Home > Economics > The federalist argument against the mining tax

The federalist argument against the mining tax

July 15, 2010

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.

Categories: Economics
  1. Ben
    July 16, 2010 at 1:05 am

    Nice piece.

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