Gold Tax Formula Is a Rock Solid Way to Rejuvenate Mining Locational Advantage

Cape Times (South Africa), March 27, 2014 | Go to article overview

Gold Tax Formula Is a Rock Solid Way to Rejuvenate Mining Locational Advantage


BYLINE: Stephen Meintjes

Throughout the urgent debate on the mining industry in South Africa and elsewhere something fundamental has been overlooked. It is that mining, in one respect, is like the property industry, where it's all about "location, location and location".

So why pretend that a one-size-fits-all tax rate is what we need when every producer dreams of finding a shallow, high-grade deposit in a First World jurisdiction with infrastructure to match.

What is so magical about a 28 percent tax rate that is going to compensate a producer for delving kilometres deep into rock for medium-grade gold or platinum as opposed to a rich and shallow deposit of, say, iron ore? And within a mining jurisdiction that is turbulent, to say the least!

Failure to acknowledge the sometimes vast differences in the attractiveness of different mining properties can be said to lie at the heart of our mining debacle.

Yes, there are many contributory factors, such as unsatisfactory living conditions, high levels of debt, trade union rivalry and uncertain government policy. But consider: why was it that Julius Malema, in the many months leading up to Marikana, won such wide support from the miners for his calls for nationalisation?

Quite apart from the fact that the ANC, before the Mangaung conference in December 2012, was hopelessly ambivalent on the issue, Malema was saying that only through nationalisation would the people get the "delicious cake" that was rightfully theirs.

There was obviously not much cake to hand around on the elderly gold and other marginal mines, so the miners' perception of massive profits eluding "the people" would have had more to do with mines that were indeed making generous profits - such as the iron ore mines in the Northern Cape.

Ironically, Kumba's much-publicised, and in many ways commendable, payouts of some R500 000 each to about 6 000 of its workers in December 2011 could, unwittingly, have aggravated the situation.

To many miners in the western limb of the platinum-bearing Bushveld complex, including Marikana, it must have seemed inconceivable that they could not share in this bounty but instead remained mired in debt and shanties.

All this, together with the torpidity of the incumbent mining union, the National Union of Mineworkers, was grist to the mill of the aggressive newcomer, the Association of Mineworkers and Construction Union, with consequences we know only too well.

So how could mere tax changes possibly change all this? Well, for a start, once one recognises the need to differentiate between what the government takes from rich mines compared with marginal mines, one is in effect recognising the need for natural resource rental collection.

Rent is simply locational advantage. In other words it is the difference between what can be produced on the least productive mine in operation and all others given equal inputs of labour and capital. It is also sometimes described as the excess return on capital over that required to bring the mine into production.

Locational advantage, land value or rent can in many ways be seen to be due to the community or its proxy, the government, not least of which is by virtue of the grant of security of tenure.

By relating its tax take to the value created, instead of taxing the product of labour and capital, the government would no longer over-collect from marginal mines and hence put them out of business, but would enable them to survive for longer and enjoy subsequent commodity booms. Nor would the government under-collect from the rich mines.

So in boom times, when calls for windfall taxes and "more for the people" usually arise, the minister of finance could point to the much higher tax rates as evidence that the government was collecting that part of the mineral wealth realised that it created on behalf of the people. …

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Gold Tax Formula Is a Rock Solid Way to Rejuvenate Mining Locational Advantage
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