Julia Gillard’s tax legacy

This is a policy rant so if you care about what the current tax law is, and don’t care what it could have been, then save yourself some time and don’t read this… 

This week we have both the release of former Prime Minister Julia Gillard’s biography telling us about her valuable legacy and her appearing before a Royal Commission where there have been specific allegations of fraud against her. The battle lines are drawn and both sides are going to be fighting all week about what history should say about her three years as prime minister…

But what about looking at the way the former prime minister handled taxation to get an idea of the legacy she should be afforded. For in my almost two decades of tax policy interest I have never seen anything quite like how Julia Gillard handled the mining tax.

Given this tax was repealed this week I thought we should remember her handling of this major tax reform… in the hope nothing like this ever happens again. I don’t mean a tax like this never happens again but rather a prime minister never stuffs up tax reform this badly again.

Yes I accept that Wayne Swan’s initial handling of the Mining Tax under the Kevin Rudd presidency (come on, he never thought he was just a Prime Minister) was poor. However, what happened under Julia Gillard was much worse.

The great policy developer, consensus maker and hard negotiator, Julia Gillard, had a problem. She had rolled a first term prime minister and her poll numbers did not look that solid. What’s more, she had promised to “fix the mining tax” – which was political speak for stopping some low budget, poorly made ads on TV by the miners.

So the new Prime Minister decided it was time for her negotiation skills to shine. She gathered her Treasurer Wayne Swan and her Resources Minister Martin Ferguson and the heads of Australia’s three big mining companies: BHP Billiton, Rio Tinto and Xstrata.

She decided that that was all they needed. The mining companies who had studied the mining tax proposal backward and forward, against three pollies not famous for their intelligence (check out their university records – very bright but not quite Rhode Scholars). 300 metres down the road sat the 200 staff in the Treasury who specifically work in tax policy and some of who wrote the actual tax – but none were allowed in… Craig Emerson who was in the Gillard Ministry had written academic papers (quite good ones actually) on the use of resource rent taxes but even he was not in the room. The prime minister decided that she did not need help from the experts – she could handle it all on her own… And what happened?

A tax that was to bring in tens of billions of dollars each year, enough to fund both the gonski reforms and the NDIS with cash to spare, was changed so that, when you take into account collection and marketing costs, collected pretty much nothing. A tax that raised no revenue. It almost does not fall within the dictionary definition of what is a tax.

The 1½ page agreement signed that night replaced the 40% resource super profits tax with a 22.5% tax only applying to coal and iron ore rather than all mining.

Worse still, the agreement allowed “all state and territory royalties” to be deducted from the tax. So Western Australia promptly lifted its iron ore royalty from 5.6% to 7.5% effectively just taking money from the Federal Government – smart move by WA, pure stupidity by Julia Gillard and Wayne Swan.

Also, (its hard to believe it could get worse) they increased the profits the miners could earn before paying any tax (long term bond rate plus 7% so need to be making upwards of 10% profits before any tax is paid) and allowed profits to be calculated after revaluing assets to market value… Crazy.

Mining taxes have seen some countries change themselves dramatically. Spend some time looking at what the Norwegians have done with their petroleum sovereign wealth fund and you will start to cry when you think what might have been…

Fortunately in countries like Norway who have a resource rent tax (aka a mining tax) their leaders do not do either of the following:

  1. Put their politics before their people (assuming Gillard and Swan knew what they where doing and gave up the revenue from the tax to stop a bad advertising campaign against them so they could win – just – an election); or
  1. Think they are some amazing policy developer, consensus maker and hard negotiator who does not need anyone’s help when they are really just an average industrial lawyer (and industrial lawyers rank not much above workers compensation lawyers in the intelligence stakes).

For just a few million dollars in advertising, the big three miners saved themselves billions of dollars every year as they totally and utterly out negotiated our then prime minister.

The chance to have a resource rent tax funding my children’s future, like our Norwegian brothers, is gone, not thanks to Tony Abbott, but thanks to Julia Gillard. It is impossible to defend the mining tax that raised not revenue and was supposed to fund billions of dollars of concessions. Once that agreement was signed there was nothing that was going to save a tax. Once a prime minister’s politics or pride had ripped the heart out of the tax it was never going to survive

And thanks to this debacle no one will have the political courage to take this on again.

But saving that… Remember in 1985 Paul Keating went to his prime minister at the time with his preferred tax reform – not just a capital gains tax, a fringe benefits tax and dividend imputation – a goods and services tax. He argued long and hard for it but Bob Hawke would not have it.

Then in 1993, John Hewson agreed with Keating and ran a campaign on a major GST led tax reform. Keating, knowing it was the best option, and having argued for it for years, ripped it to shreds. When political advantage can be made who cares about the policy (or people).

After Hewson’s loss it seemed like no one would ever touch the GST again – even though it was the best option. Whatever you think of Howard and Costello, you must give them credit for bring the GST to their first attempt at re-election. As someone who has worked in a Labor minister’s office it pains me to say, lets hope there is another John Howard or Peter Costello ion the future who will see that a resource rent tax is very good policy.

End of rant for today… lets go back to reading boring explanatory memoranda.

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About Ken Mansell

As a stay at home Dad most of the week this is my way of pretending I am still the tax counsel of ASX and SEC listed companies, working at big 4 firms, working at the Federal Treasury, on the Henry Review and at Parliament House for the previous government.
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