Academic journal article Agenda: A Journal of Policy Analysis and Reform

The Treasury-KPMG Econtech Modelling of the Excess Burden of Mining Taxation: Some Doubts

Academic journal article Agenda: A Journal of Policy Analysis and Reform

The Treasury-KPMG Econtech Modelling of the Excess Burden of Mining Taxation: Some Doubts

Article excerpt


The Commonwealth Treasury commissioned KPMG Econtech to model the efficiency of the existing Australian tax system. The report was an input to the 2010 'Henry Review' of the Australian tax system (henceforth AFTS), and proved very influential to both it and (especially) the Rudd government's response to AFTS. That response comprised proposals for a new Commonwealth tax on mining, called the Resource Super Profits Tax (RSPT); a proposal to abolish royalties; and a proposal to reduce the rate of corporate income taxation. Subsequently, Treasury commissioned a second KPMG Econtech report to model the welfare effects of that response.2

Both of the KPMG Econtech reports used a large Computable General Equilibrium model called MM900. As a proprietary model, its full publication would depreciate its value to the owners. However, because it was an important input to major government policy decisions, Treasury should have ensured that sufficient information was made available to enable disinterested but informed outsiders to judge its quality. It is not sufficient for Treasury, through its own internal processes, to be convinced of the quality of the modelling.3 And there is no evidence that Treasury adopted a process similar to that of the Productivity Commission - which is widely regarded as 'best practice': when relying upon one model only the Commission forms an expert advisory group to question the modellers in some detail; and the Commission then publishes a summary of the comments and responses.

Central to mining-tax policy development were two notions. The first is that a tax on resource rents would produce public revenue without any disincentive effect or excess burden. When it came to the Petroleum Resource Rent Tax and the RSPT, KPMG Econtech assumed that this was the case; subsequently, however, Treasurer Swan disavowed the proposition. The second claim was that royalties, the main sources of mineral revenue for the states, were very inefficient. In fact, using MM900, KPMG Econtech concluded that royalties were the most inefficient of all 19 major taxes modelled (excepting gambling taxes, the inefficiency of which was likely overestimated. See 'CGE Current': 6): the average excess burden of royalties and crude-oil excise was 50 cents for each dollar of public revenue; and the marginal excess burden was 70 cents.

This paper concentrates on the KPMG Econtech modelling of royalties and the special taxes on mining profits. The published reports, 'CGE Current' and 'CGE Response', contain explanatory and expositional material, brief discussions of some of the modelling and the relevant literature, and the parameter values. But crucial data and modelling have not been released in sufficient detail for independent examination, let alone sensitivity analyses - and the reports contain no sensitivity analyses. Therefore, this paper will rely on partial equilibrium, back-of-the-envelope calculations of excess burden, using information in the reports and other public sources.4 When these calculations take account of effects on supply, and on the price of mineral exports, they suggest a very much lower excess burden than was estimated in 'CGE Current'. Moreover, the incidence tables that were provided by KPMG Econtech in 'CGE Current' themselves suggest a low excess burden.

Background: 'Australia's Future Tax System'

On 13 May 2008 the Rudd government announced an inquiry into the Australian tax system, to be chaired by Dr Ken Henry, Secretary of the Australian Treasury.5 The inquiry received over 1500 submissions, met with interested parties and conferred with tax specialists, and issued five consultation papers (but no interim report). A report on the retirement-income system was released on 12 May 2009. The final report, 'Australia's Future Tax System' (AFTS 2010), was provided to the government in December 2009, and released on 2 May 2010, simultaneously with the government's response. …

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