Have mining royalties been beneficial to Australia?

Abstract

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://taxreview.treasury.gov.au/content/html/commissioned_work/downloads/KPMG_Econtech_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.