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Have Mining Royalties Been Beneficial to Australia?

Author

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  • Jonathan Pincus

    (School of Economics, University of Adelaide)

  • Henry Ergas

    (SMART Infrastructure Facility, University of Wollongong and Deloitte Australia)

Abstract

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.

Suggested Citation

  • Jonathan Pincus & Henry Ergas, 2013. "Have Mining Royalties Been Beneficial to Australia?," School of Economics and Public Policy Working Papers 2013-10, University of Adelaide, School of Economics and Public Policy.
    • Handle: RePEc:adl:wpaper:2013-10
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    File URL: https://media.adelaide.edu.au/economics/papers/doc/wp2013-10.pdf
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    References listed on IDEAS

    as
    1. 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.
    2. 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.
    3. 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.
    4. 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.
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    Cited by:

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    4. Paredes, Dusan & Rivera, Nathaly M., 2017. "Mineral taxes and the local public goods provision in mining communities," Resources Policy, Elsevier, vol. 53(C), pages 328-339.
    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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    More about this item

    Keywords

    Excess burden; Henry tax review; mining royalties; foreign ownership; KPMG Econtech.;
    All these keywords.

    JEL classification:

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

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