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Economic Affairs, 1984, 5 (1), 60.

GOVERNMENTS DO COMPETE FOR CITIZENS -- in Australia



John J Ray

Michael van Notten suggested in these pages that consumers of national laws should use supranational legislatures to allow themselves to choose between competing suppliers of law. His proposal was greeted as outlandish, if intriguing. But, Australian economist John Ray reveals, it is already happening.

In Economic Affairs Vol. 4, No. 3, Michael Van Notten envisages a transformed EEC wherein citizens can choose which set of national laws they will obey. This is a version of the old libertarian idea that there is no reason that a given country should have only one government. Let there be competing governments and each citizen can choose which government he wishes to 'subscribe' to. If he wants high welfare benefits, he chooses a high-tax government. Or he can choose low tax and low benefits.

This happy state already prevails in a number of countries with Federal systems -- at least with some taxes. The usual example quoted is Switzerland: the cantons of Zug and Glarus have very low income taxes and a very small degree of government activity. The more urban cantons have higher taxes and more services. So a Swiss can choose the system he wants by internal migration.

Such a system has worked also in Australia. The governmental system is rather like that in Federal America. Separate State governments have different powers and responsibilities from the Federal (national) government. Trade and movement between the States is constitutionally guaranteed to be free and unrestricted. Hospitals, roads, schools, police, etc., are State responsibilities. Most taxes, other than customs duties, excises and income tax, are paid direct to the State governments -- which can and do levy them at different rates.

My home State of Queensland is generally considered the most conservative in the country. Some years ago it completely abolished all death duties in the State. Britons know how distressing death duties can be, and this was once true in Australia. Therefore, when the Queensland government abolished these duties, what Michael Van Notten envisages did come to pass precisely. Retired people moved in droves to Queensland - causing a massive boom in housing construction in Queensland's main resort area (the Gold Coast). As Queensland residents when they died, they could pass on their estates to their heirs without loss. Even if you made your money elsewhere in Australia, it paid to die in Queensland.

Since then other Australian State governments have understood the message and they, too, have now by and large abolished death duties. So Australia as a whole is now something of a tax haven for the successful -- with no wealth taxes of any kind (neither death duties nor capital gains tax) other than the inevitable inflation. The people voted with their feet to end an unpopular tax, and all State governments now have to watch the efficiency and economic effects of their policies lest they lose their citizens to a better-run government in another part of the country.

A federal system, with devolution to regions or countries, would benefit Britain, too.



POST-PUBLICATION ADDENDUM

Since the above was written, Australia has of course introduced a national capital gains tax -- but not a particularly severe one.




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