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Have Mining Royalties Been Beneficial to Australia?

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  • Henry Ergas
  • Jonathan Pincus

Abstract

type="main" xml:id="ecpa12068-abs-0001"> The “Henry tax review,” Australia's Future Tax System (Commonwealth of Australia, Department of Treasury, [, 2010]), recommended that royalties be abolished and replaced by a resource rent tax. Regarding abolition, AFTS drew on KPMG Econtech ([, 2010a]) ( http://taxre view.treasury.gov.au/content/html/commissioned_work/downloads/KPMG_Econtec h_Efficiency%20of%20Taxes_Final_Report.pdf ), a major 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 of royalties and crude oil excise, taken together, was 50 cents per dollar of public revenue, and that the marginal excess burden, at 70 cents, was the highest of all imposts except those on gambling. 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. More fundamentally, the finding that royalties do harm is difficult to reconcile with the widely accepted claim that a rise in the terms of trade is beneficial. Using a partial equilibrium model, we conclude that royalties are likely to have brought substantial benefits to Australians, and that higher royalty rates would have increased both economic welfare as well as public revenue.

Suggested Citation

  • Henry Ergas & Jonathan Pincus, 2014. "Have Mining Royalties Been Beneficial to Australia?," Economic Papers, The Economic Society of Australia, vol. 33(1), pages 13-28, March.
    • Handle: RePEc:bla:econpa:v:33:y:2014:i:1:p:13-28
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    File URL: http://hdl.handle.net/10.1111/ecpa.2014.33.issue-1
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    References listed on IDEAS

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    1. Jonathan Pincus, 2012. "The Treasury-KPMG Econtech Modelling of the Excess Burden of Mining Taxation: Some Doubts," Agenda - A Journal of Policy Analysis and Reform, Australian National University, College of Business and Economics, School of Economics, vol. 19(2), pages 23-38.
    2. John Creedy, 2003. "The Excess Burden of Taxation and Why it (Approximately) Quadruples When the Tax Rate Doubles," Treasury Working Paper Series 03/29, New Zealand Treasury.
    3. Henry Ergas & Jonathan Pincus, 2012. "Modelling the Excess Burden of Royalties," School of Economics and Public Policy Working Papers 2012-03, University of Adelaide, School of Economics and Public Policy.
    4. Henry Ergas & Mark Harrison & Jonathan Pincus, 2010. "Some Economics of Mining Taxation," Economic Papers, The Economic Society of Australia, vol. 29(4), pages 369-383, December.
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    5. Drew, Joseph & Dollery, Brian Edward & Blackwell, Boyd Dirk, 2018. "A square deal? Mining costs, mining royalties and local government in New South Wales, Australia," Resources Policy, Elsevier, vol. 55(C), pages 113-122.

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    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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