The Undone Tasks of Deregulation

Back in 2007, Kevin Rudd thought he could make a big political statement by outflanking John Howard as a free marketeer. He claimed to be the true “economic conservative”, and attacked the Howard government’s “reckless spending”. But that was just half of Rudd’s pitch. A headline in the Australian Financial Review in October that year screamed, “Labor blasts PM over red tape burden”. Readers learned that Rudd had “savaged” the Coalition for the regulation that was “strangling” business. “Stand by for the Regulation Revolution,” said theSydney Morning Herald; “cutting back the maze of business regulation and red tape” would be one of Rudd’s “top policy priorities”.

They say the past is another country. Campaigns are another planet. Once handed power by the Australian voters, the practice of the Rudd government was light years away from its soaring campaign rhetoric. Yes, true to Rudd’s promise, Lindsay Tanner was appointed Australia’s Minister for Finance and Deregulation. Yet one of Tanner’s first acts as minister was to preside over a vast increase in regulatory control over the finance sector, adopting new federal anti-money-laundering and counter-terrorism-financing laws that had been prepared by the Howard government.

This was just a taste of things to come. Tanner was our first deregulation minister and the experiment was a failure. Just as he was unable, as Minister for Finance, to prevent the massive splurge of government spending instigated by Rudd, Wayne Swan and Treasury Secretary Ken Henry, he was unable to hold back the tidal wave of new regulation that came with an interventionist government. By the twilight of the Labor government, this wave of regulatory interventionism had become a flood. Rudd’s professed disdain for the red tape burden strangling business was forgotten. Vast new regulatory frameworks were being imposed on labour markets, financial markets, employment conditions, child care, hospitals and health, aged care, competition law, health and safety laws, higher education, charities, coastal shipping, and of course the environment.

These increased the regulatory burden on individual sectors, but also the economy in general. For instance, the cost of regulation imposed on the mining and energy sectors flow through to raise the costs of downstream products. Just as taxes—like the carbon and mining taxes—reduce economic growth and living standards, so can regulation imposed on these vital sectors.

Some of the most egregious new regulations were not successfully implemented. Communications Minister Stephen Conroy was unable to pass his large-scale attempt to regulate fairness in the press. Attorney-General Nicola Roxon was unable to pass her attempt to create a right not to be offended on everything from race to politics in the workplace. Roxon did however manage to pass that manifestly absurd and deeply symbolic instance of regulatory over-reach—plain packaging on tobacco products.

These new regulations became a source of pride for the Labor government. Trying to combat the sense that parliament under Julia Gillard’s minority government was chaotic, Anthony Albanese used to brag about just how many pages of legislation Gillard had ushered through parliament. As the months ticked by the number grew ever larger. In six years, Labor passed a whopping 975 acts, adding up to 38,874 pages of legislation.

It’s true that the volume of legislation is an imperfect measure of the growth in regulation, for a number of important reasons. It is indicative rather than demonstrative. It does not take into account the effect that each new piece of legislation will have, nor does it take into account the fact that some legislation might repeal existing law, thereby reducing the regulatory burden. On the other side of the ledger these figures do not include subordinate legislation nor any state laws and council bylaws. But it is extremely suggestive. And constant legislative change imposes its own costs, as we shall discuss below. In 2012 the Institute of Public Affairs calculated that there were 103,908 pages of Commonwealth legislation on the books.

Rudd’s deregulation push may have been brazen, but every government comes to power promising to cut red tape. The Howard government had its own promise to reduce the regulation which was “enveloping small business” but the fruits of that labour are hard to see. Australia was more regulated after the Howard years rather than less, as I pointed out in the 2009 book The Howard Era. For all the stability and good governance that the Coalition offered between 1996 and 2007 it did little to stem the growing tide of regulation. Rudd wasn’t wrong when he diagnosed the red tape problem in 2007. It’s just that he wasn’t the person—and his party wasn’t game—to fix it.

So how does the Abbott government shape up? There are positive early signs. On the headline figure of legislative activity, 2014 was a good year. There were just 135 acts constituting 4607 pages of legislation passed through the Commonwealth parliament last year. This is a drop from the more than 5000 pages passed in 2013, and happily well below the 8150 passed in 2012. No doubt this is in part due to the trouble that the government has had passing its bills through a hostile, unpredictable Senate. But it is also due to the efforts of the Coalition’s own deregulation minister, Josh Frydenberg, and the emphasis that the Abbott government has placed on its deregulation agenda. Abbott and Frydenberg made deregulation one of the central features of its economic message in the Gillard years, leaning heavily on reducing the regulatory burden as part of its plan to revive the economy after years of sluggishness.

And yet. While the Abbott government repealed 57,000 pages of legislation in 2014—and claims to have saved the economy a whopping $2.1 billion a year—much of that which was repealed was already defunct. The real work of deregulation, if it is to occur, hasn’t started.

Indeed, the Abbott government’s deregulation experience shows why this agenda is so hard to pursue. In 2013, the much-publicised “Repeal Days”—a single parliamentary day every six months dedicated solely to repealing law rather than introducing it—were important but, as they came around, their agenda items kept disappearing. For instance, the proposal to eliminate the entirely unnecessary gender-equality reporting requirements imposed on businesses with more than 100 employees had to be dropped, apparently for political reasons. The reforms to the Labor government’s Future of Financial Advice program, which would have taken the edge off some of the most extreme regulatory controls but nevertheless left the previous government’s regulatory framework largely in place, were implemented by regulation. In a surprise upset the Future of Financial Advice reforms were reversed by the Senate at the end of the year. Other deregulatory proposals—such as the deregulation of higher education—have floundered as well.

Every regulation, even the most absurd, has a unique justification, and its own constituency. Gender-equality reporting is “not an issue of red tape”, according to Claire Braund, the head of an organisation called Women on Boards Australia. But it is the epitome of red tape—it imposes no other compliance requirements on firms except paperwork, and paperwork that has no other purpose except informing government. It should be the low-hanging fruit of regulatory reduction. There is not a single person in the country, except perhaps the bureaucrats that administer the program, who would be materially worse off if this requirement was abandoned. Yet gender reporting could not be repealed.

In some areas the government seems intent on going backwards. The Abbott government started 2015 with a stalled budget and by talking up a range of regulatory increases. It’s clamping down on foreign ownership in property. It’s introducing new country-of-origin labels to food products. It’s talking about lowering the GST threshold on imports and digital products, which would require enormous new regulatory infrastructure for retailers and importers alike. It has passed legislation to impose new controls on social media websites to clamp down on cyberbullying and to require internet service providers to keep vast amounts of information on every Australian’s online activities just in case they are in the future suspected of a crime or regulatory violation.

We can bat the pros and cons of these proposals around. They ought to be debated earnestly. But they illustrate that even a government as apparently dedicated to deregulation as the Coalition under Tony Abbott is nevertheless unable to resist the steady creep of new economic controls. There’s something much deeper going on here than traditional party ideology. While it is clear that Labor’s approach to regulation was worse than what we saw under the Howard government and what we have seen so far under Abbott, we’re talking about differences in degree, not kind. There is a deep and seemingly inexorable logic of modern democratic government that pushes it towards regulatory excess. Recognising we have a problem is the first step to solving it.

And it is a problem. Each year the World Econ­omic Forum publishes a Global Competitiveness Report which rates world economies according to a large range of indicators that would help facilitate business. Australia does relatively well overall. We rate well on things like education, the soundness of our banks, the health of our population, the depth of our financial markets, the professionalism of management and so on. But we are catastrophically bad when it comes to “burden of government regulation”—a terrible 124th in the world, sharing a spot with such economic powerhouses as Iran, Spain and Zimbabwe. Our competitors rate much higher. The United States is at eighty-second, while Canada is twenty-ninth.

The Australian Industry Group surveyed 241 CEOs in Australian businesses. The number of executives who nominated government regulation as one of their top three impediments to growth has grown from 9 per cent in 2011 to 11 per cent in 2014. This figure may seem relatively small in isolation, but given that it competes against other factors like the global economic and investment climate, it is strikingly high. Fully 83 per cent of CEOs believe they face a medium to high level of regulatory burden—particularly in the areas of industrial relations and health and safety.

The Minerals Council of Australia commissioned a review of legislative controls on the mining industry. It found that the number of primary pieces of legislation overseeing project approvals nation-wide increased from ninety-four to 144 between 2006 and 2013. Subordinate legislation increased even more: from sixty-six in 2006 to 119 in 2013. As they told the Productivity Commission’s 2013 review into mineral and energy resource exploration, the largest mining states, Western Australia and Queensland, have some of the most onerous regulatory burdens. Hancock Prospecting’s Roy Hill iron ore project in the Pilbara has required a staggering 4000 licences, approvals and permits—much of them imposed by the state government.

The cost burden of regulation is well known. But more important—and harder to test—is how regulations shape and constrain the economy itself. A modern economy is subject to constant shocks. Technologies change. Preferences change. New business models supplant old business models. Political events in distant countries can have unpredictable ricochet effects for Australian firms. Foreign price changes suddenly render existing ways of work unprofitable, or open up new opportunities. Firms have to constantly shift their operations, their ways of doing things, even their entire business models sometimes just to stay afloat. Economic change does not just occur in boom-bust cycles, nor in the long-term technological revolutions that have characterised the last two centuries. Tiny changes to supply lines, seemingly minor legislative changes in distant countries, and modest but constant adjustments to consumer goods mean that the economic ground is constantly shifting under the feet of the business sector.

Contrast this unstable economic dynamism with the political system that proposes to regulate it. Statutes reflect the nature of the world only at the moment of their passage through parliament. Legislation is static—black words in leather books that can only be altered through fraught and complex political negotiation. Even minor, uncontroversial legislative amendments can take months. Serious change can take years, from green papers to white papers to exposure drafts to committee inquiries to law of the land. Each of those legislative changes that the Gillard government was so pleased to have overseen was a long time in the making—the fruit of months and years of bureaucratic busywork. As a consequence the economic environment depicted in statute is almost always long out of date. Embedded in each statute are assumptions—about the shape of industry, technological ability, the force of competition—which do not last.

In other words, no matter how active the government is, the law is a static instrument. The economy it governs is dynamic. This creates serious problems. As rock beats scissors, law trumps business needs. Firms facing economic headwinds find that their ability to adjust is limited by the legislative environment they operate in: legal constraints are constraints on business flexibility. In an Institute of Public Affairs paper published in December 2014, Dom Talimanidis demonstrated the perilous decline in entrepreneurism in Australia. Where new businesses constituted 17 per cent of total businesses in 2003-04, in 2012-13 new businesses were just 11 per cent of total businesses. Unsurprisingly, the relative decline in business entry is greatest in those states that are the least economically free.

The burden of regulation is most obvious when we look at individual firms—the time spent on paperwork, the business opportunities not pursued. But all these little disincentives and distractions add up. Regulatory excess can have serious macro-economic consequences. In an important paper published by the Swedish think-tank Research Institute of Industrial Economics in January 2015, the economist Christian Bjørnskov looked at the relationship between standard measures of economic freedom and economic crises. As Bjørnskov finds, a high degree of economic freedom does little to prevent countries from suffering an economic crisis. But the degree to which an economy is free is a very important factor in how quickly a country recovers from a crisis. The things that matter here are not whether taxes are low, government spending is modest, or whether the rule of law is strong, but how efficient the regulatory environment is.

Economic crises necessitate a large-scale reallocation of resources, away from troubled sectors and into more stable ones. At the individual level, a person who has lost a job in an economic crisis needs to move rapidly into new employment—perhaps even new employment in a new industry—before the harm of unemployment becomes too manifest. Regulations like occupational licensing and industrial relations laws that raise the cost of employment act as a handbrake on the necessary economic adjustment. All regulation in some way prevents resources from being used alternatively—even if it is just the opportunity cost of time spent filling out gender-reporting forms. Even when regulation is desirable, we have to recognise that all regulation makes for a less flexible economy, and one less able to adapt to change.

One possible answer to the problem of legislative immobility is for parliament to grant a certain amount of discretion to adjust and interpret regulations according to changing circumstances. This is what we do when we hand decision-making power over to regulatory agencies. Yet vesting unelected regulators with discretionary power does more harm than good. It exacerbates regulatory uncertainty, with serious consequences for the private plans of individuals and firms. It facilitates regulatory “capture”. And of course it has a democratic legitimacy problem—under whose authority do regulators make what are effectively public-policy decisions?

Nevertheless, policy-makers today lean heavily on delegation to regulatory agencies, handing them quasi-legislative power. In an important book, Is Administrative Law Unlawful? (2014), the Columbia Law School professor Philip Hamburger traces the origins of such delegated legislative power back past the creation of regulatory agencies at the beginning of the twentieth century—where most scholars’ history stops—all the way to the pronouncements of medieval kings. Hamburger draws a distinction between administrative pronouncements by executive governments that are intended to bind officers of the executive and those that are intended to bind society more generally. The former form of pronouncement is obviously necessary for government to function. Bosses need some way of instructing their employees. But pronouncements that affect the public more generally ought to be the purview of the legislature, not the executive. These are more akin to the exercise of the royal prerogative than democratic law.

We often imagine that our modern concerns are distinct from those of the past. But how much legislative power the executive could exercise without parliamentary approval was one of the great contests in the lead-up to the English Civil War. The seventeenth-century English historian Roger Twysden declared that “the basis or ground of all the liberty and franchise of the subject” was “this maxim, that the king cannot alone alter the law”. Yet through executive pronouncement and delegation governments have vested vast legislative power in what scholars call “non-majoritarian” regulatory and bureaucratic agencies.

We are yet to work out the long-term democratic significance of this approach to governance. But the economic consequences are dire. Friedrich Hayek argued that the rule of law had three requirements. Laws had to be general, that is, they applied not to specific circumstances and individuals but to society as a whole. They had to be equal—they had to apply to all people in society equally, without discrimination. And finally they had to be certain. Certainty is a strange word to be used in connection with economic life, of course: there is nothing certain about the future. But the challenge of economic uncertainty is exacerbated by political uncertainty. Hayek wrote:

I doubt whether the significance which the certainty of the law has for the smooth and efficient working of economic life can be exaggerated, and there is probably no single factor which has contributed more to the greater prosperity of the Western World, compared with the Orient, than the relative certainty of the law which in the West had early been achieved.

So laws ought to be clearly spelled out. They need to be “known”. Their consequences and significance ought to be discernible to all those who are expected to follow them. We ought to limit the discretion that administrators and bureaucrats have in applying the law.

But does this black-letter approach to law really create certainty? What is certain about black-letter law that is subject to constant revision? Or black-letter law that is constantly being supplemented, complemented and expanded? The volume of legislation currently being pushed through parliaments, state and Commonwealth, Labor or Coalition, and invented by regulatory agencies, is itself a challenge to the certainty of the law. As Bruno Leoni wrote in his classic study Freedom and the Law:

The more intense and accelerated is the process of law-making, the more uncertain will it be that present legislation will last for any length of time. Moreover, there is nothing to prevent a law, certain in the above-mentioned sense, from being unpredictably changed by another law no less “certain” than the previous one.

Thus, the certainty of the law, in this sense, could be called the short-run certainty of the law.

For anybody who had a time horizon longer than that short run, the law was anything but certain. Leoni’s book was published in 1961. His lifetime (Leoni was born in 1913) had seen enormous economic and technological change, but the scale of those changes pales in comparison to the shifts in technology and business that we are seeing today. In just a few years entire industries have shifted out of the terrestrial world into online. Ubiquitous communications have made older traditions of work obsolete. It is absurd that we have shop trading-hour regulations, as still exist in Western Australia, co-existing alongside always-on mobile internet shopping. While firms like Uber and Airbnb are revolutionising transport and accommodation respectively, they present a competitive threat to the taxi and hotel industries that have been lumbered with long-standing and costly regulation. Stretching our view slightly further into the future, today’s regulatory assumptions are going to be challenged by new technologies like 3D printers, consumer drones and digital cryptocurrencies like Bitcoin. No matter how manic is the legislative activity that characterises our political system, it is nevertheless unable to keep up with social and technological change.

Despite the small but important successes of the Abbott government in reducing some regulation and clearing the statute books of anachronisms, it is obvious that the deregulation movement has stalled. Deregulation is now more a political slogan than a serious public-policy project. Politicians have ceased trying to justify the purposes of deregulation and now treat deregulation as a good in-and-of-itself. This is a testament to the intellectual success of the deregulators of the past—who made the case for lower regulation a virtual self-evident proposition—but it has left the political class with little appetite to actually argue the case for needed reform. When each side has committed itself to deregulation, all that remains is a rule-in, rule-out game. Unfortunately, in the nature of politics, rule-outs are more common than rule-ins. The populist pressure for new law is far greater than the intellectual pressure for less.

Thus the deregulation stalemate, a stalemate more pernicious as we move towards an unpredictable economic future and hyper-innovations in technology. The issue is not how many “repeal days” are scheduled in a year. The issue is how the government sees its relationship with the economy. We do not lack alternatives to the over-regulation path we have taken. Leoni was an advocate of the common law—the system of private, particular and iterative law-making vastly superior to the statutory law which now dominates our legal systems. Rather than expecting politicians to play constant catch-up with economic and technological changes, the common law would allow legal issues to be solved when they arise. Law can be discovered, rather than imposed.

Hayek spoke of “generality” as an ideal of the rule of law. In modern regulatory parlance this is akin to “neutrality”. Four decades ago the Fraser government’s Campbell Committee into financial regulation spoke of “competitive neutrality”, just as the Rudd government’s Convergence Review into media and communications regulation spoke of “technological neutrality”. The idea is that products or services that compete with each other should face the same regulatory burden. Deposits in building societies should be regulated the same way as those in banks. Video broadcast over television channels should be regulated the same way as video served over the internet.

Neutrality has proven to be more of a catchphrase than a policy program. This is because genuine regulatory neutrality undermines some of the most fundamental assumptions of government economic management. To regulate is to control. Every advocate of new regulation has an idea of the world that their proposal would create. Regulation is always purposeful—it has a goal, a vision of a fixed future. For all the valuable discussion of technological neutrality, Labor’s Convergence Review collapsed into absurdity when it was unable to shed a fundamental belief in the ability of governments and regulators to shape the world around them. Rather than reducing the burden on highly regulated television services, it proposed to expand those regulations onto the ungovernable internet. Neutral, yes. But also absurd.

The Convergence Review offers a microcosm of the broader regulation problem. Regulatory excess is the result of governments trying to impose their values on the economy—using law to shape the economy according to their own preferences rather than allowing the economy to flow unpredictably according to consumer demand and entrepreneurial experimentation. In that sense, it is a reflection of the political system from which it emanates. If the Abbott government wants to go down in Australian history as a significant reform-driven government, then the “deregulation agenda” is not enough. It needs to start a serious rethink of the relationship between the dynamic, entrepreneurial economy and the static but over-energetic regulatory state.

Labor Can Stop Beating The Inequality Drum

The Labor Party’s new Inclusive Prosperity Commission is driven by the principle that “equality itself is a driving force for economic growth”, in the words of Wayne Swan.

It is a lovely idea. Inequality is a bad thing. Growth is a good thing. Wouldn’t it be great if by reducing inequality we would also be boosting economic growth? A true win-win. For Labor, it would be a win-win-win, given that it would align with their philosophical interest in redistributive tax and welfare policies anyway.

Unfortunately for Labor, this is voodoo economics – ideological wish-fulfilment dressed up as analysis. The proposition that equality and growth are intrinsically linked is weak.

Two extremely high-profile documents published last year made the economic case for action against inequality. The first, “Redistribution, Inequality, and Growth” was published by the International Monetary Fund (IMF) in February 2014. The other, “Trends in Income Inequality and its Impact on Economic Growth”, was published by the Organisation for Economic Co-operation and Development (OECD), in December.

(There was of course another other major inequality document of 2014: Thomas Piketty’s Capital in the Twenty-First Century. I looked Piketty’s book on The Drum when it was published.)

Now, there are lots of reports published every year by these and other bodies. The IMF and OECD have been talking a lot about inequality recently. But it was these two papers that most clearly spelled out a causal relationship between reducing inequality and boosting growth. It helped that they came from the IMF and OECD – two apparently neoliberal, conservative organisations. It wasn’t so long ago that the IMF was protested as a bastion of anti-poor plutocracy.

Hence the prolonged press coverage. This Guardian story on Labor’s new Commission cites the IMF paper. A piece breathlessly citing the OECD report was published in The Age this week.

Yet there were less to these reports than the media coverage suggested.

The IMF report is actually a staff discussion note with the usual “does not necessarily represent IMF views” caveat. It found a correlation between less inequality and growth. That’s not new. Remember that correlation does not equal causation. The real question is: what is the economic impact of policy designed to reduce inequality? The IMF paper concluded that income and wealth redistribution does not harm growth. This was the finding that made global headlines.

But there’s an important qualification in the paper. The IMF authors were only willing to say that redistribution is “generally benign”. In “extreme cases” they found that redistribution does harm growth. So what is an extreme case? As the economics journalist Tim Worstall points out, what the IMF paper calls extreme redistribution is the exactly sort of redistribution many first world countries indulge in.

You can see the key chart in figure 7 on page 23. According to the IMF paper’s findings, the United States could afford to do a little more redistribution without harming growth. Countries like France and Germany do too much – that is, if they’re worried about growth.

Australia is dead on the line between extreme and benign. If this is right, any more redistribution would hurt our economy. Is this really the story that Wayne Swan and Labor want to tell right now?

So much for the IMF report. It shows exactly the opposite of what is claimed in the Australian press.

The story contained in the OECD report is a little more complicated. Again, it’s not a report – it’s a working paper with the standard caveat (“should not be reported as representing the official views of the OECD” etc.). This paper says that increasing inequality has a causal effect on growth, and “it follows” that reducing inequality is necessary to sustain long term growth. That’s all well and good, as far as it goes.

But the paper also has some strange findings. For instance, its modelling finds that investment in human capital – that is education – has no positive effect on economic growth. (They write: “the results … do not point to a positive effect of human capital on growth. Those findings are in fact hard to reconcile with the large amount of evidence on the positive consequences of education on individual productivity … and on the significant contribution of human capital to aggregate growth”.)

Huge, if true. All the money we put into skills and education as individuals and as society as a whole does little to grow the economy. If that’s not strange enough, the economist Eric Crampton observed that the OECD paper nonetheless calls for greater spending on education. Huh? If the authors don’t believe the own findings of their own model, why should we?

Yet despite these issues, the OECD and the IMF papers are Exhibits A and B for political action on inequality.

Let’s be fair. Comparisons between countries are fraught. Untangling the relationship between inequality and economic growth is complicated. The mechanisms by which one affects the other are controversial and unclear. Thomas Piketty’s book was one attempt, and a very idiosyncratic one at that.

Still, politics rarely waits for scholarship to come to a conclusion. What one New Yorker writer recently said about the British election could stand in for the entire inequality debate:

While [John Maynard] Keynes was being unceremoniously booted out the front door of Labour’s headquarters, Thomas Piketty was being ushered in through the side entrance.
It’s obvious that the Australian Labor Party needs a new agenda – particularly after the grubby politics of the Rudd and Gillard years. And they probably think focusing on inequality is a nice counterweight to the Coalition with its rich mates and its unfair budget.

But it’s not obvious that tackling inequality will grow the economy. If Labor is looking for an agenda, it would be wise to look elsewhere.

Conservative Voters Blindsided By Coalition Tax Increases

What exactly is the point of a Coalition government if it offers the same sort of tax increases as voters expect from Labor and the Greens?

It’s disturbing how quickly the Abbott government has turned its attention to boosting government revenue rather than reducing government spending. It’s only been in power 18 months.

First, there’s the planned deposit tax, a levy imposed on all our bank accounts purportedly to pay for the deposit insurance introduced by Labor during the global financial crisis.

When Kevin Rudd proposed the deposit tax in August 2013, Joe Hockey, then shadow treasurer, said it showed how “Australians end up paying for Labor’s waste and mismanagement”. So what does it say now the tax is being mooted by the Coalition?

Then there are all the possible changes to the GST. The GST-free import threshold of $1000 might be lowered. The government is drawing up legislation to impose GST on digital downloads – the so-called Netflix tax. There’s even been discussion of broadening the GST base to include things like fresh food, health and education.

There’s also a Google tax on the horizon. Hockey said last month companies that do not pay the “legitimate level” of tax are “thieves”. But tax minimisation is perfectly lawful. We all do it when we fill out our tax forms. In fact, firms have an obligation to their shareholders to minimise tax.

To change corporate tax law as Hockey wants wouldn’t be recouping money that is rightfully the Treasury’s. It would be increasing the corporate tax burden, and increasing investment uncertainty while it’s at it.

Likewise, the government wants to tackle what is described as the superannuation tax “concession”. Here it is on a virtual unity ticket with Labor.

Don’t be fooled by the word concession. It is a euphemism. The issue here is that while income is taxed progressively – rich people pay proportionally more than poor – superannuation is taxed at a flat rate of 15 per cent. The government thinks wealthy people are putting too much money into super, avoiding high marginal income tax rates, and depriving Treasury of money. Let’s be blunt: to eliminate superannuation concessions would be just another tax increase.

But there is a more fundamental point. Superannuation is taxed at a lower rate to counterbalance the income tax system’s bias against savers. All those so-called loopholes and thresholds and concessions exist for a reason. Many of them exist to prevent perverse and unfair taxation, to treat different assets equally, to avoid double taxation, to encourage saving. And all of them were instituted as part of a democratic bargaining process. Eliminating a loophole is the same as raising a tax.

The Coalition should know this instinctively. Liberal parliamentarians campaigned under the slogan “Our Plan: Lower Taxes”. When he became leader Tony Abbott declared “there will not be any new taxes as part of the Coalition’s policies”. Now his team are lining up alongside Bill Shorten and Christine Milne to push for new and higher taxes. Let’s hope they’re embarrassed.

I haven’t even mentioned bracket creep, the process whereby inflation slowly pushes wage-earners into a higher tax bracket without making them wealthier.

The tax system is full of little revenue-scrounging tricks like that, tricks of language and mathematics and perspective that hide who pays and how much.

Funny how those tricks always work in Treasury’s favour. Bracket creep could be done away with once and for all by indexing income tax to inflation. Malcolm Fraser’s government experimented with such a policy, but abandoned it. It is in the government’s political interest to let bracket creep work its subtle expropriating magic.

The government’s problem is spending, not revenue. The public spat this month between Hockey and Peter Costello was revealing. If you missed it, Costello criticised Hockey’s desire to raise tax. Hockey responded that he wished he had the sort of revenue Costello enjoyed in government.

But hold on: Hockey does have that sort of revenue. If we adjust the figures for inflation, Hockey has $18.6 billion more revenue than Costello received in his last budget. (The most recent reported figures appear in the December Mid-Year Economic and Fiscal Outlook.)

The government’s other budget excuse – that the iron-ore price is bottoming out – isn’t convincing either. Yes, iron ore could go as low as $US36 ($46) a tonne. It was nearly $US200 a few years ago. But that was under Labor. Costello hadn’t been so lucky. Iron ore only lurched above $36 after the Howard government left office.

Hockey said he was kicking off a national conversation about tax and efficiency when he launched his tax discussion paper last month. Economists – particularly the sort of economists that populate treasury departments – spend a lot of time thinking about what is the most efficient tax system. The discussion paper reflects a lot of that thought. It judges taxes on how much they distort our incentives to work and produce.

However, efficiency isn’t the only thing we want in a tax system. Too often politicians use the word efficiency as a synonym for ingenious. The 17th-century French finance minister Jean Baptiste Colbert famously described the art of taxation as “plucking the goose as to get the most feathers with the least hissing”. You can understand his view. For a treasurer the most important thing is maximising revenue.

But it’s not obvious why we should be pleased the government wants to pluck more of our feathers. A Coalition government, no less.

A Single Drink Puts Media Over The Limit

Tony Abbott skolled a beer this weekend.

The Australian press made sure this skol received the hyperbolic, wall-to-wall coverage it deserved.

No doubt you read about it in the Herald Sun, The Australian, the Canberra Times, the Sydney Morning Herald, the Courier Mail, the Guardian, the Adelaide Advertiser, or the West Australian.

You would have read that the Prime Minister was cheered on by a football team at Sydney’s Royal Oak Hotel. You would also have read that the act took him about six seconds, although whether this is a fast or slow pace for drinking a schooner in one go has unfortunately been left un-analysed.

And finally, you would probably have read that this was a bad example for a prime minister to set to young people. The Foundation for Alcohol Research and Education expressed concern that it sent the wrong signal.

Journalist Judith Ireland said Abbott was “supposed to be a vocal advocate against binge drinking”, and that this sort of macho behaviour seemed to go against his claim to be “also the Minister for Women”.

Another writer, Andrew P Street, immediately connected this single skol with the binge drinking”scourge that’s destroying Australian society, turning our young men into animals”.

It would be hard to invent a better symbolic clash between the Australian self-image as larrikin and the po-faced posturing of the media than Abbott’s drink.

It is now apparently impossible for any public figure to stray outside the incredibly tightly prescribed rules of behaviour – prescribed, not by the public, but by the press, who of course would be horrified if those standards were applied to them.

The idea that a politician’s personal behaviour influences the behaviour of the public is pretty dubious.

Nevertheless, Abbott violated no cultural norm, his actions pose no ethical dilemma, they were neither reckless nor self-harming, and they had no political, economic, or social consequences. It was one beer. Abbott is a fitness fanatic. He’s famous for having once ordered a light beer shandy with 60 per cent lemonade. The weekend’s skol would be barely worth mentioning in a colour piece.

Yet once we hear from earnest prognostications of public health lobbyists, downing a single drink in one go becomes symbolic of a deeper, dangerous, threatening moral panic about alcohol consumption.

Alcohol consumption and risky drinking has been steadily declining, as the statistics from the Institute of Health and Welfare have consistently shown. The proportion of Australians drinking daily is at a 20-year low, and young people are taking up drinking at a later age than ever before.

These facts contrast with the frenzied, and well-funded, anti-booze movement who pop up in the bottom half of every news story tangentially related to alcohol.

Take the suggestion aired over the weekend that the Abbott Government might make a step towards volumetric alcohol taxation in the May budget.

If you were designing an alcohol tax from scratch, you’d want it to be volumetric – that is, levied on the alcohol content, rather than the type of drink. But we’re not designing a tax system from scratch. In the middle of a budget crisis what is really being proposed is a simple tax increase on one specific good.

Yet the story was quickly filtered through a paternalist prism: “Cheap cask wine is a serious health issue in many communities,” one public health activist said.

Thus the Government might be able to dress up a tax hike that disproportionately affects poorer Australians as if it were a compassionate health measure.

Last week the NSW Bureau of Crime Statistics and Research (BOSCAR) released research suggesting the Sydney liquor licence lockout had achieved its stated goals by dramatically reducing the number of assaults in Kings Cross.

Determining cause and effect in a complex system is incredibly hard. But BOSCAR found that one of the possible reasons that the assaults declined is because the number of people visiting Kings Cross declined dramatically. Business groups say revenue in Kings Cross is down 20 to 50 per cent. The City of Sydney says footpath congestion in Kings Cross is down 84 per cent. And BOSCAR says foot traffic at night from Kings Cross station is down too.

Obviously shutting down Kings Cross was going to reduce assaults in Kings Cross. But this is an extraordinary disproportionate response to what was a policing problem.

HL Mencken thought that one of Australia’s best contributions to the English language was “wowser”. The word’s origins are obscure but some wowsers at the start of the 20th century liked to say it stood for “We Only Want Social Evils Remedied”.

Yet in going after social evils, Australia’s wowsers have rarely been able to avoid attacking the harmless, knowing choices of people who are perfectly capable of making decisions about their health, and who can distinguish between a prime minister having a joyful, boisterous single drink and serious alcohol abuse.

Shorten Must Start Thinking About Life After Opposition

One of the unsurprising consequences of Tony Abbott’s modest poll recovery has been the new focus on Bill Shorten.

If you’ve read one column on Shorten, you’ve read them all. The Opposition Leader doesn’t stand for anything. He promised a year of policies but hasn’t yet offered any policies to speak of. And (for a certain type of commentator) he’s abandoning the Hawke-Keating legacy of reform and so forth.

All this is obviously true. But come on. Would you do any different if you were in his shoes?

Almost every incentive Shorten faces is telling him to stay quiet about his plans for government – to avoid making any potentially divisive statements or holding any potentially controversial positions. (I’ll return to the word ‘almost’ later.)

This is perfectly rational. No matter what the opposition does – no matter how opportunistically or rashly it acts – popular dissatisfaction with the economy or society will be directed towards the government of the day. The opposition’s job is to gently fan the flames, confident they are unlikely to be caught in the backdraft.

The last thing Shorten wants to do is get caught up in a debate about the specifics of what he would do in government. Detail is death. Better to keep the attention on Tony and his unfair-out-of-touch-just-don’t-get-Aussie-mums-and-dads Tories.

Oppositions that have tried an alternative strategy – outlined detailed policies, even transformational agendas – have been torn down by incumbent governments, who have the entire bureaucracy at their disposal to fact check and nit-pick anything the opposition throws up.

Think John Hewson, Mark Latham. Whatever your view of their political philosophy, they both tried the big-picture, year-of-ideas, stand-for-something strategies people are urging Shorten to pursue. And look at them today.

So now tell me you’d do anything different. Don’t blame Bill for Labor’s fecklessness. He’s just a company man.

In the simple model of political competition outlined in Anthony Downs’ seminal 1957 book An Economic Theory of Democracy, political parties will delay announcing any policy for as long as possible. The winner will be the party that announces last.

But incumbent governments can’t put off making choices forever. They can’t fully participate in this game of policy chicken.

The best strategy is the one that wins government, and maximises longevity in government, and allows the most flexibility to implement policies.

The need to govern benefits the opposition. Government policy announcements helpfully identify what the electorate hates. So the simplest opposition strategy is to copy the government’s popular policies and oppose the unpopular ones.

Abbott was an especially talented opposition leader. He didn’t just oppose unpopular policies. He managed to make policies unpopular, seemingly through sheer force of will.

Shorten as Opposition Leader looks as if he’s trying to mimic Abbott’s example. Yet Shorten is drawing the wrong lesson.

Remember that ‘almost’? The optimal opposition strategy isn’t just the one that wins government. It’s the one that wins government, and maximises that party’s longevity in government, and allows them most flexibility to implement their policies.

The Abbott team has learned – apparently to its surprise – that strategies adopted in opposition constrain what can be done in power.

Voters expect some promises to be broken, as I argued in the Drum last year. Yet this is only true within a certain range. The public wants to know what they are buying, even if they have a reasonable tolerance for products that do not exactly match the packaging. Expectations still matter.

The Coalition forgot this. The Coalition did not prime the electorate for the sort of policies it introduced within its first six months. Having pared its campaign message down to the most memorable essentials, voters were surprised to learn that End The Waste and Cut The Debt actually involved large-scale policy change, not just swapping one party in power for another.

Even in government the Coalition tried to hold back the policy reckoning as long as possible. It disavowed the Medicare co-payment when it was first discussed in Christmas 2013. It delayed the Audit Commission until the eve of the budget.

I won’t bother recapping how everything has played out since. But the legacy of that opposition strategy has left us with a badly denuded Coalition government. It is shell-shocked and weak. It is unable to pursue its own agenda. Now it grasps at whatever it thinks will keep it stable and in power until the next election.

A year ago the question was whether the Coalition was bold enough to tackle industrial relations head on. Today the question is whether the Coalition will ever feel confident enough to tackle the deficit it was elected to reduce.

No doubt Bill Shorten likes to imagine he can win the 2016 election. It’s not impossible. But winning is only half of it. He needs to start imagining how Labor’s small target strategy might harm him if he does win.

Moral Panic Overlooks Real Company Tax Problem

with Sinclair Davidson

The corporate tax profit shifting debate is a classic example of moral panic. First, it’s incredibly complicated. How many Australians could explain how company tax is calculated, let alone what business practices a “double Irish Dutch sandwich” refers to?

Second, it’s driven by hyperbolic and simplistic reports of companies paying little to no tax. These stories pivot on even more complicated scandals, such as “Lux Leaks”, and the technicalities of foreign tax systems.

And third, it’s wildly overstated. The best current estimates of how much corporate tax is shifted across borders is in the realm of 2 per cent to 4 per cent of total corporate tax.

It’s true that earlier estimates in the 1990s were much more than that. It was those high estimates that got the Organisation for Economic Co-operation and Development interested in the issue. But the firm- and affiliate-level evidence is better now. It’s pointless to scrutinise a moral panic for the clarity of its claims. But the corporate tax debate is missing the point.

As a society we don’t value firms for the money the government extracts from them. We value firms because they produce goods and offer services that make us richer, our lives easier, more convenient and more enjoyable, and our standards of living higher.

We ought to design our tax system to encourage foreign firms operating and doing business on Australian shores, bringing investment and jobs. Any attempt to tackle profit shifting that raises uncertainty or lowers Australia’s investment climate would be a disaster.

The corporate tax is not a good tax. As a recent Treasury paper pointed out, it is one of the most inefficient taxes levied by Australian governments. The burden of the corporate tax is scattered and obscure.

Greens leader Christine Milne has been running around this week accusing companies of not paying their “fair share”. But that fair share is always and inevitably passed on to someone else. The literature on the incidence of corporate taxation suggests the burden of corporate tax is worn in the short term by investors, and in the long run by a combination of investors and workers. Of course, under our superannuation system every worker is an investor as well.

Few of the standard justifications for the existence of corporate tax – particularly in a small, open economy – are compelling. One fear is that company owners might divert their personal income into the company. But they’d still have to pay capital gains tax on the way out again. Another argument is that corporate tax is an easy way to get money out of multinationals. Absurd, we know.

That’s why there are academic tax papers with titles such as “Why is there corporate taxation in a small open economy?” and “Can capital income taxes survive? And should they?”

For the political class, the corporate tax has one great advantage: it’s unclear who ultimately pays. It’s easy and comfortable to beat up on corporations, just as long as you stay mum about who actually ends up paying corporate tax. The whole system rests on this clever one-two trick. Who could sympathise with big bad business?

But even if the government wishes to keep the corporate tax fiscal illusion going, there’s hope. For all the handwringing about the double Irish Dutch sandwich, one point often missed is that Ireland has been very clever. That country’s low corporate tax rates have brought in multinationals, and with them jobs and investment.

It’s not obvious those low rates have come at a cost to the Irish budget. Corporate tax revenue as a percentage of total revenue in Ireland is almost exactly the OECD average. There’s no reason we couldn’t copy the Irish example – get in on the Irish-Dutch sandwich ourselves. The Irish make their own luck. So should we.

This Small Business Fetish Has Gone Too Far

As part of its back to basics campaign, the Abbott Government has telegraphed a small business tax package for the 2015 budget.

The plan, as far as we know, is that small business will get a tax cut of about 1.5 per cent. Big business will be left paying the standard rate of 30 per cent.

The Coalition has long had a romantic attachment to small business as a sort of moral heart of Australian private enterprise, but this policy is the worst sort of small business fetishism.

It threatens to further undermine an already complicated corporate tax system, confuses the sources of economic growth, and will distract policymakers from the much more fundamental task of opening protected areas of the economy up to competition.

Let’s take these one at a time.

It beggars belief that while the political class is banging on about the convoluted the tax code, “unfair” tax concessions, and clever corporate tax minimisation, the Government is planning to increase the complexity of the corporate tax system.

How long before we see the first exposé in Fairfax business pages about large corporates rearranging themselves to take advantage of the concessional small business rates?

The proposed small business tax cut would make the Australian corporate tax system explicitly progressive. Just as we pay a higher rate of income tax according to our wealth, firms would pay a higher rate of corporate tax depending on their size. The United States has a progressive corporate tax. Ours is flat – 30 per cent no matter what.

Now, in practice, firms don’t pay the same 30 per cent rate. As my Institute of Public Affairs colleague Sinclair Davidson has documented, all those deductions, offsets and credits mean the effective tax rate – that is, the amount of tax paid – hovers about 25 per cent. On top of this, small businesses tend to have much more variable profitability, so they tend to pay less than big business already.

Even with this caveat in mind, progressive corporate taxes are a terrible idea.

Corporate taxes are very different from income taxes. Income taxes are ultimately paid by the people whom the tax is levied upon. The money comes out of the pocket of the person who fills in the tax return. I’d prefer our income tax to be flat. But progressivity for income tax at least has its own internal logic.

Corporate taxes are very different. The cost of corporate tax is ultimately paid by someone other than the corporation – passed on to consumers through higher prices, or to shareholders, or even to the company’s employees.

After all, companies don’t pay corporate tax, people do.

It’s not at all clear why we would want to tax people who buy products from large firms more than those who buy from small firms. Unless, of course, the small business tax cut is a form of primitive industry policy to prop up small business and make it artificially competitive.

Large firms exist for a reason: to take advantage of economies of scale. Large scale manufacturing is more efficient than small scale manufacturing. Big is beautiful. All else being equal those big multinationals that everyone hates have given us cheaper products and higher living standards.

This hints at a much deeper confusion underlying the Government’s small business fetishism.Joe Hockey likes to describe small business as the “engine room of the economy”. Funnily enough Wayne Swan used to say the same thing.

Of course, no single sector is the engine room of the economy. That’s just rhetoric. (Anyway, what happened to mining?)

But the Government seems to be attributing the economic characteristics of entrepreneurship onto small business. Entrepreneurs bring new products to market, put competitive pressure on existing firms to do better, undercut monopolies, and keep not just the economy going but our living standards improving.

All those giant firms that dominate the 21st century economy – Google, Apple, Microsoft, etc – were originally garage start-ups. Why would we want to penalise the next Google for growing by taxing them at a higher rate?

Obviously by definition entrepreneurs start as small business owners. But not all small businesses are equally entrepreneurial. The defining characteristic of an entrepreneur is that they do something new. They are driven by an idea. We hear from Canberra that big business is a threat to small business. Well, entrepreneurs are a threat to big business. Paper beats rock.

If the Government wants to help entrepreneurs, it shouldn’t be looking first at the tax code. It should be looking at the sorts of things raised by the Harper review into competition policy last week. That is, the regulatory restrictions on entering markets, like the taxi or retail pharmacy markets, which hold back entrepreneurs from exerting competitive pressure on incumbent businesses.

It’s true that the small business tax cut is a lot less objectionable than the tax increases being proposed, like the bank deposit tax and an increase in the GST. Maybe it’s churlish to criticise a tax cut when the real risk is tax increases.

But the Abbott Government says it understands the importance of free enterprise and the market economy. It should want to reduce corporate tax on all firms – not just small ones.

Why Should We Join Another Development Bank?

Over the weekend Australia announced it will be part of the initial negotiations on the Asian Infrastructure Investment Bank (AIIB).

The AIIB is a global financial institution intended to rival the World Bank and the International Monetary Fund (IMF). The idea is that the AIIB will fund large scale infrastructure development in the region.

But if the AIIB is anything like the World Bank or IMF, then the new body is certain to be heavily politicised, bureaucratic, and imperialistic.

The AIIB is a China-led initiative, so unsurprisingly the bulk of discussion about Australia’s participation in the AIIB has been filtered through a geopolitical prism.

The United States doesn’t want us to join. But then our closest, fondest ally doesn’t have much diplomatic high ground to stand on here.

In Brisbane last year the US gave the Australian government a swipe when Barack Obama tried to make climate change a centrepiece of the Australian-led G20 meeting. Obama did this against the advice of his embassy. So after that very deliberate diplomatic jab, it’s hard to see why their sensitivities about China should be our concern.

And anyway, the US is hardly working to make existing international institutions any better. For instance, the IMF badly needs reform. But the US Congress has a veto over any IMF reform. That intransigence is in part why Britain signed up to the AIIB earlier in March.

Still, it’s easy to understand why the United States is upset.

The establishment of the International Monetary Fund and the World Bank at the Bretton Woods conference in 1944 represented a formal shift in economic power from the United Kingdom to the United States.

Britain had a leading role under the gold standard but Word War II ended that. After Bretton Woods, American leadership of the international economy was reflected in the role of the dollar and the country’s influence over the IMF and World Bank.

Seventy years on, the United States is resisting any sense that it might have its historical role usurped by China.

But the geopolitical symbolism of the AIIB is one thing. Whether the AIIB is a good idea is quite another.

As a general rule, we ought be very sceptical of an economic institution explicitly intended to pursue political, rather than economic, purposes.

The AIIB is part of China’s Economic Belt and Silk Road program to build a regional network of infrastructure that would counterbalance the United States.

So already the AIIB is starting with political goals in mind. Ignore whatever governance structures are imposed on the AIIB by Australia and Britain and other western participants. The AIIB’s investment decisions are almost certainly going to be made on the basis of strategic and political factors, rather than what investments are most economically viable or effective.

How do we know this? Well, because we’ve had 70 years’ experience with the equivalent institutions of the World Bank and IMF.

The IMF and the World Bank are inefficient and interfering and deeply politicised. Often they create the problems they are intended to resolve.

The World Bank has the modest goal of ending extreme poverty. To do so it finances projects in the developing world. This 2006 US News and World Report investigation uncovered a bevy of inefficiencies, wasteful programs, accounting problems, bureaucratic featherbedding, and quasi-corrupt practices in the World Bank. No wonder, as the economist Adam Lerrick points out, “After half a century and more than US$500 billion, there is little to show for World Bank efforts.” Unsurprisingly the World Bank wants more money.

The IMF offers financial assistance to countries in economic strife. But that assistance comes with bureaucratic interference, as the IMF tries to reshape the country they are assisting. Sometimes IMF reforms are worthy, sometimes they are not. But they are always imposed as a condition of assistance, often against the democratic wishes of the people.

The anti-democratic nature of IMF intervention is made worse when it combines with the “moral hazard” created by IMF bailouts. Domestic policymakers feel they can act recklessly because the IMF will save them if they get into trouble.

Development banks are supposed to fund projects that the private sector deem too risky. But a project which is too risky for the private sector remains risky even once funded by a development bank. The projects these banks fund too often fall prey to corruption and poor management. That’s why private investors don’t want to get involved in the first place.

Last week the Wall Street Journal rhetorically asked, “Why does the world need another development bank?”

For China, the answer is to enhance its geopolitical influence. The question Australia needs to ask is: why are we getting involved?

Why It’s OK To Strip Foreign Fighters Of Citizenship

Citizenship is one of the central ideas of political philosophy. But not one most people spend a lot of time thinking about.

The Abbott Government proposes to strip Australian citizenship from dual nationals who fight for Islamic State. (This would only apply to dual citizens as there is a strong presumption in international relations against making anybody stateless.)

And there is legislation before Parliament that would make it harder for children who have lived in Australia for 10 years to automatically qualify for citizenship.

Announcing the citizenship amendments, Parliamentary Secretary to the Minister for Communications Paul Fletcher told Parliament that, “Australian citizenship involves a commitment to this country and its people. It is a privilege which should not be taken lightly.”

Yet beyond fuzzy little nostrums about “membership” and “belonging” it’s not obvious what citizenship actually means.

What principles would allow us to judge whether such legislative changes are good or bad? Is citizenship a right or a privilege? Who should be a citizen? But most importantly, why?

Some countries give citizenship automatically to anybody born on their soil. Australia doesn’t. Here you need an Australian parent too.

The word “citizenship” is absent from the Australian constitution, save an incidental, negative mention in the prohibition on foreign citizens from serving in parliament.

Legally, citizenship is an odd beast. Citizenship is neither necessary nor sufficient for many of the most important Australian rights and privileges.

Citizenship doesn’t give you an absolute right to vote. Underage citizens can’t vote, and neither can citizens who are serving a prison sentence of three or more years.

Citizenship isn’t the criteria for enjoying welfare and publicly funded health. They are protected by our laws. Non-citizens pay taxes and have access to our courts. Permanent residents can buy property.

Non-citizens enjoy our version of free speech – the right to political communication – and the freedom to lobby and protest.

A Senate committee roundtable last week batted around the pros and cons of putting citizenship in the Australian Constitution. (I was one of the participants.)

The idea is that this would offer the High Court some clarity when deciding cases that concern questions of who is and isn’t a citizen for legal purposes.

But if we’re not clear what citizenship is, then why trust the High Court to decide?

At Federation, Australian “citizenship” was based on whether you were a British subject. However, this worldly and cosmopolitan idea co-existed clumsily with the other, racist idea of Australianness that was manifest in the White Australia Policy.

Putting anything that reflected that idea of citizenship in the constitution would have been a disaster.

While there exists a thing called citizenship in Australian law, citizenship is really a philosophical concept not a legal one. And it is a fuzzy concept because the idea of group membership is a fuzzy concept.

Yet, for all that fuzziness, it is central to our notions of identity and politics.

The whole point of citizenship is that it is exclusionary – it is a unique national identity, one that confers specific rights and privileges.

To adopt a nationality is not to join just any old community. At citizenship ceremonies, new citizens transfer their identity and allegiance from the old country to their new one.

Dual citizenship sits awkwardly with even the most modern ideas of citizenship.

One argument for dual citizenship is that formally offering it is something we sell to potential migrants, making Australia an attractive destination for foreigners.

A more powerful argument is that dual citizenship is simply inevitable. Children born to parents with different nationalities automatically receive the citizenship of both. And we have no way of forcing other countries to strip the nationalities of those who become Australians. We live in a complex, globalised world, etc.

Dual nationals who go to fight for the Islamic State are effectively renouncing their Australian citizenship. Many dispose of their passports when they get to Iraq and Syria. It would be hard to imagine a more thorough rejection of democratic values – the values that citizenship is supposed to represent – than going to wage war for a theocratic slave state.

Surely, if we were willing to deny people citizenship because they failed a trivia quiz about Don Bradman, then fighting for Islamic State is also a reasonable disqualification.

Some experts say that giving the government the power to revoke citizenship status from dual citizens makes the very idea of citizenship less valuable. Citizenship is meaningless if it can be taken away.

But this argument confuses the legal concept of citizenship – a contingent and not particularly coherent bundle of privileges and rights – with the deeper philosophical one.

At a philosophical level, dual citizenship is a lesser form of citizenship, as it represents a less than absolute allegiance and national identity.

And just as importantly, if citizenship is most valuable as a bond between members of a political community, then treating the citizenship of those who reject the community as inviolate undermines that bond.

Fuzzy nostrums sometimes matter. And if citizenship is to matter it has to mean something.

Communications Minister Malcolm Turnbull’s Metadata Move Will Aid Regulators, Not Security

The Abbott government has rightly focused on red tape reduction and deregulation.

But Communications Minister Malcolm Turnbull could well preside over one of the largest increases in the regulatory burden since the telecommunications market was liberalised two decades ago.

At the very moment when Turnbull seems to have cleaned up the mess that was the national broadband network, his mandatory data retention policy puts the entire competitive dynamic of the Australian telecommunications sector at stake.

Terrorism is a very real problem. The existence of the Islamic State in Iraq and Syria has heightened the terror threat. If there are serious gaps in our anti-terror law framework, they should be filled. The government has spent the past six months doing so.

However, the data retention bill the government has put forward – which requires telecommunications providers to store masses of data on their customers for no other purpose than if a law enforcement agency or regulator wants to have a look at it in the future – is not a targeted anti-terror law.

If data retention is just for terrorism, the government could legislate to ensure it was just for terrorism. But from what we know, both the Australian Competition and Consumer Commission and the Australian Securities and Investment Commission are likely to get access to the new data.

Indeed, over the half a decade that data retention has been debated, its most fervent advocates have been economic regulators, not counter-terror agencies.

One draft data set (even as Parliament is set to vote on the bill, we still don’t know what the final data set to be retained will be) included a requirement to store records of “download volumes” for two years. What anti-terror benefit would that add? Download volumes would useful in copyright infringement cases.

The threat data retention poses to privacy has been widely discussed. But data retention is, first and foremost, a new economic regulation. So let’s treat it as sceptically as we would any increase in the regulatory burden on business.

Prime Minister Tony Abbott has said that the cost of data retention would be around $300 to $400 million, or just 1 per cent of the total revenue of the telecommunications industry.

This is a very significant amount of money. Telcos are already some of the most highly regulated firms in the country.

Turnbull has suggested government will contribute substantially to the cost of implementing data retention. But whether we pay for data retention through internet bills or just general taxation, we’ll still pay for it.

This new burden could dramatically reshape the telecommunications sector. All else being equal, large firms, with their well-established regulatory teams, are able to comply with new regulation much easier than small firms, which lack the economies of scale to absorb costs.

The unfortunate result of burdensome regulation is push smaller firms out of the market, reducing competition as they disappear. Less competition will, in the long run, result in higher prices.

In the case of data retention, it isn’t just size however that matters. Some telcos have more complex networks and technologies and legacy systems – think of Telstra – for whom imposing these new requirements might be disproportionately expensive.

Turnbull and Attorney-General George Brandis claim that mandatory data retention will require telcos to store no more data than some firms do already – just store it for a bit longer.

It’s not clear which firms they’re referring to. The entire industry has been up in arms about data retention. The proposed policy is not just a minor extension of existing practice.

Nevertheless, there’s a reason some telcos store data more than others. The smallest internet service providers survive by keeping their data storage and infrastructure costs as low as possible, hoping to pull customers away from the big firms with lower prices or better service.

For the law enforcement and regulatory agencies that have spent the past six years lobbying for data retention, regulatory compliance costs are an abstract second-order issue.

But for internet users and taxpayers, who will be charged higher prices by a declining number of internet service providers, the economic effect of mandatory data retention is a big deal.