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Introduction
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...