent and it has made huge investments in Australia, ploughing back its profits.

The parallels with the UK are obvious. It is high time politicians in Britain as well as Australia finally understood that tax rates matter. Hiking capital gains tax in this country, as is currently being planned by the coalition government, will inflict huge damage and will at best yield very little money and at worst cut the Treasury’s tax take. Why do governments never learn?