Red earth and rising taxes

MINING, as both the firms doing it in Australia and the government would acknowledge, is the goose that laid the golden egg. But the two camps have sharply divergent views of the government's proposed new tax on it: it is either an innocent egg-collecting operation or a vicious goose-killer. The so-called Resource Super-Profits Tax (RSPT) would be levied from 2012 on mining profits above a “normal” rate of return (defined as the ten-year government bond yield, currently below 6%), at the stiff rate of 40%.

After details of the proposed tax were unveiled a month ago, the boss of at least one huge global mining firm was reportedly livid. Mick Davis, chief executive of Xstrata, called the tax the “biggest assault on the mining industry I have witnessed.” Rio Tinto's Tom Albanese also chipped in, branding Australia his “number one” sovereign risk, ahead of several countries not known for their stability, including Guinea and Mongolia.

Wayne Swan, Australia's finance minister, has returned fire. He argues that miners have reaped huge profits from selling Australia's very soil to China but are not paying the Australian people their due in taxes. Worse, the miners have created a two-speed economy riven with “dutch disease”. He calls the miners' campaign against the tax “fundamentally dishonest” in that it uses “hysterical” numbers for the purpose of “massive” and “grievous” misrepresentation. He also chides them for amassing a public-relations war chest of A$100m ($84m)—an indication, in his view, of their determination to distort the government's noble intentions.

A vast array of numbers about the RSPT are indeed being put around, few of which are uncontested. When the tax was unveiled Mr Swan claimed that mining companies only pay 13-17% of their profits in tax. The miners quickly pointed out that this figure is drawn from a draft academic study from the University of North Carolina which compared only corporate taxes, while neglecting royalties, payroll taxes and the like. Australia's Treasury retaliated with its own hasty calculations which coincidentally also settled on a figure of 17%.

The mining giants do not deny that they have profited handsomely from high commodity prices but do dispute that figure. BHP Billiton says it has paid an overall tax rate of 43% over the past few years; Rio Tinto says its has averaged over 35% during the past decade. Analysis from Citigroup backs up these claims. The bank calculates that miners have paid nearly 35%, including royalties, over the past five years, making the industry one of the most heavily taxed in Australia. The miners say that the RSPT could push rates to nearly 60%, making Australia's mining taxes the world's most burdensome by some distance.

Naturally the government disagrees, pointing to the hefty tax breaks that miners already enjoy. It says that as profits have exploded the share of them paid in taxes has tumbled. It also accuses the mining industry of warping the local economy. The high interest rates needed to curb the mining boom, it says, have strengthened the currency, hurting other exports. It intends to use some of the revenues from the RSPT to fund a cut of a couple of percentage points in the general corporation tax, in an effort to boost other Australian businesses and thus rebalance the economy.

Mining companies say the so-called distortion is in fact a strength. They point to a report from Deloitte that contends that mining helped shield Australia from recession last year, when the economies of most rich countries contracted. They insist the tax will massively dent future investment. That is thanks not only to the increase in the rate itself, they say, but also to its application to existing mines, which will make investors nervous about possible future changes to the tax regime. Xstrata shelved planned spending of A$6.6 billion on June 3rd; other firms say they are also trimming investment and reviewing projects.

With an election due within a year Australia's government undoubtedly calculated that picking a fight with miners, which it characterises as greedy foreigners siphoning off Australian resources for a pittance, would play well with the electorate. It may have misjudged both the fury of the miners and voters' disquiet. Public opinion is evenly split on the tax, even though some of the proceeds will go to pension funds.

To win public backing the government has commissioned a series of television adverts set to begin airing on June 6th. To pay for them it was forced to declare a “national emergency” to circumvent rules on using public cash for political advertising. It reckons that the high quality of its mineral deposits and its reputation for stability leaves the miners with little option but to stay put. But Canada, and even Zambia, have said they spy an opportunity to win investment away from Australia—a national emergency indeed, if true.