Real Federalism Protects Citizens against Coercion

According to the 2008 edition of the Canadian Investment Climate Report, published by the Fraser Institute, the province of Alberta with a score of 8.5 out of 10 “continues to set the pace and leads the country in terms of creating and maintaining a positive investment climate”. Manitoba (4.3), New Brunswick (3.7), Quebec (3.5), Nova Scotia (3.3), and Prince Edward Island (3.1) were rated as the most investment-unfriendly of the 10 Canadian provinces.

The index is composed of seven policy areas identified by Canadian investment managers as the most important in contributing to investment climates: corporate income tax, fiscal prudence, personal income tax, transportation infrastructure, corporate capital tax, labour market regulation, and burden of regulation. Transportation infrastructure in each province, including highways, urban transit, air, rail, and marine service, is assessed by examining the extent, use, accessibility, cost, and condition of each mode of transportation.

Clearly, with the power to decide over such important policy areas, the people living in the Canadian federal provinces have a considerable say in their own affairs. SA’s nine provinces are almost totally dependent on the central SA government for their budgetary income. What would it be like if they could differentiate themselves from each other economically regarding provincial taxes, labour market regulation and general regulation? They do have some say regarding transport infrastructure but it is doubtful if a large project such as Gautrain could ever be built without approval from the central government.

In the Swiss federation, which consists of 26 regional cantons, the federal income tax takes no more than 11.5% of a taxpayer’s income. Tax rate competition between the cantons has led to a corporate tax rate of 12.5% (federal 6.5% and cantonal 6.0%) in the canton of Obwalden, which attracted 500 newcomers to its population of 35,000 in 2007. At the individual level the top tax rate (federal, cantonal and communal) in the canton of Zug at 23.1% was previously the lowest but Obwalden’s recent tax reforms are set to give it the lowest total individual tax rate as well. The highest total individual tax rate of 39.95% in Switzerland is charged by Zurich City.

Retention of powers at the local level can play a critical role in the governance of states, provinces and cantons in a federal system. For instance, if Limpopo province had the power to adopt labour laws different to those applicable in other provinces, it would probably have done so to avoid thousands of farm jobs being lost due to the application of minimum wage laws and other regulations. Poorer provinces would consider reducing taxes in order to attract business investment. As matters stand, uniform taxes and regulations across the entire country prevent poorer provinces from competing for people and investments against wealthier provinces with their comparative advantages of large cities, towns, infrastructure and amenities.

At first sight the average observer would be puzzled by the fact that left-leaning governments push for greater centralisation of power, considering that in SA the “left” constantly talks about a National Democratic Revolution (NDR). The word ‘democracy’ is derived from the Greek demos (people) and kratos (power). In other words, power to the people, which is best achieved through a system that gives people the greatest say over their own affairs by keeping decision-making as close as possible to those affected by the decisions. While socialists and communists pay lip service to the ideas of democracy, their actions belie their words.

A position statement adopted by the 9th Annual Congress of the SA Communist Party (SACP) stated, “as a liberation movement we stand for real devolution of power” and the “advancing, deepening and defence of democracy”. The statement declared that the SACP intended “to embrace a wide range of representative, participating and direct democracy institutions and positions”. However, in their activities within the tripartite alliance the SACP shows no inclination to support referenda to allow the people to decide on issues. There has been no support for devolution of power; on the contrary, there is a tendency towards centralisation as reflected in the formation of the metro councils and mechanisms that deprive traditional communities of their right to make their own decisions in their own way within their villages and communities. There has even been some mention of reducing the number of provinces.

In a paper, Federalism and Individual Sovereignty, Nobel Laureate James Buchanan said, “We should not, of course, be surprised at all by socialist-inspired opposition to the federalist idea and ideal. Socialists have been and remain forthright in their desire to extend the range of politicised control over the lives and liberties of persons.” Buchanan maintained that federal political structures, because they divide political authority, tend to limit the potential range of political coercion.

A false assumption is often made that federal governments are more expensive to administer than unitary states with centralised government. A 1998 study, The Size and Functions of Government and Economic Growth, conducted for the Joint Economic Committee of the US Congress by economists Gwartney, Lawson and Holcombe showed that of all the OECD countries the US government expenditure (at all levels of government) had increased the least over the period 1960 to 1996 – from 28.4% to 34.6% of GDP. Switzerland’s government expenditure accelerated from a low 17.2% of GDP to 36.9% of GDP over the same period. By comparison, the total government outlays of Denmark increased from 24.8% to 60.8%, Sweden 31.0% to 66.1%, Greece 17.4% to 49.4% and Spain 13.7% to 45.4% during the same period.

Containment of the costs of government is dependent on the level of control that voters can exert over taxes, which usually involve coercion, and government expenditure. If taxing powers are centralised, as they are in SA, citizen control is much weaker than it is in Switzerland where citizens approve or disapprove tax rates by referendum and the US where competition for investors limits taxes charged by the states.

South Africans should be wary of centralisation of power because it dilutes the value of their vote. In a community of 100 people the vote of one person is of much greater value than the vote of the same person in a countrywide vote of 20 million. If SA is to build a truly peaceful nation it is vital that it should incorporate traditional African participatory democracy principles in its decision-making processes. The people should create the governance powers in a democracy in a bottom up process. All power should vest in the people and only those powers that they wish to release should be passed on to the government institutions they establish. Governing power, correctly created, should therefore evolve and never be devolved.

Author: Eustace Davie is a director of the Free Market Foundation. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the Foundation.

FMF Feature Article/09 December 2008 - Policy Bulletin/8 September 2009