Have Mining Royalties Been Beneficial to Australia?

The ‘Henry tax review’, Australia’s Future Tax System (2010), recommended that royalties be abolished and replaced by a resource rent tax. Regarding abolition, AFTS drew on KPMG Econtech (2010a), a report commissioned by Treasury to investigate the efficiencies of a wide range of Australian taxes, using MM900, a proprietary CGE model. That report estimated that the average excess burden (AEB) of royalties and crude oil excise was 50 per cent, and the marginal excess burden was 70. This may have led some policy advisers and commentators to conclude that royalties, considered separately from the excise, are the most inefficient of all (non-corrective) imposts. We argue that the KPMG Econtech long run comparative static framework was inappropriate for policy purposes. By ignoring that mining is largely foreign owned, the model missed a large ‘rectangle’ of gain—which we calculate using a partial equilibrium model. Also, the modellers assumed stationary minerals prices, apparently those of 2004-05: the subsequent doubling of mineral prices halves the estimate of AEB. More fundamentally, the finding that royalties harm Australia implies that a rise in the terms of trade also harms Australia. Thus, KPMG Econtech overstated the excess burden of royalties; in fact, royalties are likely to have been beneficial. Keywords: Excess burden; Henry tax review; mining royalties; foreign ownership; KPMG Econtech * SMART Infrastructure Facility, University of Wollongong and Deloitte Australia. † School of Economics, The University of Adelaide. The Ian Wilson Foundation provided funding through the University of Adelaide. This is a drastic revision of a paper given at Australian Conference of Economists 2012, Melbourne, Victoria, July 8 -12, 2012. Thanks but no blame goes to conference participants, especially John Freebairn, to anonymous referees, Jeff Sheen (as managing editor) and Mark Harrison.