The mining industry has been a major driver of economic growth in Australia in the recent decade and currently accounts for 5 per cent of Australia’s GDP. On July 1, 2012 Australia introduced the Minerals Resource Rent Tax (MRRT), which is a tax on profits generated from mining of iron ore and coal. The tax of 30%, levied on the “super profits” from the mining, is to be payed by any mining company with annual profits of $75 million or above. Given the decline in iron ore prices and a slowdown of Chinese economy, what would be the impact of MRRT on the Australian iron ore industry? In your answer, please comment on the structure of the industry, the type of regulation used, factors affecting the industry and state your opinion. Make sure to use relevant diagrams
Note: Use relevant concepts and theories from weeks 1-9 to address a contemporary economic policy issue, currently debated in your country.
Ready Paper Excerpt
Competition and Regulation
Australia’s mining industry has been flourishing in the last few years and has made significant contributions to economic growth. The Minerals resource rent Tax is a taxation strategy imposed by the government on the firms in the coal and iron ore mining industry that register profits greater than $75 million. Industry regulation has many impacts not only on the industry but also on the country’s economy. While regulating the mining industry protects the country’s environment it also has a great impact on income generation. It affects National output hence leading to a fall in GDP. The GDP value falls in this case because of the five percent contribution by the mining industry. A fall in the prices of iron ore in the industry further aggravates the situation since firms in the industry will register lower revenues than before hence lower profit margins. The 30% tax levied on these lower profits might lower the motivation to produce more in the industry leading to further fall in general industry output and consequently lower GDP.
The selective structure of the taxation strategy encourages unfair competition. Firms having a profit turnover less than the threshold covered by the MRRT will have undue advantage over those that have to pay the tax. They will therefore incur less production costs in the process than the other firms will. In terms of competition, companies that pay the tax are inhibited from producing more and pursuing further production objectives (Fieldstein, Hines & Hubbard, 2007). The overall general effect of the MRRT is retrogressive; the tax will lead to higher costs causing a reduction in output by the industry subsequently leading to a fall in the contribution to GDP.
The structure of an industry can be identified mainly from its competitive environment. The market structure is an efficient way of describing Australian industry. The Australian mining industry is a typical example of oligopolistic competition…..
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