The federalist argument against the mining tax

[Cross posted at my personal website — johnhumphreys.com.au]

There are lots of good reasons to be opposed to the proposed new mining tax — because it increases the size of government, because it punishes explorers and innovative businessmen for the “crime” of success, because it will hurt the industry with flow on consequences to jobs and investment funds, and because it increases the political risk of investing in Australia.

But one of my major concerns with this proposed new tax is that it further undermines and damages our federal system of government.

This sounds like an abstract concern with few real world consequences, but in my opinion there is no more important long-term political issue. The benefits of jurisdictional competition and federalism are: (1) it allows for a diversity of approaches to meet the diverse needs of different communities; (2) it allows for competition between different jurisdictions which improves efficiency and effectiveness; (3) it gives citizens a greater say in their government; (4) it allows more policy experiments, and it makes it easier for jurisdictions to copy good experiments and quickly abandon bad experiments; and (5) it ensures division of power and so acts as a protection against the abuse of concentrated political power.

For these reasons, my main political concern — which trumps all of my other writing about tax, welfare, civil liberties etc — is to ensure that political power is decentralised. And the most important political power is control of the tax system.

Since federation, many politicians (on both sides) have weakened our federal system. As reported by the WA Treasury, 100 years ago the States controlled about 50% of total revenue; today they control about 20%. The current government is working to further destroy our federal system. First they have demanded greater control over GST revenue, proving that it is a federal tax that is handed out at the mercy of Canberra; and now they are undermining the State’s control of mining royalties.

The new mining tax hurts federalism in several ways:

* The new tax is primarily a tax on businesses in WA and Queensland, where the majority of mining activity takes place. The minerals being taxed officially belong to the State governments, and the mining tax is an example of the federal government basically stealing the resources from WA and Queensland;

* The new tax will likely result in a smaller-than-otherwise mining industry, and so will result in relatively lower royalty payments to the States;

* The new tax will be uniform throughout Australia and it will be difficult for States to adjust their royalty payments. This means a loss of State control over their revenue, and the destruction of the current diversity of approaches and jurisdictional competition;

* Because currently royalties are not uniform, and the proposed tax system is uniform, it represents an unequal tax increase. In States with relatively lower royalties, mining businesses will end up paying a relatively higher tax to the federal government, which is unfair both to the businesses and their State government; and

* The new tax means that mines will be double-taxed, leading to more complexity and a call for a “single tax” to avoid the hassle. The federal government will then offer to replace royalties and provide grants to the States, further weakening State control of their finances.

And ultimately, there is no good reason to have the new tax. If the Commonwealth Treasury believes that a profits-based tax is preferable to a royalties-based system, and/or if they believe that the mining tax should be increased, then they can provide that advice to the State governments and let them decide for themselves.

This is not to say that State governments are perfect. They are not. But no government is perfect, and the benefit of State governments is that they allow diversity and competition. If one State followed the recommendations from the Commonwealth Treasury and they gained a noticable benefit, then other States could copy that approach. If they suffered a noticable cost from the reforms compared to other States, then the reforms can be abandoned. In contrast, if the federal government imposes one system on the whole country, there is no easy comparison to make and no quick and effective feedback mechanism. A centralised approach means that good ideas aren’t tried often enough, and bad ideas are allowed to stay for too long.

The mining tax is taking us the wrong way. Instead of looking for new areas of tax and spending to centralise, we should be looking for ways of returning power to lower levels of government, and back to the community.

22 thoughts on “The federalist argument against the mining tax

  1. I have good reasons for calling my own philosophy X-Centralism! Government from the middle sounds good, but the Cast-Iron Law of Unintended Consequences guarantees that bad things will happen. Whilst this might be true of everything, a central government has a broader scope to spread mistakes everywhere!
    However, didn’t our own founding Dead White Males believe that Canberra was meant to gather more power into itself? Didn’t they design the system that way?

  2. This isn’t an argument for federalism, but for overgovernance. If competition in governance is so great, why don’t we create another layer of “regions” underneath the states, and then another layer of “counties” underneath the regions, each with their own houses of parliament. The more houses of parliament, the more competition!

    If the States were competing as in a real marketplace, they would be able to merge, like corporations can. But they can’t. Some industries in the marketplace are better suited to small, agile companies and some are better suited to the economies of scale and so forth that come with large corporations. Governance is no different – some challenges are better suited to a centralised approach (national defence is the obvious one, but I would also include taxation) and some are not (should dogs be allowed in parks in a certain neighbourhood?). Just as forcing all the major multinational oil companies (or banks, or whatever, take your pick) to split into 300 separate companies and banning them from merging again would not magically give us a more efficient oil industry through “competition”, so splitting the administration of Australia’s affairs into 7 different parliaments isn’t going to get us better outcomes.

    As for the real virtue of federalism – that it gives citizens a greater voice in their government – the States fail there too because they are too large and their boundaries completely arbitrary. What people in Broken Hill want is not going to bear any more resemblance to what people in Sydney want than it is to what people in Adelaide want. The States are a compromise between centralised and decentralised government that has the drawbacks of both and the virtues of neither.

    Also, as an aside:

    “The minerals being taxed officially belong to the State governments, and the mining tax is an example of the federal government basically stealing the resources from WA and Queensland”

    I don’t see how you can argue that the State of Western Australia’s claim to the minerals is any more legitimate than the Commonwealth of Australia’s, unless you say simply “because It’s The Law”, which is not normally an argument beloved of libertarians.

  3. “I don’t see how you can argue that the State of Western Australia’s claim to the minerals is any more legitimate than the Commonwealth of Australia’s, unless you say simply “because It’s The Law”, which is not normally an argument beloved of libertarians.”

    Because old laws are fair laws, generally.

  4. ChrisV — a few mistakes there.

    You misunderstand what I mean by competition. I do NOT mean competition between different levels of government (ie competition between State & Federal). I mean competition between different jurisdictions at the same level (ie competition between different States). The logical conclusion from my preference for competition would be to have most power decentralised to many local governments.

    When situations call for a larger jurisdiction, smaller jurisdictions are always free to come together voluntarily to give grants to larger jurisdictions so they can coordinate activities. That is what humans do when we form communities and businesses, and it works well.

    Australia has eight State-level parliaments, not seven.

    I am not sugguesting the forced splitting of any state, or any corporation. But I also think that analogy falls down, because corporations came together voluntarily.

    The “greater voice” argument is separate from the “allows diversity” argument. The first is regarding the power of a single vote, and the second allows for different areas to make different choices. I agree that not all people in a State will agree with each other, but surely you agree that eight jurisdictions allows more diversity than one.

    My understanding is that the States own the minerals according to our constitution. Irrespective of how ownership was originally distributed, I don’t believe in arbitrarily and involuntarily changing it for the convenience of the federal government.

    In my opinion, without more jurisdictional competition we are destined for ever-bigger and less efficient government. I do not think that is a good thing.

  5. Ideally, Federation allows diversity, but, in practice, Centralism creeps in. This is why I prefer the Swiss model of confederation, even if the local governments can be heavy-handed. The small size at least means you could escape to a freer canton, if conditions really became bad.

  6. According to wiki:

    A confederation is an association of sovereign member states, that by treaty have delegated certain of their competences to common institutions, in order to coordinate their policies in a number of areas, without constituting a new state on top of the member states.

    In a federation a new state is created at the federal level.

  7. So the US is a federation and the EU is a confederation.

    However Switzerland seems to be a state at the top level. Is this not the case?

  8. I think Switzerland started out as a Confederation, but that Centralism is creeping in even there! I believe they share their currencies and the armed forces. I think Cantons should be allied, keeping their separate armed forces, but going on training exercises together, so they can co-ordinate when needed.

  9. Because it doesn’t automatically happen! A Federation is a state above others, whereas a Confederation might not create a new government. It’s a bit like these G8 and G20 summit meetings- they aren’t new levels of government. They are existing governments meeting to discuss matters. confederations can be like that, and should be.
    However, it’s hard to think of any Federation without a Federal government!

  10. You misunderstand what I mean by competition. I do NOT mean competition between different levels of government (ie competition between State & Federal). I mean competition between different jurisdictions at the same level (ie competition between different States). The logical conclusion from my preference for competition would be to have most power decentralised to many local governments.

    No, I understand that and I would support that kind of decentralisation. But decentralising to the states is a hindrance, not a help, to that kind of proper decentralisation, because the states are a very centralised form of government. It’s not going to be a stepping stone to decentralising still further, but an end in itself. As I said, they have the downsides of both centralised and decentralised government and the upsides of neither.

    I am not sugguesting the forced splitting of any state, or any corporation. But I also think that analogy falls down, because corporations came together voluntarily.

    The analogy wasn’t really about whether the splitting and merging was forced or voluntary, I included the forced part as an arbitrary reason why the companies would split up. The point is that breaking down large oil companies into smaller ones would not automatically increase efficiency due to competition, as petroleum mining is an industry best suited to large companies.

    The “greater voice” argument is separate from the “allows diversity” argument. The first is regarding the power of a single vote, and the second allows for different areas to make different choices. I agree that not all people in a State will agree with each other, but surely you agree that eight jurisdictions allows more diversity than one.

    It theoretically allows more diversity, but that doesn’t mean that more diversity is what you’re actually going to get. If you divide Australia into 7 more or less completely arbitrary regions (I’m not including the ACT as it is probably geographically small enough to be an effective example of federalism. You can see that wrt its policies on gay marriage, pornography etc) then what you get is not diversity, but 7 wasteful bureaucracies individually handling challenges of government in virtually identical ways.

    My understanding is that the States own the minerals according to our constitution. Irrespective of how ownership was originally distributed, I don’t believe in arbitrarily and involuntarily changing it for the convenience of the federal government.

    My understanding is that the Federal Government may levy taxes on the mining industry according to our constitution. No laws are being changed here. You’re basically pretending to care about how ownership was originally distributed because you don’t like the enrichment of the Federal Government. If the states were using legal means to extract mining revenue away from the Federal Government, you’d be trumpeting the right of the states to use any means at their disposal to wrest power from the evil centralised government.

  11. TerjeP, my ideal form of government would be absolute property-owners as supreme, then local governments composed of locals to own and run local public spaces, then powerless conferences of locals to discuss mutual issues, with the final say on public property always being in the domain of local governments. Like a confederation of individual monarchs, true landlordism.

  12. Chrisv — I’m not sure why you think decentralising to the states is a hindrance to jurisdictional competition. Eight states are better than one centralised government. And while I’d like to see power devolved to local governments, another way to achieve something similar would simply be the creation of more states.

    Either way, if you want to avoid an ever-growing and ever-more-inefficient government, you need to avoid centralised power at all costs. I don’t think you fully understand the existential threat that centralised power is to western civilisation.

    You point out that sometimes different jurisdictions will have the same policies. Fine. I don’t want to mandate diversity, just allow it. You complain about duplication, but (1) I’m not sure it’s as big of a problem as people insist; and (2) we also have duplication when we have competition between businesses. Both Coles & Woolies have marketing departments and separate admin staff. Shoe retailers manage to deal with lots of different shoe manufacturers without crying for the need for a “single supplier to avoid duplication”. I suggest the benefits from competition are far more important than the costs.

    I never said that splitting up a company would create efficiencies. When working together makes sense, people can come together *voluntarily* and work together. That applies also to local councils, community groups, businesses, individuals, state governments and national governments. But the power should rest with the lower groups, and they can work together when they want.

    http://johnhumphreys.com.au/2010/03/02/competition-v-monopoly/

  13. JohnH

    “because it punishes explorers and innovative businessmen for the “crime” of success”

    You have got to be kidding. Burglars are explorers too, with very much the same intention. Should these energetic self employed individuals be given free range in your opinion?

  14. Wrong. Burglars are losers who rob others of success. Most would be pummeled by the property owners if the cops didn’t intervene.

    You knucklehead.

  15. You’ve added nothing there, “.”, other than to say that successful burglars are admired, failed burglars are to be deplored. And there are plenty of examples of both in many fields.

    You fail to recognise that a successful burglar becomes a wealthy property owner who then pummels those who attempt to reduce his success. This is very common in industrial intellectual property burglary.

  16. “This is very common in industrial intellectual property burglary.”

    Yeah I’m sure that’s what you were talking about to start with…um yeah sure.

    Libertarians are known for their praise of IP abuse…and I am Miranda Kerr’s secret lover.

  17. That is the problem with the Libertarian “philosophy”,”.”, it is a very blinkered narrow view on reality, almost infantile. Babies cry and expect, need, everything to be brought to them. Libertarianism is similar in its expectation, need, for a carpeted path through life.

  18. “That is the problem with the Libertarian “philosophy”,”.”, it is a very blinkered narrow view on reality, almost infantile. ”

    Except you have no idea of what you’re talking about and must be constantly corrected as to the premises of what libertarians actually believe in.

    “Babies cry and expect, need, everything to be brought to them”

    You need a fucking tutor in every debate you involve yourself in.

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