Opportunities for resource rent tax

My advice to investors is that this resource rent tax will not proceed for several reasons, so it will actually make a compelling opportunity to buy resource stocks. The reason why I think so is:

1. The Rudd govt is going to be attacked (and rightly so) by the combined financial resources of the mining industry, and there are a few billionaires among them.
2. The Rudd government is only doing this to win the election. He does not even care if he raises the money, he only needs to be 'perceived' to be raising the money, so for the sake of giving you 'seemingly' funded election promises.
3. The tax proposal is already costing you money because Australia's sovereign credit rating is going to rise just by threatening to introduce the tax, and will increase further still if he does adopt the policy. i.e. All those Australians will housing loans will be slugged by higher interest rates. Rudd does not know, or does not care.

I want to correct some misconceptions:

1. Australians own the resources so the government has a right to tax them - 40% is reasonable? That is the same logic that Saudi Arabia used when it nationalised BP's oil in the Middle East. Yes, we are fighting in the Middle East for freedom right? Did you ever wonder whether we should be fighting for freedom in Australia when your leader is arbitrarily applying taxes like they have no consequences. Resources are not just 'found' - lest not some of them. It takes a lot of money to find them, and investors need upside to justify the investment. They are also very volatile, so if there is no 'huge upside', people will not invest.
2. Rudd cares little about Australia's long term future, he is only interested in his short term political budget. He needs to 'out-promise' the Liberals. Frankly 'I think nothing will save him' as Gough would say. Sounds like Gough politics doesn't it.
3. The misconception that mining makes HUGE GAINS. We need to remember that whilst metal prices have risen a great deal over the last decade, they were at VERY LOW levels for 15 odd years. That is why the stock prices have done rather well. Also consider that the exchange rage has doubled over that period, so since metal prices are based in USD, the real metal price gain is less. Also consider the huge cost inflation for mining services because of the demand for minerals from China and India.

Frankly, I think Rudd's move is the thin edge of the wedge. I can see South Africa, Canada, Chile, Brazil, USA and other countries to adopt the same tax system to increase the government's share of corporate profits. After all these companies can't move minds offshore. This will still hurt investors, it will be inflationary, and it will be a sad day for freedom. This is the worst type of government policy - the opportunistic, arbitrary, unprincipled...so what's new? The amount of waste it will add up to, and the huge opportunity cost.

Mind you - you don't want to give him the chance to raise taxes - because you don't know how stupid he is. The prospect of no tax of course means there could be great market opportunities for you when Labor finally abandon the tax - after the election to be sure!

see my taxation blog - I have a lot to say on this issue!

--------------------------------------------

Andrew Sheldon www.sheldonthinks.com