Opinion

Billionaires dig in to kill good idea

By William Pesek (China Daily)
Updated: 2010-06-18 10:48

Australia is committing economic suicide.

That's what the hyperbolic backlash over Kevin Rudd's planned 40 percent tax on mining profits would have you believe. Executives are foaming at the mouth with every free-market clich imaginable: the prime minister is killing the goose that laid the golden eggs, tossing the baby out with the bathwater, shooting the economy in the foot, you name it.

This bellyaching misses the point. The tax is the right thing to do and miners will have to live with it.

We can quibble over Rudd's clumsy introduction. The tax's sudden appearance and complicated mechanics left voters scratching their heads. Yet the levy is right for three reasons.

One: it's Australians' money. Yes, BHP Billiton Ltd, Rio Tinto Group and Xstrata Plc work hard digging resources out of the ground. But this is about how 22 million people best profit from that treasure. It's about using the proceeds wisely and preparing for when the iron ore and coal run out. As resource prices surge, Australians should be using the windfall to invest in their future.

Instead, we're witnessing an infantile debate that's all about political point-scoring. Rich miners seem to think the louder they yell, the stronger their argument. Supporters of the tax haven't been effective in countering the backlash.

Rudd is a weak communicator. We saw that with the collapse of his planned emissions-trading system. He needed to explain clearly to voters how putting a price on carbon would change behavior and curb greenhouse gas emissions. Instead, he allowed the opposition to tear apart initiatives that would have made Australia more prosperous and competitive.

Now, Rudd is counting on the fact that there's little love for big, hugely profitable global mining companies. It's not enough. His resource tax is complicated and it needs to be explained very carefully to voters. This, after all, is hardly the evil, capitalism-killing idea that's been portrayed.

The tax would be on "super profits", or anything over a level deemed reasonable. Under Rudd's proposal, the levy would be imposed on resource-company returns that exceed the rate on long-term Australian government bonds, currently about 6 percent. You can bet miners will fight for, and get, a higher threshold of 10 percent or more.

Two: a "two-speed economy" isn't realistic. Mining's success is leading to a growing disparity between the resource rich states of Western Australia and Queensland and the rest of the nation. Some might even call it a mining bubble, if property prices in Perth are any guide.

The current system, focused on state royalties, is becoming more and more outdated. It's not producing a fair share of the nation's wealth for all Australians.

By moderating investment, the tax may also curb inflation pressures. Chinese demand unleashed a modern-day mining boom, boosting consumer prices. That's prompted the central bank to raise interest rates as other major monetary powers hold them at historical lows. That's hurting Australians not involved in the mining industry.

Related readings:  Australia keeps interest rate unchanged at 4.5%  Damaged Chinese coal carrier leaves Australia  Australia says door open on mining 'super tax'  Australia rebuts mining tax 'myths'

It would be silly for Australia not to sell its resources to fast-growing developing nations. Yet Australia's future lies more in what's above ground: the ingenuity of its population. The future is about ideas, innovation and education. Improved infrastructure is also needed. Rudd's tax could go a long way toward financing those needs.

Three: prospects for big change. It's been many years since Australia undertook complex policy reform. This coasting contrasts sharply with the 1980s and 1990s, when import tariffs were removed, the dollar was floated and the financial industry opened.

Rudd's tax would be one for the history books. Should it be defeated, it could mean the end of big economic thinking. It could deepen entrenched divisions between political parties, leading to a more polarized system, a la the US, and allow big business to dictate government policy.

To see where that got the US, look no further than the catastrophe at BP Plc. Or how Wall Street giants like Goldman Sachs Group Inc that received government bailouts are now fighting regulatory change that would benefit America.

Rudd is the only leader of the developed-economy world who navigated around the global financial crisis. That hardly makes him the clueless liberal ideologue that right-wing pundits suggest.

The public-relations battle is clearly being won by the billionaires. To listen to the miners, Rudd's tax is an assault on Australia's future. No, just them and their monster profits. Rudd is putting Australians first, and good for him.

William Pesek is a Bloomberg News columnist. The opinions expressed are his own.