The Australian Capital Territory Treasurer Ted Quinlan and federal Territories Minister Jim Lloyd have rejected a plan to make the ACT an income tax and payroll tax haven . One of the problems facing the States is that Federal government's taxing of income and GST enforce homogeneity on the states. They have little chance to differentiate themselves or to innovate in areas of tax and economic policy. The Federal Government's unitarianism is an impediment.

This proposal has been put forward by the Canberra Institute. This is a think-tank with no internet presence what-so-ever. How can they be so stupid? I am getting annoyed that every article or rafferty's I write now has an opening paragraph which berates the ignorance of politicians, media, think-tanks and other industrial structures when it comes to the internet.

Anyway, I am stuck with trying to make sense, or an opinion, with what the Canberra Times has written on it. Stephen Bartos has put his backing to it. Bartos is a Director at the National Institute of Governance . But without more detail it appears that the plan consists of;

The plan would "declare the ACT and Jervis Bay tax-free advantage areas for both ACT residential PAYE [Pay As You Earn] and company taxpayers. ... The GST, and the Medicare and superannuation guarantee levies would remain from the Commonwealth and the ACT would continue to collect stamp duty, car registration and rates.

That is very innovative, and would probably draw people to Canberra. If the ACT had control over the income tax, they could lay a flat tax of say 5% and use that to fund health and education - they could let the federal government keep any GST revenues in return. But the federal government collecting all income and sales taxes for the states leaves them little room. Jim Lloyd's spokesperson was quoted as saying;

Minister Lloyd notes the idea proposed by the Canberra Institute as interesting but impractical in the context of the national taxation scheme," she said. "The Australian Government administers tax in the interests of all Australians, and the proposed changes would advantage one part of the Australian population over others.

Unitarianism. Canberra sees us as one homogeneous lump. This leaves no room for States to compete for skills, for workers, for families, for businesses or investment through state-based taxation, economic or labour policy. The federal government is inhibiting innovation. Supposedly the Liberals are about competition and free-market policies. They are against it when it dilutes their power at the federal level.

This is the failure of the Australian political system, it enforces federal conformity, entropy, weight and inertia. It is an inhibition to the states innovating and competing against each other.

The United States is a far more diverse federal system with greater state independence than Australia. On Sunday's you see New Yorkers streaming across the Hudson River to the malls in New Jersey. This behaviour is a result of sales tax being lower in New Jersey. New York competes in return by having "no sales tax" days.

Because the GST is leveraged by, and collected by Canberra before being disbursed to the States. The competition New Jersey and New York have over sales tax cannot occur in Australia.

Another example of American states competing against each other is Delaware's incorporation laws ;

More than half a million business entities have their legal home in Delaware including more than 50% of all U.S. publicly-traded companies and 60% of the Fortune 500. Businesses choose Delaware because we provide a complete package of incorporation services including modern and flexible corporate laws, our highly-respected Court of Chancery, a business-friendly State Government, and the customer service oriented Staff of the Delaware Division of Corporations.

This small state has captured a good chunk of the American incorporation market.

One of the few Australian States who has maintained a somewhat independent stance is good ol' Queensland. it still pursues development state policies which are more reminiscent of the autocratic Asian nations. One of the independent policies is the Queensland Fuel Subsidy Scheme . This knocks approximately 8.5c off the cost of each litre of petrol.

I am sure this act of local and regional policy making will meet a green federal challenge in the future where a federal government will use the power of Canberra to force homogeneity on Queensland and bring them into line with every other state. As it is the Federal government is forcing the states into a corner anyway with its own fuel taxes ;

One question remains to be answered. Why has the Commonwealth been allowed to escape criticism regarding underprovision of infrastructure and services, and the problem of traffic congestion?

While state and local governments have nominal responsibility for provision of most infrastructure and services, the Commonwealth controls the main sources of tax revenue. Hence, state and local governments depend on grants that are inadequate to meet their responsibilities.

The Commonwealth refuses to give back more than 16 per cent of fuel tax revenue for road infrastructure, and will not cut the fuel tax rate to make room for congestion pricing by state or local governments. So while special interest groups try to bludgeon the Queensland government into reallocating fuel subsidy monies in accordance with their particular interests, the Commonwealth laughs all the way to the bank.

Big government in Australia has a name - it is the Federal Parliament. It is enforcing control on the states through its taxation policies. This leaves the states homogeneous and incapable of reacting to regional economic pressures. The federal government is acting like a monopoly, extracting rents from the states and inhibiting innovation.

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