Hit from Down Under

This is a bad news. Australia just unveiled a mining "super tax" that the country plans to levy against its natural-resources sector starting in 2012.

Not that because mining is Australia's most important economic sector, this country is also an enormously important supplier of resources to the fast-growing economies of East Asia, where so many of the world's products are now manufactured. The mining super tax will cause prices to rise on the raw materials that are the key ingredients in so many of those products. And that means the levy from "down under" truly is bad news for the overall global economy as well.

The rationale for the super tax was that the percentage of mining revenue taken in taxes and royalties by Australia's state and national governments has declined during the past few years despite mineral prices have risen.

Since Australia's corporate tax rate is already 30%, the new super tax would raise the marginal rate on most profits to 70%. That's grossly excessive. It will badly discourage new exploration in boom years, since the additional profits to the mining company from a new discovery would be modest, indeed. The new super tax would take an additional 40% of mining-company earnings - over and above a "reasonable" return on capital, defined as the yield on long-term Australian government bonds.

You can see why Australian Prime Minister Kevin Rudd wanted the new tax as this tax will give him lots of juicy new revenue to spend on pet projects. After all, he faces an election in October.

Instead of improving Australia's budget position, the new mining super tax will actually make it much more difficult. And here's why. When prices are high, the tax will generate a bonanza of revenue - which will no doubt be funneled into all sorts of new projects and programs. But when prices fall, the tax will serve as a spigot that shuts off the revenue stream - leaving officials to search for funding for those new programs and thus exacerbating the cyclicality of Australia's resource-based economy.

The effect will be similar to that of California's capital gains tax, which left the state with a horrendous budget problem when the dot-com bubble burst in 2001. The only saving grace of this super tax is that - even if passed by parliament after the October election - it will not come into effect until 2012, by which time resources prices may have declined, making it irrelevant.