Is state sovereignty relevant to resource rent taxation?

The Henry tax review into Australia’s future tax system recommends:

‘Subject to transitional arrangements, the new rent-based tax should apply to existing projects, replacing existing charging arrangements. The allocation of revenue and risks from the new tax should be negotiated between the Australian and State governments’.

The federal government seems to be attempting to ignore this advice in imposing the new tax. It is proposing to reimburse mining companies for existing royalty payments rather than to replace existing charging arrangements. It has decided unilaterally how it proposes to use the additional revenue from the new tax. In selling the tax to the Australian public it is asserting that mineral resources are owned by all Australians, contrary to the legal position of ownership by the Crown, with state governments having constitutional authority for resource management.

The government of Western Australia is threatening a constitutional challenge to the new tax, but the federal government doesn’t seem to be particularly concerned about this. I’m no lawyer, but I imagine the federal government think they are on safe ground in calling the tax a profits tax rather than a resource rent tax.

However, even if the new tax is legal, I think the federal government should be concerned about the viability of their proposal not to reimburse mining companies for any new or additional royalties that might be charged by state governments. Whatever the High Court might decide about the validity of the new federal tax, it is not likely to rule that the imposition of a new tax by the federal government has extinguished the rights of state governments to raise royalty rates.

Are state governments likely to impose additional royalties? Some proposals for higher royalties were already in the pipeline in Western Australia prior to announcement of the new federal tax and it is possible that these charges will be accommodated in transitional arrangements. The state governments review their royalty charges from time to time and I imagine that they will continue to do so. It is quite possible that having read and digested the Henry report a state government could decide to change the basis of their charging arrangements to a resource rent tax and to increase revenues from the resources sector. In considering such a change the state government might note that there is nothing particularly magical about the 40 percent tax rate proposed by the federal government. They might even read in the Henry report that Norway imposes a total tax rate on petroleum rents of 78 percent.

The point I am leading to is that the new federal tax has not extinguished the potential for state governments to raise royalty rates. This remains a potential source of sovereign risk for mining investment in Australia. This consideration is additional to the argument in my earlier post (Does a resource rent tax solve the problem of sovereign risk?) that the proposed application of the new tax to existing mines would lead investors to perceive that they have under-estimated sovereign risks in Australia. Even if the federal government comes up with satisfactory transitional arrangements for the new tax, miners will still need to factor into their calculations an allowance for possible future increases in state government royalties.

In my view the federal government should take another look at the recommendations of the Henry report and seek negotiations with state governments about the allocation of revenue and risks from their proposed resources rent tax.

What metaphors help us to understand the functions of reason and emotion?

Plato argued that we can only be masters of ourselves if reason, the ‘human charioteer’ is able to control the dumb beasts of passion:

‘Now the winged horses and the charioteers of the gods are all of them noble and of noble descent, but those of other races are mixed; the human charioteer drives his in a pair; and one of them is noble and of noble breed, and the other is ignoble and of ignoble breed; and the driving of them of necessity gives a great deal of trouble to him. ... The right-hand horse is upright and cleanly made; he has a lofty neck and an aquiline nose; his colour is white, and his eyes dark; he is a lover of honour and modesty and temperance, and the follower of true glory; he needs no touch of the whip, but is guided by word and admonition only. The other is a crooked lumbering animal, put together anyhow; he has a short thick neck; he is flat-faced and of a dark colour, with grey eyes and blood-red complexion; the mate of insolence and pride, shag-eared and deaf, hardly yielding to whip and spur’ (‘Phaedrus’).

Plato’s metaphor seems to have provided the basis for an influential model of human flourishing which puts reason (or rationality) on a pedestal and views the emotions as crude and primitive. In his book, ‘How We Decide’(2010), Jonah Lehrer links Plato’s metaphor to Cartesian philosophy and notes that Freud used a similar metaphor in which the horse (id) provides the locomotive energy and the rider (ego) determines the goal and guides his powerful mount towards it (p.10-12).

However, Lehrer points out that this classical theory is ‘founded on a crucial mistake’: ‘What we have discovered when we look at the brain is that the horses and the charioteer depend on each other’ (p. 13). ‘When we are cut off from our feelings, the most banal decisions become impossible. A brain that can’t feel can’t make up its mind’ (p.15). We might like to think that reason plays a large role in our decisions, but if our feelings didn’t tell us what we like and dislike we would not be able to make decisions.

Jonathan Haidt has argued similarly that Plato’s metaphor ‘may overstate not only the wisdom but also the power of the charioteer. ... Reason and emotion must work together to create intelligent behavior, but emotion ... does most of the work’ (‘The Happiness Hypothesis’, 2006, p.13).

Haidt has his own metaphor, an elephant and its rider, to explain the relationship between the controlled and automatic systems that determine human behaviour:
‘The controlled system ... is better seen as an advisor. It’s a rider placed on the elephant’s back to help the elephant make better choices. The rider can see further into the future, and the rider can learn valuable information by talking to other riders or by reading maps, but the rider cannot order the elephant around against its will. ... The elephant and the rider each have their own intelligence, and when they work together well they enable the unique brilliance of human beings’ (p.17).

Jonah Lehrer uses a modern aeroplane in his metaphor to explain the functions of the emotional brain and the pre-frontal cortex:

‘To sit in a modern airplane cockpit is to be surrounded by computers. ... These computers are like the emotional brain of the plane. They process a vast amount of information and translate that information into a form that can be quickly grasped by the pilot. ... These computers are so reliable that they perform many of their tasks without any pilot input. ... Pilots are like the plane’s prefrontal cortex. Their job is to monitor these onboard computers, to pay close attention to the data on the cockpit screens. If something goes wrong, or if there’s a disagreement among the various computers, then it’s the responsibility of the flight crew to resolve the problem. ... When the onboard computers and pilot properly interact, it’s an ideal model for decision-making. The rational brain (the pilot) and the emotional brain (the cockpit computers) exist in perfect equilibrium, each system focusing on those areas in which it has a comparative advantage’ (p.256-8).

Which metaphor is best? I doubt whether one metaphor is the best aid to understanding of all aspects of human behaviour, but I think the elephant metaphor is better than the plane metaphor from a personal development perspective. It is possible to think of the rider and elephant as being responsible for their future performance as well as for their current performance. As Jonathan Haidt puts it, ‘virtue resides in a well-trained elephant’ (p.160). I don’t pretend know much about training elephants or their riders but it seems reasonable to suppose that they would have a stronger incentive to learn to work together and to improve their performance if they were held jointly responsible for their behaviour.

How can we ensure that parliaments are representative and governments are accountable?

An update of my views on the topic has now been published by "On Line Opinion":



‘In a really equal democracy, every or any section would be represented, not disproportionately, but proportionately. A majority of the electors would always have a majority of the representatives; but a minority of the electors would always have a minority of the representatives. Man for man they would be as fully represented as the majority. Unless they are, there is not equal government, but a government of inequality and privilege: one part of the people rule over the rest: there is a part whose fair and equal share of influence in the representation is withheld from them; contrary to all just government, but, above all, contrary to the principle of democracy, which professes equality as its very root and foundation’ (J S Mill, Representative Government, Chapter 7, 1861).

Some famous person has probably written in support of strong executive government which dominates parliament and is held in check only by periodical elections (as well as an independent judiciary etc) but I don’t know where to find an appropriate quote. Those who have commented on such a system have tended to refer to it disparagingly as an elective dictatorship. However, I think it is possible to defend a system that tends to deliver the governing party a substantial majority of seats on the grounds that it results in more accountable government than a proportional system in which no party has a clear majority. A government that dominates parliament cannot claim that it has not implemented its promises to the electorate because of obstruction by other parties. It has to wear the electoral consequences of its own actions.

The point I am trying to make is that while proportional representation might be a desirable characteristic of a parliament, it is undesirable to have a system of government in which parties go to the polls to seek endorsement of their policies and then, after the election, enter into negotiations to decide what policies the temporary coalition of parties forming the government will actually seek to implement. Parties forming such temporary coalitions tend to blame each other for poor outcomes and electors find it hard to tell who is responsible for what.

Various compromises between proportional representation and elective dictatorship are possible. One possibility is the reinforced proportional representation system used in Greece under which the party which wins the largest number of seats in parliament is allocated additional seats so that it more likely to be able to form a majority in its own right. Leaving aside the obvious point that it is difficult to envisage that Greece’s recent economic performance could have been much worse without this reinforcement of proportional representation, an arbitrary adjustment to numbers of seats seems somewhat inelegant (if not undemocratic).

Another possibility is to have a bi-cameral system with the government being formed in the lower house, elected on the basis of a system that usually produces workable majorities for a governing party or stable coalition (e.g. single member electorates) and an upper house, acting as a house of review, elected using proportional representation. As recent events in the UK show, single member electorates cannot always ensure that the party winning the largest number of votes is able to govern by itself (or even to form part of the government for that matter). But single member electorates have a reasonable track record in producing stable and accountable governments. This system has the added advantage of allowing voters to vote for a person to represent their locality rather than for a party (or party list).

Luke Malpass and Oliver Marc Hartwich have recently advocated a bi-cameral system, such as I have just described, to replace the single chamber proportional representation system in New Zealand (CIS Policy Monograph 109). This is also the system that we have in Australia.

So, does the Australian system provide the best possible compromise between a representative parliament and an accountable government? I don’t think so, because it gives too much power to the upper house. The Australian Constitution contains a sensible procedure to resolve a deadlock between the upper and lower houses of parliament – a joint meeting of both houses – but joint sittings can occur only after a double-dissolution election.

I think the requirement for an election to resolve deadlocks between the two houses of parliament tends to work against accountable government because it enables governments to blame obstruction in the Senate for failure to implement policies. Before going down the double-dissolution path governments have to consider the possibility that they will lose such elections or be returned to power with more obstructive upper houses than they had before. Although there are half a dozen occasions in Australian history when governments have brought on double-dissolution elections, they have been defeated on about half those occasions. A joint sitting of both houses of parliament has occurred on only one occasion.

Given the difficulty of amending the Australian Constitution it seems that we will have to continue to live with the adverse consequences for government accountability of the requirement for elections to resolve deadlocks. We can, however, take some solace from the fact that the election requirement has the virtue of providing a test of the extent to which governments have the courage of their convictions. The value of such a test has recently been highlighted by the current government’s decision not to trigger a double-dissolution election on the bill to establish a carbon emissions trading system in Australia.

Postscript 1:
After reading a post by Tim Harford I have been reminded of Kenneth Arrow's impossibility theorem. Rather than wondering where to find a quote from some famous person supporting elective dictatorship I could have quoted Kenneth Arrow to the effect that whatever electoral system you use you will always end up with some form of dictatorship (although some forms of dictatorship are worse than others). The inference that I think should be drawn from Arrow's impossibility theorem is that markets are usually better than politics in producing outcomes that are beneficial for everyone.

Postscript 2:
Joseph Schumpeter qualifies as a famous person who emphasized the value of strong executive government. In Capitalism, Socialism and Democracy (1942) he wrote: 

"It is in fact obvious not only that proportional representation will offer opportunities for all sorts of idiosyncrasies to assert themselves but also that it may prevent democracy from producing efficient governments and thus prove a danger in times of stress. But before concluding that democracy becomes unworkable if its principle is carried out consistently, it is just as well to ask ourselves whether this principle really implies proportional representation. As a matter of fact it does not. If acceptance of leadership is the true function of the electorate's vote, the case for proportional representation collapses because its premises are no longer binding. The principle of democracy then merely means that the reins of government should be handed to those who command more support than do any of the competing individuals or teams".

I wrote more about Schumpeter's views of democracy here.

Which books should I recommend?

I am in the process of becoming an Amazon associate. This is unlikely to make me rich, but it is still worth doing to highlight some books relating to freedom and flourishing that I would like to recommend to readers.


Which books? When I started making a list I quickly noted around 30 titles, but the carousal widget that I had decided to use has room for only 10 books. So I have focussed on the books I would recommend to a person somewhat like myself – a person with a background in economic policy or business who is becoming increasingly interested in broad issues relating to human flourishing, including the role of liberty, the nature of happiness and the ethics of well-being.

My recommendations are not listed in any particular order. See the carousal (at right) for links to Amazon.

1. ‘Happiness: A History’, by Darrin McMahon.
This book traces the way ideas about happiness have changed through history. I particularly enjoyed his discussion of the inclusion of ‘pursuit of happiness’ in the US Declaration of Independence. There is a quote from the book in my post: Does the evolution of ideas about happiness intersect with the evolution of ideas about markets?

2. ‘Norms of Liberty’, by Douglas Rasmussen and Douglas Den Uyl.
Is liberty compatible with human flourishing? This book argues that not only is liberty compatible with human flourishing, it is also necessary because individual flourishing is an inherently self-directed activity. The book is not an easy read, but well worth the effort for anyone with any interest in political philosophy. The book is discussed briefly in my posts: Is freedom a necessary condition for human flourishing? and Why should we view individual rights as metanormative principles?

3. ‘Happiness: The science behind your smile’, by Daniel Nettle.
This little book provides an excellent introduction to the science of happiness. I particularly like Nettle’s discussion of different kinds of happiness and of the distinction between wanting and liking. Some comments relating to the book are included in posts here, here and here.

4. ‘The Logic of Life’, by Tim Harford.
This is my favourite among the spate of books that have been written over the last few years about the economics of everything. The basic idea is that if you want to understand how the world works keep in mind that people tend to respond to incentives. I have discussed the book here.

5. ‘Predictably Irrational’, by Dan Ariely.
This book is a good introduction to behavioural economics. Ariely describes experiments which show that we are often not as rational as we might think we are. I have discussed the book here.

6. ‘Well-being for Public Policy’, by Ed Diener, Richard Lucas, Ulrich Schimmack and John Helliwell.
This book probably has the best account currently available about the relevance of subjective well-being measures to consideration of public policy issues. I have some comments on the book here and here and in a review essay for ‘Policy’, Summer 2009-10.

7. ‘In Pursuit of Happiness and Good Government’, by Charles Murray.
This book was first published in 1988, but the views it presents are still highly relevant today. Anyone considering the potential relevance of happiness research to public policy should read this book. I have commented on the book here and here.

8. ‘The Pursuit of Unhappiness’, by Daniel Haybron.
This book is a philosophical exercise in clear thinking about the nature of happiness. It is fairly difficult to read, but provides plenty of food for thought about the directions of well-being research. It also provides some grounds for concern about the direction in which western society may be heading. I discussed the book here, here, here and here.

9. ‘The Happiness Hypothesis’, by Jonathan Haidt.
Martin Seligman, author of ‘Authentic Happiness’ is quoted on the cover of the book as saying: ‘For the reader who seeks to understand happiness, my advice is: Begin with Haidt’. That is high praise from the author of another very good book. I particularly like Haidt’s view that some of the conditions for happiness come from within us and others require relationships with other people, our work and 'something larger' than ourselves. There are some references to Haidt’s book in my posts here and here.

10. ‘What is Good and Why, by Richard Kraut.
This is a highly readable book about ethics. The main purpose of the book is to establish that we should specify ‘for whom’ or ‘for what’ when we talk about what is good. Kraut presents a developmental view of human well-being. I discussed the book in posts here , here and here.