Doorstop Interview, Sydney
Hon Peter Costello
Friday, 7 May 2010
SUBJECT: Henry Review of Taxation
Well I have just addressed a breakfast this morning in relation to the Henry Review. We were promised that the Henry Review would be a "root and branch" investigation of Australia's taxation system and the Government's Response has been a mild cultivation with not much flowering potential. To put it another way a Review which was going to be big bang tax reform ended not in a bang but a whimper.
There are really only two things that have come out of this Report. One is an increase in tax on mining companies to 57 per cent, 57 per cent, which means that the Government will be taxing more than half of the income of mining companies in Australia that make a profit. And the second of course is an increase in the Super Guarantee which I think is to take place eventually in a decade's time. I just want to make two points about this.
The first is that there is no connection whatsoever between the increased tax on the mining sector and the superannuation changes - none whatsoever. Some spin merchant has decided that if we call the tax a 'Super Profits Tax' and we call the increase a 'superannuation increase' - super - super - there must be a connection. There is none whatsoever. The two proposals stand independently and separately.
And the second point I would make of course is that the graph which was produced to try and show that tax was declining as a proportion of mining profits was a bodgy one. The graph was bodgied up to make it look as if taxation from mining companies was falling as a proportion of revenues. The way it was bodgied was by leaving out company taxes. And with company taxes set at 30 per cent as profits go up you always get 30 per cent of those rising profits. The company tax take does not fall as profits rise. And a number of people would have seen that graph and would have thought that as a consequence of that taxes on mining were falling. They have not been falling and that does not present a reason to increase the taxes to the Government's 57 per cent proposed level.
One last point that I made this morning was that it's not as if anything lasting is going to be done with these new taxes on the mining industry. It is not going to be invested in a future fund for future generations. They are not going to be set up and put aside and guaranteed they are just going to go into general revenue and these new taxes will be spent just as the existing taxes have been spent and we will have very little to show for them at the end of it.
But to come back to the Henry Review this was an opportunity for substantial tax reform and it has been lost. It is a pity for Ken Henry I think that he spent as much time as he did on this Report and that it has lasted such a short shelf life. And it is a missed opportunity which if it had have been grasped it could have improved Australia's taxation system but it hasn't.
Mr Costello shouldn't mining companies contribute more though at a time when they are doing better? They are making a lot of money from the growth of India and China.
They do contribute more. Every additional dollar that they make they contribute another 30 per cent to the taxpayer. You don't have to change a thing to get a mining company to contribute more. It contributes more by virtue of the fact that 30 per cent of its profits are taxed. So that if it makes $100 it contributes $30. If it makes $200 it contributes $60. If it makes $900, you do the math, it does contribute more. You don't have to lift the percentage taxation to get it to contribute more. It is a percentage taxation and it already contributes more.
Are the companies crying wolf as the Prime Minister has suggested? Are they crying wolf by suggesting that projects will be shelved or threatening to shelve projects?
Well this sector has been along with the banks the greatest taxpaying sector in the Australian economy - huge taxpaying sector in the Australian economy. And whilst I was the Treasurer with the taxes that it was paying we could even balance our Budgets. But you don't have to increase the rate to get more out of it. The fact that the rate is 30 per cent means that you get more out of it. They are trying to not only get more out of it but lift the rate at which they swallow more out of it. That is the argument that is going on here.
Wayne Swan says you squandered the proceeds of the mining boom Mr Costello. What do you say to that?
Well I make two points of course. For the first eight years of the Coalition Government there was no mining boom. The mining boom such as it is started in about 2004 and mining prices even in 2004 were nothing like they are today. I think as I said before if you have seen the prices of today and you look back in 2004-2005 you would say there was no mining boom. So compared to today there was no mining boom. But of course what did we do? Even on prices that were nothing like the prices of today we balanced our Budget. The current Federal Government is not in surplus. It is in deep deficit. We didn't run up debt we paid it off. We upgraded Australia's credit rating to AAA level and we set up the Future Fund which has got $60 billion in it which will be there for generations. Now compare that to what is going on now. Debt is rising, the Budget is in deficit, the Future Fund is not being built, prices are higher and the Government wants to lift the rate of taxation.
Is there a basis for going to a sovereign wealth fund with these funds Mr Costello? You say the Government is putting it into general revenue would it be better to put it into a sovereign wealth fund?
If you want to build something for future generations you would be building it into Australia's sovereign wealth fund - a Future Fund. If the Government had said for example that we want to make sure this lasts for generations the revenues from this would not be put into general revenue and expended they would be set aside. Australia has a sovereign wealth fund - the Future Fund - it could have been put in that but it is not proposing to set it aside and put it in the Future Fund. It is proposing to spend it. And here is the rub even after all these taxes the Budget will still be in deficit.
Do you think Australia faces a national savings problem that the Government has just justified the superannuation guarantee increase?
Well the only thing I would make about the Super Guarantee of course is Ken Henry didn't recommend an increase in the Super Guarantee. So here we have 138 recommendations, the Government picks up one, adds another that wasn't recommended, rejects 23 and doesn't comment on the rest. It is not a good strike rate.
What signal is Australia sending to international investors and other governments by the tax on the mining industry?
Well I think my friend Jim Flaherty the Canadian Finance Minister answered that question. Jim is a Finance Minister, he wants to promote his own country, he sees this as a great opportunity and he is doing it. You know what I think I would like to see in Australia is our leaders getting out and talking to other companies around the world about why they should be coming here not hear foreign leaders around the world talk about why Australian companies should be going there.
Should other industries be nervous? (inaudible) this could potentially become a tax on any sector that outperforms?
Well at the moment we have a company tax rate of 30 per cent and as your profits rise you pay 30 per cent of the profits. The Government takes 30 per cent. This is a proposal to move the Government from a one third tax take to a majority tax take. That is take 57 per cent. Now if you can take 57 per cent out of the mining industry you could take 57 per cent out of any other industry. The logic is still the same. "We need more taxes on profitable companies." I don't recommend it myself. I think that the 30 per cent company tax rate is right and I noticed that the Henry Review is actually saying it should lower if anything it should come down to 25 per cent. And so we have got this thing that is going on with Henry saying on the one hand company taxes generally should be coming down from 30 to 25 per cent except in relation to the mining industry where they should be going up to 57 per cent. Well you know once you do that for one industry yes you could use the same logic on other industries.
Mr Costello is the response that we have seen from the mining industry genuine? What threat will that have to economic prosperity if we are seeing such a pull-back in the mining sector?
Well I think the mining industry is genuinely concerned that this is going to be - you have got to understand this - the Government is going to take more than half of their profits. The mining companies are going to become junior partners to the Government in their operations. Now they are concerned about that. You probably would be too if the Government took more than half your income. So I think that there is genuine concern from the mining industry and it is not just the rate it is the way in which this is applied. This is not being introduced in exchange for the abolition of royalties. The royalties will stay. And the second thing that concerns is the rate that is going to be allowed by the Government before it pays deferred expenses which is a rate of 6 per cent. I think in relation to the petroleum industry it is the long term bond rate and 11 per cent. There is a very big difference. And so it is not just that the rate has been magically increased it is that the assumptions underpinning what the rate will apply to are very detrimental to the mining industry and you have got to remember for many Australians they do invest in these companies and their superannuation funds invest in these companies. You have got to remember that one of the consequences of the increased government taxes here will be that ordinary Australians through their superannuation funds and through their direct investment are going to get less as a consequence. Now don't forget this that the really big investors in mining companies in Australia include superannuation funds investing your and my superannuation. If the Government takes more your superannuation will get less.
What about the response from Tony Abbott? Do you think the Coalition has taken the correct policy position on this or has he been cornered on this?
Oh I think he is absolutely right. The other point I will make is this, that the idea is being put out that this somehow only applies to super profits. It applies to all profits of mining companies. Even if you were only to make a dollar in profit you would get this new higher rate of tax. The public should not think that somehow your normal profit is taxed at one rate and then a higher rate kicks in on super profits. This is an increased tax take on all profits, right, even if it's only one dollar. Now as I said earlier the Government will get more revenue out of that which is obviously what it wants. It is trying to get the Budget back where it inherited it. Back into balance. But bear this in mind that the more the Government takes the less goes to investors and big investors include your superannuation fund. The Government will take more but your superannuation fund will get less.
Is it true that Ken Henry and the Treasury put forward a resource rent tax while you were in Government?
Well there is a Petroleum Resource Rent Tax, a PRRT, which I administered and I thought was reasonable. But I can tell you this that if this had ever been bowled up to me it would never have got through the door.
The Government is making an argument that by taking the heat out of the mining sector they are actually going (inaudible) because you actually take the heat out of labour, inflation, capital cost and all that sort of stuff. What's your view on that?
Nice try. Okay thanks.
7 May 2010
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