Racial Discrimination Act: Turnbull should revisit 18C repeal case

If it wasn't already clear, the past few months demonstrate how firmly the issue of section 18C of the Racial Discrimination Act 1975 is now entrenched as a fixture in the political debate in this country.  The only way to resolve this issue is to repeal the law which so badly restricts freedom of speech.

In an opinion piece published in The Australian last weekend, Tony Abbott nominated failing to repeal section 18C as a key reason for his downfall as prime minister.

In his words:  "Section 18C ... is clearly a bad law.  Our debates should be polite but they should never be guaranteed not to offend ... With hindsight, I should have persisted with a simpler amendment along the lines of senator Bob Day's later private member's bill."

Indeed, in recent months the depth and number of problems associated with this provision have been shockingly revealed in the form of a case involving the payment of money, secret legal proceedings, and the pursuit of left-wing political aims using the federal court system.  The complainant responsible for this extraordinary trifecta is Cindy Prior.  She was a university administrator at QUT until she decided she simply could not work any more for fear of being offended.

The basis of her distress was a number of remarks made online by QUT students, including the factual statement by one student that indigenous-only computer labs were an example of "QUT stopping segregation with segregation".

Three respondents have each handed over $5000 to make the issue go away.  But the case continues for the remaining respondents.  Let's all hope common sense prevails, the case is dismissed, and Ms Prior gets the help she needs.  But it doesn't end there.

The current case against QUT and its students is a case study of a far broader problem.  My research demonstrates this complaint is just the tip of the iceberg.

A freedom of information request I lodged with the Australian Human Rights Commission has revealed there are 18 complaints under consideration by the commission.  The progress of these complaints ranges from an acknowledgment to a final response following conciliation at the commission.

Details of these complaints are not made public.  The documents provided to me under FOI are heavily redacted.

They include some basic procedural information, dates, and the race of the complainant but none of the conduct which forms the basis of the complaint.

The conciliation process within the commission is shrouded in secrecy.  Human Rights Commission race commissioner Tim Soutphommasane admitted this last year:  "To give you a sense of how the law currently operates, last financial year the commission received 440-odd complaints.  Only about 3 per cent of those complaints ended up in proceedings before a court".

That means 97 per cent of all complaints to the commission are dealt with behind closed doors.  Only in 3 per cent of cases, where the matter is not resolved at conciliation, is the public ever made aware of the details of a complaint.

Why is this relevant?  Because had it not been for the QUT complaint advancing from conciliation to litigation the public would never have known the extent to which section 18C threatens freedom of speech.

And without transparency around the conduct subject to section 18C complaints, the public doesn't have the opportunity to assess the practical operation of the law.

The extent to which the commission is accountable to the public is essentially the requirement for commissioners to appear before Senate estimates, and the publication of an annual report.

The annual reports list the number of complaints considered by the commission in the various areas in which it is given legislative authority to resolve disputes.

The reports include the number of complaints made each year under section 18C.  In the last six years, 832 section 18C complaints have been lodged with the commission.  Many people, including the former prime minister, have made the mistake of believing that section 18C cases are aberrations.  But my own FOI request exposes the 18 cases currently before the commission.

And the AHRC's own statistics show section 18C has restricted freedom of speech in hundreds of cases over the past six years alone.

Malcolm Turnbull would do well to learn from the lessons of Abbott's time as PM.  In taking the leadership of the Liberal Party, the Prime Minister promised to lead a "thoroughly liberal government".

Turnbull should make the case for freedom of speech to the public, and recommit to the repeal of section 18C.

Fossil fuels are good business for universities

Australian universities divesting from fossil fuels is costly, ineffective, and ultimately bad for students.

In recent weeks divestment protesters at the University of Queensland aggressively occupied chancellery buildings demanding their university sell investments in companies associated with the fossil fuel industry.  QUT students have similarly called for the university to cut educational ties with mining company Adani.

At the University of Melbourne, students set up a camp-out with tents, workshops and entertainment, as well as stripped naked.  Meanwhile, earlier this month Monash University announced they would be joining the Australian National University and Swinburne University in divesting from fossil fuels.

In practice divestment leaves universities with a less diversified profile, reducing returns and increasing risk.

The Fischel Report, a major investigation into the question by a former Dean of University of Chicago Law School, found that over the past 50 years, a divested portfolio would have returned 23 percent less on investment.  This amounts to millions of dollars of lost revenue every year.

On top of the direct losses to the portfolio, there are also substantial indirect costs.  Divestment necessitates additional analysis costs, to determine which stocks are acceptable and unacceptable, as well as administrative costs to process and execute the divestment.

The ethnical questions about what to sell, and what not to sell, are in themselves quite arbitrary.  The Australian National University faced strong criticism about their divestment choices when they announced not only divestment from fossil fuel producers, but also miners of nickel, gold, and copper.

In the end students are the ones who are going to suffer the most as a consequence of losses to university investment portfolios.  Lower endowment income means higher student fees, inferior facilities, and fewer scholarships.

Additionally, for all the costs, divestment is not going to have any impact on the targeted companies.  Stock prices reflect company value and future profits and dividends.  Universities are a relatively minor part of the stock market.  If universities divest others will happily buy their stocks, leaving the stock price, and therefore incentives to modify behaviour, unchanged.

Divestment proponents, faced with the extraordinary high costs and low impact of divestment, are forced to make superficial moral arguments against fossil fuels.  Their case ignores the necessity of conventional fuels to the Australian economy, and global economic development and poverty alleviation.

Universities, even if not invested in these fuels, still require them every day to fulfil their basic energy needs.  Campuses — with all the lighting, computers, and research machinery — are energy intensive places.  In this respect universities differ little from the rest of the economy that is dependent on conventional fuel sources to deliver us prosperity.

There are still an estimated 1.3 billion people across the globe who do not have access to electricity.  These people need conventional energy, like Australia's gas and coal resources, to raise their standard of living.  This is why China has been building a new coal fired power station almost every week for years and why coal consumption in South East Asia will triple by 2040.

Renewable energy sources are simply too expensive, and unreliable, to provide the energy to lift these people out of poverty and deliver opportunity and wealth.  Throughout the world massive government subsidisation of wind and solar power has significantly raised electricity bills for little increased energy production.  Additionally, when the wind is not blowing, and the sun is not out, we still need conventional sources of energy.

Resource companies are perfectly legitimate operations, and an important pillar of our economy.  In a time when graduates are increasingly struggling to get jobs it is nonsensical to disparage students, many of whom study courses relevant to these companies, from employment opportunities.

Universities should prioritise maximising returns from their investment portfolios and educating students, not ideological brinkmanship.

'Proactive' regulation a bad idea

The Australian Securities and Investments Commission (ASIC) will soon be handed more power to intervene proactively in financial product markets.  These regulatory powers will stymie financial entrepreneurship and innovation.

Last week the government announced $127.2 million in funding to financial watchdog ASIC.

Among other things, that money will go towards wiz-bang technology for data analytics ($61 million) and ongoing surveillance and prosecution ($57 million).

This money-spending power-granting exercise has been branded as an attempted political deflection to avoid a Royal Commission.

But there is a deeper concern here:  the acceleration in powers towards "proactive" regulation.

At first, proactive and outward-looking regulators looks like a good thing.  But the problems with this new approach are easily demonstrated.

Take one new extended power:  product intervention.  This is a recommendation from the Financial Systems Inquiry (FSI) to provide more regulatory tools to ASIC "as a last resort or pre-emptive measure" to warn consumers, restrict, or even ban bad financial products, allowing the regulator to "respond to market problems in a flexible, timely, effective, and targeted way".

Wielding of pre-emptive regulatory power is both dangerous and naïve.

This is dangerous because it is tantamount to enforcing financial pre-crime.

In 2002 American film the Minority Report starred Tom Cruise as Chief of PreCrime.  The department he worked in was tasked with policing crimes before they were committed.

The links between the fictional characters of Minority Report, and the new proactive approach to regulation by ASIC, are chilling.

Indeed, new product intervention powers will "give ASIC the capability to intervene before serious harm is done rather than simply cleaning up the mess after the event," according to Minister Kelly O'Dwyer.

This is also clear in the supposed problem the FSI was attempting to rectify:  "ASIC can only take action to rectify consumer detriment after a breach or suspected breach of the law by a firm."

Such a world of pre-crime furnishes some troubling questions around innovation.

Would credit cards exist if ASIC had determined they were too risky?  As humans we're constantly overweighing the perceived dangers of new things.  And ASIC will be no different.

It is deeply naïve to think any regulator could possibly gather the information to determine whether a product is going to harm consumers before the fact.

To suggest such a monstrous bureaucracy can accurately predict the diffusion and adoption of financial products is fantasy.

As Nobel Laureate F A Hayek suggested, the problem is that the information necessary is distributed about the economy in the minds of individual consumers.

The only way to discover this information-about what products and good and what are bad-is through entrepreneurial endeavour in markets.

Losing touch with the market process through pre-emptive or proactive red tape hinders financial product innovation.

While this isn't red tape in the traditional sense-of direct and tangible costs like signing forms and writing reports-it is distortive regulation nonetheless.

The threat of ASIC regulatory intervention over some arbitrary level of riskiness of future harm will have disastrous economic effects.

Erstwhile entrepreneurs considering launching new financial products are already dismayed by the peril of a "tough cop on the beat", let alone the latest extension in powers.

By fully insulating the downsides of risk-by banning or restricting products-we lose the potential upsides of risk-diversity within our financial services industry.

What is needed in Australia is a permissionless innovation approach:  where entrepreneurs are left free to test, trial and experiment with new financial products.

The further we move towards a world of financial pre-crime, ruled by the arbitrary powers of ASIC, the fewer financial innovations will be born.

The biggest cost of the latest extension of ASIC powers is not the $127 million face value, but the impact of proactive pre-emptive regulation holding back entrepreneurship.

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Turnbull's policies aren't Liberal, they're incoherent

In trying to keep up with the suite of policies Labor has announced, the Coalition Government is going against the principles it professes to stand for.

It's hard not to conclude that Bill Shorten has the measure of Malcolm Turnbull.  Policy after policy the Government is chasing the Opposition, rather than leading it.

For instance, this weekend's talking point — negative gearing — is only on the table because Labor announced their negative gearing policy in February.

The Government's reforms to the Australian Securities and Investment Commission are obviously because Labor called for a royal commission into the banks.

The assistant treasurer, Kelly O'Dwyer, announced a new public register of shell companies last week.  Does anybody believe the Government would be so keen on this issue if Labor hadn't made corporate tax avoidance a centrepiece of their economic message?

Labor declared earlier this year that it would hike tobacco taxes.  Lo and behold so will the Coalition.

And the mooted superannuation reforms we heard about last week appear to be specifically calibrated to trump Labor's proposal.  Where Labor will increase taxes on those earning more than $250,000 a year, the Coalition will increase taxes on those earning more than $180,000.

These aren't marginal issues:  if the leaked script for the post-budget advertisements is correct, multinationals, tobacco and superannuation are exactly what the Government wants voters to think about.

More damningly, those three budget centrepieces all constitute tax hikes.  (Any policy that increases government revenue is a tax hike, no matter how it is dressed up in the language of "loopholes" or "concessions" or "savings".  The Australian commentariat can be embarrassingly gullible when it comes to political euphemisms.)

If the political parties were only ever neutral policy shops freely picking and choosing ideas from across the political spectrum this wouldn't be remarkable.  Simple models of political competition suggest that in a two party system, party policies are likely to converge.

But the Coalition is not supposed to be a neutral policy shop.  The Coalition is supposed to be — indeed, professes to be — the low-tax party, reducing the burden of government on the citizenry rather than increasing it.

Shortly after becoming Treasurer, Scott Morrison declared that Australia had a spending problem, not a revenue problem.  Language ought to mean something.  If our budget problem is not a revenue problem, then why are revenue grabs at the centre of the Government's economic message?

Messiness in policy formation can always be overlooked ... But messiness in policy direction is harder to ignore.

Prime ministers usually set the standards by which they are judged.  Tony Abbott was unable to deliver the steady government he promised after the turmoil of the Rudd-Gillard years, and surrendered his "freedom wars" less than a year into office.  Turnbull set his standard — to lead a "thoroughly Liberal government" — at the moment of the spill.  It is a standard he has yet to live up to.

On the positive side of the ledger, there was the successful effort this month to abolish the Road Safety Remuneration Tribunal.  This price-fixing regulator was established by the Gillard government yet left untroubled by the Abbott government.

But on the negative side of the ledger we have tax hikes and new spending promises, the latter amounting to $10 billion of expenditure announced since Turnbull took power.  And the bevy of new powers being granted to ASIC will also represent a substantial increase in the regulatory burden — and a substantial empowerment of the regulatory state.

The Turnbull Government's policy suite isn't thoroughly Liberal — it's incoherent.

This is one reason why Bill Shorten looks more electable by the day.  To Labor's credit, they have announced a suite of policies that fit together nicely and tell a coherent story about the world.  It's not a very pleasant story — banks are ripping off their customers, multinational corporations are ripping off the budget, rich taxpayers with large super balances are ripping off poor taxpayers — but it does give a picture of what Labor stands for and what a Shorten government will mean.

Voters still lack this information about Turnbull.  After the entirely-forgettable innovation statement, the Government has been on a constant backfoot — chasing the legacy of decisions made by Tony Abbott's team, such as the tax reform process, as much as trying to keep up with a stream of Labor announcements.

Some of this dynamic has been forced upon the Government.  Leadership changes are disorderly.  But not all of Turnbull's problems have been forced by circumstance.

Turnbull needs to grab the agenda, and grab it in a way that is thoroughly — discernibly — Liberal, rather than an emulation of Labor.  After all, if voters want the Labor package, why would they vote for the Coalition?

Malcolm Turnbull's phony ''thoroughly liberal'' leadership

In September when Malcolm Turnbull took the prime ministership he said he'd lead a "thoroughly Liberal Government".  What's "thoroughly Liberal" about increasing taxes on superannuation is anyone's guess.

In the Fairfax press on Wednesday, the journalist Peter Martin summed up just how far Turnbull and the federal Liberal Party has fallen.

"The Turnbull government is preparing to trump Labor in the budget by cracking down harder on high-income superannuation tax concessions to raise four times as much as the opposition's policy.  Labor has promised to cut the income tax threshold for more heavily taxing contributions from $300,000 to $250,000.  The Coalition now plans to cut it to $180,000."

Unbelievable.  But true.  The Liberals are now in a bidding war with the ALP as to who can increase taxes on superannuation the most.  The headline to the story says it all:  "PM's crackdown on super to steal Labor's thunder."

Even more bizarre is that virtue of the fact they're planning to increase superannuation taxes by less than the Liberals, the ALP now has a better policy on superannuation than the government.  Labor's tax increases will affect 110,000 Australians.  The Liberals' tax increase will hit more than double that number.

This newspaper's economics editor Alan Mitchell neatly summed up what appears to be the calculation behind the tax increase.  He said it would not be politically costly because, "the people who will be paying the extra tax are rusted-on Coalition supporters.  They have nowhere else to go".  Whether it's in the long-term interests of the Liberal Party for its leaders to think this way about the people who vote for them remains to be seen.

If Morrison does raise superannuation taxes on the wealthy he'll no doubt claim he's doing it so he can cut taxes for everyone else, and he'll pledge the government's overall share of tax won't increase.  The problem is though that a tax rise is a tax rise, regardless of how it's spent.

Make no mistake.  If Turnbull goes ahead with the sort of tax increases Morrison is talking about it will be the equivalent of Tony Abbott's section 18C, deficit levy, and Prince Philip mistakes all rolled into one.

Abbott did himself enormous damage among the Liberal Party rank-and-file when he reneged on his commitment to remove legal restrictions on freedom of speech and when he broke his promise not to raise taxes.

When he gave Prince Philip a knighthood Abbott didn't only make himself look foolish.  It made every Liberal Party member look foolish too.  Ultimately, the sense of disillusionment so many Liberals felt with the Abbott prime ministership was reflected in the way Liberal MPs voted in the leadership ballot.

The situation is worse for Turnbull than Abbott.  Liberal Party branch members were merely disappointed with Abbott — they didn't distrust him.

There are two reasons why the Liberal Party branch members tolerate Turnbull, notwithstanding his views on things like climate change, gay marriage, and the republic which are out of kilter with those of many branch members.

The first is because he once appeared to have a firmer grasp of the economic challenges facing Australia than did Abbott.  The second reason rank-and-file members were willing to support Turnbull was because he looked more likely to win the election.

If Turnbull raises taxes and doesn't cut government spending one of the reasons for him being leader disappears.

Turnbull presented himself as a reformer and an economic liberal.  So far, precious little of that has been seen.  As diverse as the Liberal Party is, one of the things that unites party members is the Liberals' commitment to fiscal responsibility.  Not many Liberals regard higher taxes as economic reform.  There is enormous frustration that, as yet, neither Turnbull nor Morrison look like they have any sort of credible plan to put the budget into surplus, or reduce government debt, or reform the industrial relations system.

If Turnbull loses the election the second reason for supporting him as leader will have turned out to be wrong too.

It's unfortunate that so many Liberal Party branch members are asking themselves the question not whether the Turnbull government will be re-elected, but whether it deserves to be.

No wonder we hate the banks

Our financial and corporate regulatory system manages to be both bad for the economy and bad for public transparency.  And neither the Government nor the Opposition has a plan that will likely resolve it.

It's not really a surprise that two-thirds of voters support Labor's royal commission into banking, as the Fairfax/Ipsos poll found yesterday.  Anti-bank populism is a fundamental part of Australia's political culture.

Back in 2012 Essential asked voters how, specifically, they would like the banks to be controlled.  Ninety per cent wanted the government to fix bank fees.  Eighty-one per cent wanted the government to fix the salaries of bank CEOs.  Seventy-four per cent wanted to forcefully peg interest rates to the Reserve Bank's monthly interest rate determinations.

It seems likely that voters would welcome a return to the pre-1980s regulatory regime where the government fixed interest rates and micromanaged the products and investments of the banks — where credit was scarce and you had to beg banks for a loan.

So this fortnight's debate over the royal commission into banks and the government's alternative — to boost the powers and funding of the Australian Securities and Investment Commission (ASIC) — is not just a minor election year spat.

It's a revealing window into how the government changed the way it controls business over the last few decades.

The market-oriented reform of the 1980s and 1990s revitalised the Australian economy after the stagflation of the 1970s.  But in the wake of that reform grew up a complex regulatory state that pleases no one.

Now control of the economy has been delegated to arms-length independent regulators.  They oversee vast regulatory regimes that create uncertainty and impose heavy costs, while at the same time doing nothing to satisfy the anti-corporate populists who imagine that industries like banking have been left up to the "free market".

Take, for instance, the complaint last week in the Sydney Morning Herald by Allan Fels — himself a former regulator — that ASIC has failed to be the "tough cop" on the corporate beat because it has been too eager to sign negotiated settlements with the firms it is supposed to regulate.  Fels would rather ASIC take more firms to court.

No doubt many readers nodded in approval, the report further confirming their belief that ASIC is soft and that we need a royal commission.

But the idea that the increasing use of negotiated settlements and so-called "enforceable undertakings" is a sign of regulatory softness is bizarre.

The practice of negotiating enforceable undertakings — essentially promises made by firms to do certain actions which can be enforced in court — was developed to give regulators discretion to be more intrusive, not less.

The idea is this:  rather than going to court every time the regulator wants a firm to do something, it can negotiate.  Negotiation is cheaper for all involved, but it also gives the regulator more power.  With a negotiated settlement, the regulator can persuade firms to do more than the letter of the law would require:  do this, and we won't take you to court.

Enforceable undertakings are a big part of the "responsive regulation" idea that was supposed to strengthen the power of regulatory agencies.  ASIC is a big fan of responsive regulation.

Now, in my view, this sort of regulatory practice is bad policy.  Firms should know exactly what is lawful and what is unlawful.  Regulation shouldn't be a matter of discretion — it should be clear and unambiguous.  Uncertainty is bad for the economy.

But it's bad politics, too.  Recall that old aphorism:  not only must justice be done, it must also be seen to be done.  Regulatory agencies spend their life negotiating in private with firms rather than publicly enforcing clear rules in court.  No wonder voters think those agencies are a bit hopeless.

We can debate how heavily regulated companies should be, but surely we can agree that the regulation should be transparent.

Into that political void has fallen Bill Shorten and his royal commission into banks — an exercise that appears more about adverse publicity rather than a genuine desire for reform.

After all, if Shorten had any grand regulatory dreams for the sector he had ample opportunity to chase them in the three years he spent as Minister for Financial Services and Superannuation.

But it is hard to imagine a royal commission that did not recommend more regulation.  They're structurally designed that way.  Lawyers tend to be more sympathetic to legal controls on market transactions than the economists that dominate most other forms of banking inquiry.

The Coalition government has its own policy to strengthen ASIC — with new powers, a new funding model, and some more resources.

None of these options is likely to resolve the deeper problem — that the discretionary, arms-length, ambiguous regulatory state offers nothing but uncertainty to firms and the public.

No wonder voters don't have confidence in the system.  No wonder they like the idea of a populist royal commission.

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Company taxes are an expensive burden on the economy

There seems to be a concerted effort to dissuade the Turnbull government from lowering the company tax rate in next month's budget.  We've seen modelling from Victoria University claiming that a company tax rate cut could boost the economy but lower national income, Chris Bowen claiming that a company tax rate cut would cost $35 billion, and an open letter last week from 50 public figures.  Bill Shorten has claimed a company tax rate reduction would cause economic mayhem.

Arguments against cutting company tax rates vary from being wrong-headed to bizarre.  Surely one of the most bizarre arguments against cutting the company tax rate is that it wouldn't benefit small business — quite possibly because small business got a company tax rate cut last year.

Then there is confusion over the effects of dividend imputation.  The company tax system is not a substitute for personal income tax.  For Australian tax residents the company tax is a pre-payment of personal income tax.  Changing the company tax rate (and assuming dividend payout rates remain unchanged) there should be no difference in the tax paid on company profits by Australian tax residents.

In the first instance the biggest beneficiaries of a company tax rate cut would be foreign investors.  True, current foreign investors are willing to invest in Australia with a high company tax rate.  Yet all those investors who are unwilling to invest at current high company tax rates could be more willing to do so.  Last week we read in these pages the astonishing claim that increased foreign investment into Australia would lead to a decline in national income.  Mind you, the modelled tax cut would boost GDP, increase the capital stock, increase production, and increase real wages.  As if those outcomes were somehow bad.

Of course, that is the rub.  Company tax is an expensive tax.  The Henry Review estimated the deadweight losses association with company tax to be 40 per cent.  It is unsurprising that many countries around the world are lowering their company tax rates as quickly as they can.  In the 2010 budget papers, the then Labor government supported a company tax rate cut, boasting that it would drive productivity gains and increase real wages.  No talk then of declining national income.

The fact is when it comes to company tax, Australia is not a low tax nation.  Our company tax rate of 30 per cent (for large business) is the fourth highest in the OECD.  The revenue generated by the company tax system is the second highest as a proportion of GDP, and as a proportion of total tax revenue, in the OECD (after Norway).  The dividend imputation system — while benefiting tax resident shareholders — does not alter the fact that the Australian company system is onerous and expensive.  If the incidence of the company tax does largely fall on Australian workers — as many, including Treasury, argue — then lowering that tax burden should be an immediate priority for any government.

All the talk of avoidance and tax havens and whatnot overlooks some damning statistics.  According to the latest ATO data (financial year 2013-14) the company tax system raised some $66.9 billion.  The personal tax system raised $166 billion.  Yet it is not the magnitudes of those numbers that we should focus on, but the distribution of those numbers.  For example, the bottom 81 per cent of all personal tax payers paid $66.2 billion in net personal income tax.  The top 5 per cent of personal income tax payers paid $55.5 billion in net personal income tax — less than the revenue from the company tax.

So whatever the perception of companies not paying tax — it is simply not true.  The Australian company tax system is onerous and generates a lot of revenue for the Commonwealth.  There is an argument that without that revenue, the Commonwealth would be unable to "invest" in infrastructure and public goods, which in turn would benefit business.  That argument, however, fails to explain why many other countries have better infrastructure than Australia (as measured by the OECD) yet have lower company tax rates and generate less company tax revenue than Australia.

All up, there were excellent reasons to lower the company tax rate in 2010.  The then Labor government understood that lower company tax rates meant higher productivity, higher levels of investment, and higher wages for workers.  It is a pity that the Labor opposition does not hold to those views.

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ABCC row a distraction from the main game

Prime Minister Malcolm Turnbull has shown courage and ambition by threatening a double dissolution election if the Senate fails to restore the Australian Building and Construction Commission.  But the debate over the ABCC should not be the substitute for advancing a positive industrial relations policy that promotes employment through the entire economy.  On this front, the government is sorely lacking the same courage and ambition.

The only task of this industrial relations system is to provide a security blanket for those already with a job.  It provides no warmth to over 700,000 Australians currently out of work.

The re-regulation of the labour market that occurred under the previous government saw unfair dismissal laws imposed on thousands of previously exempt small businesses.  Now an employee that is fired for swearing at their boss, stealing, consistently showing up late for work, performing poorly, or physically assaulting their colleagues, can take their employer to the Fair Work Commission — and win.  Even if the employee's claim is without merit the commission almost never awards costs.

The laws protect those already with a job, but it makes it riskier — and more expensive — for employers to take on new employees.  Simply put, unfair dismissal laws are unfair on those out of work.  The best protection against unfair dismissal is full employment and a competitive labour market.

Another example is the re-regulation of wages levels throughout the economy.  While there might be an argument about the desirability of a minimum wage for unskilled workers, there is absolutely no justification for the union-stacked Fair Work Commission setting a national minimum wage for professionals such as doctors, lawyers and pilots.  It's puzzling as to why wages for a job in Hobart must be the same as that in Sydney — especially taking into account cost of living differences.  Orders issued this month by the Road Safety Remuneration Tribunal (another wage-setting body) will force owner-drivers to charge inflated rates, rather than being allowed to compete on price against unionised employee-drivers.

This price fixing would never be legal outside the labour market.  Perhaps the government should impose an effects test of substantial lessening of competition to its own regulations.

Add on top of this the minimum shift requirements that prevent students from working after school, and weekend penalty rates being so high that businesses prefer not to open.  Of course, double time means nothing without a shift in the first place.

These examples are systems of a framework that strips away the right to work.  It is a system that presumes that people are incapable of making good decisions for themselves and their families.  A job is about more than a pay cheque — there is dignity in work.  Yet, the current system prefers people remain unemployed.  This must change.

With youth unemployment continuing to track above 12 per cent, a novel solution is crossbench senator Bob Day's suggestion that young workers could "opt out" of the Fair Work Act.  The standard rebuff to this idea is "but they might get exploited".  Senator Day answers this by asking "where is the outrage when these same young people end up on drugs, get involved in crime, suffer poor health, become pregnant, get recruited into bikie gangs or even commit suicide?  No, there is only outrage when they want to take a job that suits them but does not suit the government."

There is no shortage of sensible reforms that could be taken to an election.  We all know what Labor's policies will look like, but it is genuinely unclear what the next term of a Liberal government would do on industrial relations apart from beating up the union movement.  With the recalling of Parliament we will hear a lot about the need for the ABCC, and other issues arising out of the royal commission into union corruption — but these are distractions from the main game of promoting employment for those currently without it.

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Road Safety Remuneration Tribunal costs more than it saves

Political promises to abolish the truck industry regulator responsible for pricing drivers out of work won't alleviate hardships felt today.

As horrendous as the road toll is for the families affected and the community at large, statistics show a trend decline in deaths from crashes involving heavy vehicles, including heavy rigid trucks, over the long term.

But these facts have been set aside with assertions the national truck industry pay regulator, the Road Safety Remuneration Tribunal (RSRT), needs to fix minimum pay rates for contract truck drivers to make our roads safer.

And factors unrelated to pay, such as better roads, enhanced vehicle safety technologies, and worker health, driver monitoring and other initiatives championed by industry itself, don't get their due recognition either.

The first ever RSRT pay ruling is now taking effect, after a federal court delay was recently lifted, with massive implications for a nation heavily reliant upon road transport to haul goods over long distances.

Industry analysts have said the RSRT pay ruling would lift contract rates for independent truck drivers by as much as 30 per cent, and some drivers have indicated payment rates could be even higher for return routes with light freight loads.

The risk is that such a significant cost increase could lead to some drivers being informed their mandatory rates are uncompetitive, and that work is no longer available.

Fewer contract drivers in the market could dilute competitive pressures, enabling large companies with their own truck fleets to more easily raise freight charges over time.

That means, in the end, higher prices for everyday goods that people buy, potentially exacerbating concerns about general cost of living increases as a political issue.

For owner-operators remaining in the transport sector managing the regulatory compliance costs of the RSRT order will be a constant struggle.

Certain transport industry associations are already telling their members to either adapt to the changing regulatory environment, or otherwise restructure their activities or operations to ensure they can attain viable work in future.

All of these effects are likely to add up to a significant burden upon the transport sector, subsequently flowing through to other industries.

An independent review commissioned by the government has indicated the net cost of regulatory orders made by the RSRT, including those relating to minimum payment times, dispute resolution procedures and other policies, would be in excess of $2 billion over a fifteen year period from 2012.

The review by PricewaterhouseCoopers not only found "abolition of the system would result in significant net benefit to the economy and community at large", but questioned the very need for a regulatory response forcing higher payment rates on safety grounds.

Another review that has been recently released, and it points to the archaic powers of price controls accorded to the RSRT which are incompatible with the general direction of economic reform in Australia and the OECD over the last three decades.

This study, by Jaguar Consulting, argues that improved safety performance by the trucking industry could be improved through far less prescriptive regulation which doesn't risk consigning independent owner-drivers onto the dole queues.

In any case it isn't a foregone conclusion that higher pay dictated by the RSRT will necessarily reduce crash rates and fatalities, because the prospect of earning more pay may induce remaining drivers to drive longer, not shorter, hours.

All in all this fiasco, threatening the livelihoods of trucking families, not to mention sparking transport cost-inflation for both state and national economies, could have been avoided if political inertia against reform hadn't stood in the way.

Indeed, the RSRT is a useful case study illustrating that governments hastily take action to instigate damaging regulations and bureaucracies, but are painfully slow to unwind them even in the face of mounting problems.

The Coalition parties when in opposition voted against the provisions of the bill to establish the RSRT, but with a wafer-thin majority the Gillard government managed to get parliamentary assent for its truck industry regulator.

At the 2013 election the Tony Abbott-led Coalition promised to urgently review the RSRT reflecting a concern, contained in its election policy statement, that "there is no evidence that a separate additional tribunal or a further level of regulation is necessary".

The Jaguar Consulting report was completed as early as April 2014, and the PwC study was finished in January this year, but it was only very recently that both reports were publicly released.

After all this time, and with the RSRT making its pay ruling in December last year, the Turnbull government only now announces a plan to delay the RSRT payments order until the beginning of next year, and to abolish the RSRT sooner.

But the success of this plan, of course, will crucially hinge upon whether the current Senate crossbench will agree with the plans, a very likely outcome but one which is not ordained.

Until a definitive political outcome is struck contract drivers in the trucking industry will lack the clarity they need to secure their economic future.

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Tax havens a sign of government fiscal mismanagement

The Panama Papers tax revelations are more an indictment of government fiscal mismanagement than has been publicly acknowledged.

Who, until recently, could name any Panamanian law firm?

Mossack Fonseca would certainly not have been pleased to have its name on the front page of daily newspapers around the world, but from a position of relative obscurity it has managed to achieve this feat.

Confidential financial records and identity documents, kept in-house at Mossack Fonseca, were leaked to the major German newspaper Suddeutsche Zeitung in early 2015, and after a sifting process by the self-styled International Consortium of Investigative Journalists a first batch of documents have only now been distributed to major press houses.

As even the most casual follower of the daily news would be aware the release of the first set of "Panama Papers" has led to explosive allegations that shell companies in tax-haven jurisdictions have been established to conceal tax avoidance, tax evasion, drug trafficking, and even terrorism financing.

Caught up in the dragnet of disclosures by international media thus far have been heads of state and their relatives, in both developed and developing countries, and bureaucrats, business figures and even, to some embarrassment, the now former head of NGO Transparency International's Chilean branch.

Before responding to the predictable tax haven-bashing by certain commentators, politicians, and sections of the general public, it is important to consider the privacy implications of this development.

In the modern world of instant communications through computers and smartphones, and with the use of online banking and social media at an all-time high, protecting one's personal and financial privacy from the vicissitudes of oftentimes reckless, and almost always damaging, public disclosure has become reinforced as a fundamental liberty issue of our time.

But does our enthusiasm for knowing every snippet of detail from the leaked (originally stolen information) Panama Papers suggest that, for uncomfortably too many of us, our robust defence of privacy is contingent upon whose privacy is being threatened?

As Kadhim Shubber noted recently in The Financial Times, plenty of cheers went around when WhatsApp announced it will not encrypt personal messages sent via its app, yet the same cheers are being heard when the financial privacy of some wealthy people had been violated by the Panama Papers disclosure.

The suggestion has been freely made by many commentators that any activity that involves direct corporate or financial activity in, or indirect involvement with, low-taxing jurisdictions should immediately arouse suspicion, at most even guilt, within the arena of public opinion.

But it is important to note that just because somebody opened a bank account or created a company in Panama, or some other, increasingly rare location that takes financial privacy or low, competitive taxation regimes seriously, it does not necessarily mean that wrongdoing has occurred.

And poor old Mossack Fonseca came out in its own defence by indicating it obeys regulatory obligations to "know the client", a modern euphemism for the notion that legal, financial and professional service providers have to monitor their own customers lest they themselves get into hot water with governments possessing an insatiable appetite for both data and tax.

But in a post-global financial crisis environment, typified by a growth-depressing combination of government-induced financial repression and deep social envy of wealth holdings of almost any kind, even bland statements that tax avoidance isn't illegal arouses a certain degree of hatred and suspicion.

Now, it is entirely legitimate for governments to hunt down crooks, and tracing their company-making and money trails is a part of good investigative work.

By the same token the slow recategorisation of all international capital movements and tax competition into the realm of criminality, or at least of economic or social harm, is an ill-informed strategy replete with economic risk, and even personal danger for some.

There is a saying among some Swiss bankers that "there are no tax havens without tax hells", but many detractors of tax haven locations, such as Panama, British Virgin Islands, Ireland, Switzerland, and the United States, forget just how hellish the global tax regime was virtually everywhere during the 1970s and early 1980s.

In Australia the top personal income tax rate was a whopping 61.5 per cent in 1979 (prior to the Medicare Levy and other stealth tax top-ups imposed today), whereas in the United States and United Kingdom it was an eye-watering 70 per cent and 83 per cent respectively.

As for the tax rate on corporate income they were 46 per cent, 52 per cent and 46 per cent in Australia, the United Kingdom and United States, respectively.

Financial repression is often married to burdensome taxation regimes, and the degree of restrictiveness in which governments controlled financial flows across borders was once typified by the fact that many Westerners wishing to invest overseas needed written permission from the government before being able to do so.

And the idea that a tourist could take their own spending money with them on overseas trips, of whichever amount they elected to choose, was pure fantasy for many during the period of pre-1980s capital controls.

The worst of these restrictions were sensibly removed thanks to microeconomic reforms during the 1980s and 1990s, in which liberalisation catalysed capital mobility and significant tax reductions allowed businesses and individuals to keep more of their own money.

Globalisation of capital and finance, and vigorous tax competition between countries pushing down tax rates, helped create the "Great Moderation" of healthy economic conditions up until the GFC, but governments refused to extend the full logic of reform to their social services and welfare systems.

The refusal to reform the costly welfare state has come back to bite Western governments these last few years, especially when it comes to the European reform laggards which elected to keep higher taxes and bigger public spending profiles, to their long-term economic detriment.

Instead of wanting to keep capital flowing freely and maintaining low taxes, oversized Western governments now disingenuously blame tax havens for their financial problems.

They are being assisted in this effort by the OECD, an international bureaucracy now opposed to tax competition but whose staff receive tax-free salaries, as well as tax-exempt advocacy NGOs.

Rather than blaming tax havens and driving financial freedom and tax competition out of existence, perhaps it would be better for the West to hold its nerve on globalisation and transition their own economies into tax havens.

Are the Panama Papers really such a scandal?

To be mentioned in the Panama Papers looks bad.  That the Panama Papers exist looks bad.  It's the vibe.  But when it comes to the fine print it seems the scandal is more political than legal.

What, exactly, is the scandal with the Panama Papers?

You might have read in Time that it "could lead to capitalism's great crisis" and the Guardian that it depicts "the corruption of our democracy".

It's easy to draw political conclusions from the leak of 11.5 million files from the Panamanian law firm Mossack Fonseca — even take a guess how it will play out in Australian domestic politics, which we will come to shortly — but put aside the hyperbole for a moment.

Is the scandal that Vladimir Putin's inner circle has extracted billions of dollars of the wealth of the Russian citizenry and state?  Or is it that they are trying to avoid paying the Russian statutory income tax rate of 13 per cent?

Is the scandal that you can accumulate incredible wealth as a member of the Chinese government?  Or, then again, is the scandal that some of that fortune isn't being taxed domestically?

Twenty-nine per cent of all active companies represented by Mossack Fonseca were set up by its Chinese offices.  But this doesn't inherently suggest criminality.  Wealth in China risks expropriation by the state.  Investing offshore is good risk management.

Indeed, most of the foreign leaders named in or connected to the Panama Papers come from countries that are high on corruption and low on the rule of law.

Scan your eyes over the nationalities of the "power players" in the Panama Papers.  Georgia, Iraq, Jordan, Qatar, Sudan, Saudi Arabia, the United Arab Emirates, Ukraine, Azerbaijan, Syria, Egypt, Pakistan, Ghana, Morocco, the Palestinian Authority, Cambodia, Kazakhstan.  This is not a list of the world's liberal democracies.

Some are, though.  The prime minister of squeaky-clean Iceland, Sigmundur Davíð Gunnlaugsson, stood down last week after he was named in the Panama Papers.  When his wife invested the proceeds of a sale of her father's business offshore, Gunnlaugsson failed to declare his interest in the company.  The company also held bonds in the very same Icelandic banks that the government was responsible for winding up after the Global Financial Crisis.

But Gunnlaugsson's true crime is hypocrisy.  Having professed an Iceland-first economic policy of capital controls, retaining businesses in Iceland and protecting the Icelandic króna, it understandably galls to see his own wife utilising global offshoring to — legally — maximise her wealth.

David Cameron is having similar trouble after his father was named in the papers.  All evidence suggests that Ian and David Cameron paid all taxes on the dividends they received in Britain from this offshore investment.  But the British government has spent the last few years trying to whip up a frenzy about complex tax arrangements.  Not a great look.

Still, hypocrisy is a moral violation, not a legal one.

Tax havens perform an important function by putting downwards pressure on domestic tax rates.  They are the global economy's escape valve — preventing sclerotic Western welfare states from pushing taxes up and up.

As the Cato Institute's Dan Mitchell wrote last week, the fact that law firms like Mossack Fonseca create corporate structures is no scandal.  Even though what they do is completely legal, they are now being tagged with a vague sense of criminality.  But Mossack Fonseca does not acquire the money, hold the money, or invest the money.  And it is required to do due-diligence on its clients.

Most importantly, for all the impressive scale of the Panama Papers (11.5 million files comes to 2.6 terabytes of data) it tells us little about the extent to which offshoring erodes the tax base of non-haven countries.  It is remarkably hard to identify any serious detriment to the revenue from offshoring, as even the OECD, the multinational body pushing the crackdown on tax avoidance, admits.

This is where the politics of the Panama Papers and their actual policy significance sharply diverge.

In Australia, Bill Shorten has made a crackdown on corporate tax avoidance the pillar of his economic policy.  As Lenore Taylor writes in the Guardian, Shorten is relying on the revenue gained from closing tax loopholes to fund new social spending, and close the budget deficit.

Labor thinks it can squeeze another $2 billion in revenue from a crackdown on tax avoidance, but won't release Parliamentary Budget Office estimates it says shows this.  Sinclair Davidson has often pointed out that the Australian government is much better at writing press releases announcing how much extra revenue it will collect from a crackdown than actually collecting that revenue.

The Panama Papers helps Shorten keep the Turnbull Government on the back foot.  Even though the Coalition has tried to beat up the tax avoidance issue itself, economic populism is not a game that nominally market-oriented parties can win.  As the prime ministers of Britain and Iceland have learned, the politics of offshore investments is about impressions not policy.

To be mentioned in the Panama Papers looks bad.  That the Panama Papers exist looks bad.  It's the vibe.  It's the optics of the thing.

Every article on the leak has a sentence saying something like, "There are legitimate uses for offshore companies", but who reads the fine print?  And in the middle of a frenzy about the super-rich and what they do in foreign, exotic countries, who would want to?

Reform is just hard yakka

According to Thomas Edison "genius is 1 per cent inspiration and 99 per cent perspiration".  What Edison said about genius also applies to political success.  Last week Malcolm Turnbull tried to invert Edison's dictum while standing in the car park of the Penrith Panthers rugby league in western Sydney.

It was there that he announced his plan to allow state governments to levy income tax.  Turnbull quite correctly called the plan a "very big fundamental reform to federalism".  Forty-eight hours after his first announcement the PM declared his plan dead following its rejection by state premiers on Friday.

There was nothing wrong with Turnbull's policy.  A change of the kind he proposed would impose fiscal responsibility on state governments and strengthen their democratic accountability.  Which is why I have long argued for such a measure.  On my list of 75 Radical Ideas to transform Australia published in 2012, returning taxing powers to the states came in at number seven.  It could be argued that it's not even that radical an idea.  Tony Abbott's National Commission of Audit suggested it, and it was discussed in detail in an issues paper last year out of the federal government's federalism reform process.

State premiers might not have been told of the day and time of Turnbull's announcement, but for some of them to pretend they knew nothing about the concept of state income taxes reveals either that they're not telling the truth or that they're even less informed about public policy than they appear.

A reform of the kind the PM outlined requires a lot of perspiration.  Especially because state premiers are so resistant to reform and just so recalcitrant when it comes taking responsibility for raising the money they spend.  So you'd be expect there to be a Plan B, Plan C, and Plan D following what was always going to the inevitable rejection of the plan from the premiers.  There still might be a Plan B, but we're yet to see it.

Allowing state governments to levy income tax is a good idea.  Raising the GST, restricting negative gearing, and increasing taxes on superannuation are all bad ideas.  State income taxes can eventually lead to lower taxes.  Those other policies the federal government has flirted with have only one objective, namely to get more revenue.

A state income tax actually makes it harder for governments to increase taxes.  At the moment when the federal government increases income taxes, as the Abbott government did with it's ill-conceived "deficit levy", every Australian taxpayer is affected.  A tax increase is the decision of one government.  If states imposed income taxes, a tax increase that impacted on every taxpayer in the country would have to be the result of a decision by each of the six state governments.  Only one government currently has the power to cut income tax — but if state governments had that power, any one of six jurisdictions could cut income tax.

TEN YEARS OF PERSPIRATION

The country's last major tax reform, the GST, took almost 10 years of perspiration to get implemented, from when it was first suggested by the Coalition in 1991 to when the legislation passed in June 1999.

Paul Keating likes to imagine that it was his genius and a flourish of his fountain pen that floated the dollar.  In fact deregulation of the exchange rate had been debated for decades.

As worthwhile a reform as giving state the power to levy income taxes is, it is not the single biggest issue facing Australia right now — and it's not what Turnbull should be spending the election campaign talking about.

The Turnbull government wasted its first six months contemplating the follies like raising the GST.  It now has just a few months before the federal election to reorient the public debate.

One of the challenges for the federal Coalition is to pick a policy and then stick to it for more than five minutes.

But at the moment has an even bigger challenge.  It has to find a way to spend less time talking about how to raise taxes.  Instead it should spend more time talking about how to cut government spending.  If any cause requires perspiration it's that one.

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Why the proposed tree laws are the very worst kind of red tape

The proposed vegetation clearing laws are red tape halting economic growth, suppressing entrepreneurship, and damaging our international competitiveness.

The Palaszczuk government wants to plug supposed loopholes in vegetation management law.  Their plugs, however, focus solely on conserving the environment.  What is completely ignored is a viable future for Queensland's agricultural sector.

Chopping and changing laws in a jurisdiction with the largest agricultural lands in the country is a worrying trend, and brings great uncertainty to farmers.

This political power play — reversing changes made by the previous Newman Government — is the latest in a contentious history of agricultural regulation in Queensland.

Jointly understanding that clearing is necessary for growth, and that farmers have the incentive to protect and cultivate their own land, meant very few clearing controls prior to the 1990s.

However, as the 1990s came so too did the growth and spread of conservation campaigns.  Legislation changes in 1999 and 2004 largely phased out broadscale land clearing by the end of 2006.

Of course the environment must be protected and conserved.  But what happened to the importance of economic growth and development?

Effective agricultural regulation draws a reasonable line between environmental protection and agricultural production.

It is undeniable that efficient agricultural production requires the felling of trees.  By entirely preventing such clearing — even for high value productivity land — policy makers have clearly lost sight of the real purpose of regulation.

The potential new laws, among other things, will remove land clearing purposes for high value agriculture and irrigation, reverse the onus of proof, and are retrospectively implemented.

Removing exceptions for high-value land specifically burdens the most productive farmers and removes the possibility that economic growth outweighs environmental conservation.

Not to mention all of this looks to happen with no compensation for the erosion of farmer's rights.

While farmers will technically hold the deed to their land, these new regulations determine how and where they can alter that land, effectively removing their property rights.

From 2013, when the Newman government relaxed the laws, around 112,400 hectares high value agricultural or irrigated high value agriculture land has been cleared in Queensland.

How this is viewed demonstrates the ideological divide at the heart of the current debate.

One side sees this almost exclusively in terms of greenhouse gas emissions, or damage to wonderful resources such as the Great Barrier Reef.  For instance, in the public hearing of the current Committee, this is viewed as the "release of around nine million tonnes of carbon emissions".

Farmers and land owners, however, see this clearing as a necessity to continue productive agribusiness.  The clearing, in their eyes, is the release of otherwise government-stymied land for the benefits of themselves and the nation.

In reality there must be a happy medium between these two opposing views.  And it is clear that the latest laws are certainty not in the middle.

Only compounding these matters is the retrospective implementation of the bill in an effort to "reduce the risk of panic clearing".  The government is worried that farmers will go out and clear large tracts of their land under the current laws before the new ones come in.  To farmers this means large tracts of private land will remain uncertain until at least the current Agriculture and Environment Committee reports in June this year.

If the bill is passed later this year, Queensland farming will become less viable, the entrepreneurial drive of the bush will wither, and our international competitiveness will be damaged.

Land owners and farmers are the most interested in protecting and conserving their farms.  Bureaucrats in Brisbane — far from the reality of farm life — should not be in the business of classifying and determining the use of private land.

For the future of agribusiness in Queensland, the Palaszczuk government must realise the substantial and long-term consequences of these broad sweeps of environmental red tape, and shelve the current proposals.

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Federation reform is no political plaything

Malcolm Turnbull has a lawyer's understanding of the constitution and a politician's understanding of how to deal with the states. But federation reform is about more than just law and politics.

Every government dreams of reforming the federation, but dreams usually end in disappointment.  Malcolm Turnbull should know this.

Consider his predecessor.  Tony Abbott always had a love-hate relationship with federalism.  His attitude to the states in Battlelines ranges from ambivalent to hostile.  As Howard government health minister he helped orchestrate the "local" takeover of Devonport's Mersey Hospital from the Tasmanian state government — a takeover underwritten by the Commonwealth government, of course.

But in his 2013 budget reply speech as opposition leader, Abbott suddenly declared that under a Coalition government the states would be "sovereign in their own sphere".

It was an important moment.  That phrase had been used by the Australian founders.  During the 1897 federation conference Edmund Barton said the goal was "to create a system of government under which, as to over all the powers they retain, the States will be supreme and sovereign in their own sphere."

The technical structure of our constitution says that everything not expressly given to the Commonwealth government is to be left to the states.  But to say that the states are sovereign is to go further than legalities — it is to assert that the states have fields of control which cannot legitimately be usurped by the Commonwealth.

Of course, in the 21st century the states are anything but sovereign.  There is no area of state constitutional responsibility that does not have the federal government slobbering all over it.  These days health, education and infrastructure are all, in practice, joint Commonwealth-state endeavours.  The Commonwealth dominates the collection of taxation and distributes funds for the states to spend.  But funding tends to come with conditions, and the Commonwealth uses the leverage it gains from its revenue to pursue its own goals in the areas of health and education.

It is hard to imagine a system of governance worse for accountability, for transparency, even for democracy than to have one level of government raise funds and the other level spend it.

Abbott commissioned a taskforce in his own department to produce a white paper into federal reform.  The taskforce produced a discussion paper and four issues papers but then quietly disappeared — the promised green paper (to be "released in the first half of 2015") and white paper ("by the end of 2015") never materialised.

One explanation for the quiet death of Abbott's federation agenda was the general drift that characterised his last year in office.  But part of it was almost certainly because the taskforce had thrown up some very radical solutions to the problems of Australian federalism — like removing the Commonwealth from schooling altogether, or the Commonwealth directly spending more of the money that it raises, or encouraging the states to raise more money themselves — that were a bit too bold for the Government's taste.

There are fundamental structural problems with Australia's federal system.  Almost any solution is radical.  Turnbull is not the first prime minister to propose returning income tax powers to the states, and he's not the first to abandon it on political grounds.

Political strategists often point out that voters don't care about which level of government is responsible for what policy area.  If a road has a pothole, they just want it fixed.  They don't want to be told by a politician that it is a state or local responsibility.  Newbies to federal politics quickly find themselves discussing local traffic lights with constituents rather than foreign policy.

Yes, vertical fiscal imbalance — the term which describes the disjuncture between the Commonwealth's taxing and the state government's spending — is an esoteric problem.  But then again, the federation is an esoteric topic.  Constitutional limitations on government are esoteric.  Just because a problem is esoteric does not mean it is unimportant.

Unfortunately no government has successfully made these esoteric issues relevant — outlined the relationship between fixing the federation and practical policy consequences.  "Stop the blame game" is a great catchphrase but it's not quite great enough to justify major reform.

So Turnbull's failure to win the state income tax argument against a group of self-interested premiers last week should not have been a surprise.

If, as some commentators have argued, Turnbull is playing a long game — by showing that the state governments would rather complain about being underfunded than to take financial responsibility for their own public services — then more power to him.  The question is whether the goal of that long game is simply to justify reducing the amount the Commonwealth gives to the states for health and education in the 2016 budget, or to lay the foundation for a deeper reform of the federation itself.

Turnbull has a lawyer's understanding of how Australia's federation today looks nothing like the constitution originally prescribed, and he has a politician's understanding of how to deal with the states.  But the federation question is about more than just politics and law.  It's about how we conceive the Australian nation.  It's about whether power should be divided between states and the Commonwealth or whether we should accept the centralisation of power as inevitable.  Are states sovereign?  Or are they just subservient?

Culture of regulation must change before red tape wavers

Removing costly red tape from the Australian economy will remain a monumental political struggle until our "regulate first, ask questions later" culture is redressed.

As speculation about a double-dissolution election grew to fever pitch last month, the Turnbull government quietly released its latest Red Tape Reduction Report with some sobering insight about the immense scale of the challenge to reduce regulatory costs.

The federal government claimed it cut the costs to business and individuals complying with its rules and regulations by a net $2.5 billion last year during 2015.

This regulatory burden "savings" figure might appear impressive at first glance but, in reality, is far less so when considering a stocktake of commonwealth regulations the year before revealed compliance costs upon the Australian economy totalling some $65 billion.

The staggering costs of regulation are yet to be seriously managed by any major party in government federally, let alone at state and local levels, and this is largely because government regulation is still widely conceived as an effective cure-all for problems, all and sundry.

Consider two recent instances of this phenomenon as cases in point.

It has been claimed by some that more prescriptive regulation is necessary to prevent big business screwing over small business or, putting it more dramatically, that Australians wanting cheap milk are somehow complicit in engineering a misuse of market power.

The Turnbull government recently agreed to incessant National Party demands to amend Section 46 of the Trade Practices Act that would penalise businesses with a "substantial degree" of market power for engaging in conduct with the effect, or likely effect, of substantially lessening market competition.

As many critics of the proposal have pointed out, the proposed so-called "effects test" runs the risk of inadvertently discouraging efficient market conduct because the regulator would find it much more difficult to distinguish between pro-competitive and anti-competitive conduct.

The 2003 Trade Practices Review, chaired by Sir Daryl Dawson, found that "the addition of an effects test would increase the risk of regulatory error" and could discourage competitive conduct in the marketplace for fear of litigation by those whose less efficient operations were weeded out by competition.

The potential economic costs of this measure would be significant, not least because both incumbent firms and potential new entrants are likely to become less certain about whether their own efforts to create greater economic value might fall foul of the effects test.

If businesses do become spooked by the effects test, the certain losers would be the Australian consumer who could've otherwise benefited from product supplies courtesy of more efficient businesses who prevailed in competitive markets.

Another recent proposal on the regulatory policy front, if implemented, would also likely impose major costs upon an Australian economy desperate for more entrepreneurial flair and innovative improvements.

The Australian Securities and Investments Commission has, at least since the middle of last year, been calling upon government ministers to endorse stricter regulations concerning corporate culture, defined in legislation as "an attitude, policy, rule, course of conduct or practice".

It is suggested the culture provisions of the commonwealth Criminal Code Act, allowing a judge to consider whether corporate culture contributed to the "authorisation or permission" of the commission of a criminal act, should be broadened and applied to parts of the Corporations Act especially pertaining to financial services.

ASIC has also suggested its proposed provisions should extend to responsible management, meaning that company directors, officers and managers could be penalised if it is found that corporate culture (or a lack thereof) contributed to an employee breaching the law.

The regulator's call for more restrictions seems to be animated by concerns about several alleged and proven instances of corporate misconduct, but a number of legal experts have raised significant doubts about the workability of more stringent enforcement approaches surrounding a contestable concept such as "corporate culture".

Culture is a broad-based and intangible concept, so it is nigh on impossible to objectively define it for the purposes of imposing legal liabilities without running the risk of flouting time-honoured rule of law principles that rules be applied equally and fairly, and that legal arbitrariness should not apply.

It worries some scholars and experts in corporate law that ASIC's proposals may undermine the principle that a wrongdoing individual in a corporate setting is responsible for a crime committed, rather than that person's manager or a company director standing at arm's length.

As in the case of the trade practices effects test, the likely way in which prescriptive corporate culture regulation would influence behaviour is to further diminish the economic agility of the private sector, only adding to the overall cost of regulation.

These two cases illustrate very clearly why reform-minded politicians, who wish to genuinely reduce the costs of Australia's regulation, have their work cut out for them.

Over the past two decades or so governments have sought to tackle the very real problem of politicisation of regulatory settings by devolving responsibility for regulation design and enforcement to so-called "independent" agencies, such as the Australian Competition and Consumer Commission and ASIC.

But these regulators with inflated powers are themselves imbued with an "action bias" promulgating ever more regulatory proposals in response to politically sensitive matters, such as low milk prices or allegedly bad corporate culture.

And, as noted by James Cooper and William Kovacic in a paper for the Journal of Regulatory Economics, the incentive structure for regulators tends to reward those who adopt more politically expedient policies which are not necessarily welfare-enhancing.

What this implies is that there is still a nagging tendency to overregulate, with scant regard for the enormous, often long-term costs for doing so.

If we want to make red tape reduction a meaningful policy concern, we must fundamentally alter the regulatory culture that seeks to regulate first and ask questions about the efficacy and cost of interventions later.

As individuals we should be more willing to embrace experiments to resolve more of our own problems where we reasonably can, and hopefully online and other technologies that help us interact more easily offers such a prospect.

In our capacities as voters we should elect politicians who favour deregulation as a matter of principle, and ideally have a track record to match, and who disavow regulatory agencies becoming a law unto themselves.

Ushering in such changes will be mightily difficult, but it would only be at those cultural thresholds that we'll be able to dramatically cut the regulatory costs that hold all Australians back.

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Why economists love and premiers hate the idea of income-taxing states

Malcolm Turnbull has called for a dramatic shift in Australia's model of federalism, specifically seeking to allow the states to levy their own income taxes.  Many economists regard this as sensible and much-overdue reform to correct a deeply entrenched problem in Australia's fiscal constitution — vertical fiscal imbalance.

But it was met with two types of outrage and scepticism.

The first was from those who heard it as more taxation.  But the argument is for a shift from a federal income tax to a state income tax.  In principle, this can be done in a completely revenue-neutral way.

That would make it tax reform, not a tax grab.  And that would, on the whole, benefit Australian taxpayers because a more efficient tax system is a less costly tax system.

The second came from the state premiers.  With the exception of Western Australian Premier Colin Barnett, they hated the idea.

It's important to understand why.  This is not because the idea is bad for the citizens of the states, with the premiers being outraged on their behalf.  Rather it is because it is bad for the political classes themselves, and the premiers in particular.

To see why, we need to introduce a somewhat obscure economic model from public finance, developed by Charles Tiebout in 1956.

Before Tiebout's work, the best economic thinking about the provision of public goods argued that a powerful central government should provide these in order to overcome the free-rider problem, which required the use of political force to compel those who would seek to consume the public goods or services but avoid paying for them.  No one can hide from a federal income tax, so no citizen can free-ride.

The major flaw in this mechanism is what economists call the "preference revelation problem".  Centralised funding discourages citizens from honestly signalling, through their votes, their true preferences for local public services (such as education and healthcare) and what they are willing to pay for these in taxes, because regardless of what you might want, you pay for the same set of public goods — i.e. there is just one level of income taxes.

The result is that when services are provided at the state level, but paid for at the federal level, every premier has incentive to claim their citizens want the most and best services possible.  Indeed, they would be crazy not to when other states are jointly paying for them.

The result is a perpetual war between state and federal treasurers, a lot of economic choices converted into political deal-making, and an eternal problem of vertical fiscal imbalance.

But Tiebout pointed out there was a non-political (or market) solution to this problem:  namely federalism, or what came to be called "voting with one's feet" and can equally be called "shopping for public goods".

The basic idea is that the states compete with each other by offering bundles of public goods at different prices (i.e. taxes).  This is the significance of the state-level income tax.  Victoria, for example, may offer very high levels of public services, but also at a high price through high state income taxes.  NSW may offer more moderate public services, but also much lighter taxes.

What happens next is that citizens sort themselves over the states according to their preferences.  Those who value high levels of public services move to Victoria, where they pay that marginal valuation in high taxes.  Citizens with preferences for lower levels of public services and also taxes move to NSW.

This is a market, not a political, model of local public goods.  Economists like it because it encourages competition between the states to provide an efficient bundle of public goods and services at a point that voters (as consumers) are willing to pay.  This competition tends to produce an efficient outcome.  Consumers reveal their true preferences for public goods and services by their choices about what state to live in.

THE CAVEATS

Now obviously there are limitations to this process.  There are costs to moving, and for many citizens these costs will be prohibitive.  But the model does not require everyone to move, just that the incentives work at the margin.  In which case, the premiers are also incentivised to seek to provide the bundle of public goods and services that their constituents want and are willing to pay for.

That is not the situation we have now.  Premiers are incentivised to represent their citizens as all wanting the maximum amount of public goods and services, because someone else is paying for them.

State income taxes (coupled with reduced federal income taxes) are a way of implementing this mechanism.  The main winners from this will be the 7 million or so Australian taxpayers, because it will deliver a much more efficient supply of public goods and services.  The main losers will be the state and territory premiers, because they will have to compete in the market for political goods and services.  So it's probably an even fight.

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