Before the doctor can treat what ails you, he has to know what ails you. The first rule of diagnosis is to look beneath the surface of things. What the patient complains about may have very little to do with the basic cause of his problems. He may say he has a "bad back" because his back "hurts." It could be that his back is fine, but he's wearing the wrong shoes.
The political problem we're diagnosing comes to our attention, first, as a "bad budget" because the patient—the taxpayer—feels a pain in his pocket. He says "taxes" are "too high."
This is true. But, like the aching back, the high taxes are only a symptom of the problem. We must look deeper for the causes.
THE BASIC PLAN
The first clue to the puzzle is that the symptom, and therefore the problem, seems to persist, year after year, no matter whether the Democrats or the Republicans are in control of the state legislatures, the governorships, the Congress in Washington, or even the White House. Total governmental spending has been rising faster than our national income—faster, therefore, than our ability to pay for it—for many decades, under Democrats and Republicans alike.
The problem is therefore imbedded in our very political system and has nothing to do with partisan politics and cannot be cured through partisan politics.
The basic flaw in our system is this: our political system permits special interests to gain private benefits at the expense of the taxpayers.
How can this be? It comes about because of the lobbying pressures that are exerted upon legislators. A special-interest group knows very well how much it stands to gain from a new law or program in its favor, and it will campaign hard for it—spending time in the legislature's corridors, buying lunches for lawmakers, contributing to their campaign funds, paying for political announcements on television and in the papers, making it seem there's a vast public enthusiasm for the new project.
But where's the opposition? This new project will have to be paid for. Why don't the taxpayers as a group make a similar effort to stop the lawmakers from transferring money from the taxpayer's pockets into the pockets of the special-interest group?
Because the taxpayers as a group can hardly feel it. The $600 million maritime subsidy, for example, costs only a couple of pennies a day for the general taxpayer, all hundred million of us. But, according to the Presidential Budget Report for Fiscal 1978, it means about $15,000 a year to each member of the special-interest maritime groups! So a few thousand members of the maritime trades can actually put a hundred million taxpayers over the barrel and shake the money out of them. Each individual taxpayer thinks that a given program may cost only a few dollars a year, to him personally, and so it's not worth his time or money to fight against it.
Thus, piecemeal, program by program, the special interests gain at the expense of the public interest; and the size of government, of spending, of taxes, grows and grows. The taxpayers as a group almost never have the chance to vote on the total size of government spending.
To be fair, we must add that even this basic flaw in our system would cause no problem if the taxpayers as a group were solidly opposed to politicians who "go along" with the game. But there are several reasons—some of them rather subtle—why the general mass of voters are not highly sensitive, as yet, to the basic flaw in the system.
For one thing, there is a general prejudice in favor of government. "Civics" courses in high school, social science and philosophy courses in college, public-service ads on TV, and even corporate "free enterprise" ads generally teach people that "government" is "at work" for the benefit of "all of us." Government, in general, is seen as a source of good things, all those goods and services that "cannot be provided in any other way." In this general atmosphere of trust in a supposedly benign government, it is hard to persuade people that the general discontent of taxpayers is caused by a fundamental flaw in the political system they have been taught to revere. It's like a doctor telling a man he's got a fatal illness and won't last much longer, and the man refuses to believe it, saying, "I've always thought of myself as a very healthy person."
Then again, there is the problem of actually seeing what is happening. In any governmental program that involves taking a little bit of money from each taxpayer and giving a large benefit to a small group, the "benefits" are highly visible, and who is to argue against them? But the real costs remain real even if they're invisible, and it's not easy to fight against the invisible, is it?
This problem of the visible benefit and the invisible cost is typical of almost every government program. A high tariff on shoes gives work to the shoe industry, and you can calculate very nicely how many workers are "protected" and how much they earn. But all those citizens who want a new pair of shoes have to pay a higher price than otherwise, and how can you calculate the cost to them? Or how can you reckon the real cost that is borne when a citizen realizes he can't afford new shoes and decides to do without? Or the cost to the workers who might have been employed in exporting goods to the foreigners who would have sold shoes to us?
And if you cannot calculate the costs that go along with the supposed benefits, how can you decide whether the program is efficient? There is no agreed way to measure the efficiency of governmental programs. This is the structural reason why they are inherently wasteful. But that is a different, though fascinating, subject. It explains why governmental programs are expensive. It has nothing to do with the basic flaw, the political loophole that permits the programs to get started in the first place.
Another hotbed of invisible costs is inflation. An unexpected dosage of monetary inflation (increase of the money supply) may sometimes provide a temporary boost to some sectors of the economy. But it will certainly reduce the buying power of the dollar. Inflation always means an invisible reduction in the real value of people's dollar-wealth, whether in savings accounts, bonds, cash accounts, or fixed-amount programs such as life insurance and many pension plans.
The tax law creates another kind of cost arising from inflation. This one is indirect but at least partially visible (and that's why something may be done about it). If all incomes and costs doubled overnight, it would seem that we'd all be in the same position as before. But that's not true. The new higher incomes would be subject to higher tax rates (under present law). Inflation—assigning a larger number of dollars to the same goods—leads to higher average tax rates on the income-producing people in general. In the early 1960's only about three percent of all federal income tax returns were subject to marginal tax rates of 30 percent; in the mid-1970's about one-third of all federal income tax returns were in those higher brackets.
GOVERNMENT A BARGAIN?
Because the costs of government services are invisible, indirect, and unmeasurable, there is a general idea that government services are "cheap." Not long ago an opinion survey of voters showed that the average voter has no idea of the real amount he pays for government programs. Consistently, the survey respondents underestimated such costs to themselves by as much as one-third to one-half.
Because of this general misconception, new governmental programs haven't run into any consistent public opposition. As mentioned earlier, the average taxpayer pays only a few pennies a day for the average "special interest" programs and has little immediate incentive to fight against it. On top of that, as we now see, there is the false general idea that "government is working for us" and the demonstrably false idea that government programs are "cheap." Who would argue against programs that are thought to be good, especially when they're thought to be cheap?
This is why some lawmakers can say, sincerely, that though they disagree with various programs they vote for them because of the "great popular demand" for such governmental goods and services. This is sincere—and true—as far as it goes. Of course the demand will be huge if the program is thought to be both beneficent and cheap. But the error here is that the "demand" is based on a false price, or a false idea of the price. The demand will be greater if the people are deluded into believing that the price is cheap.
Because of this deluded demand, politicians find that they can make more "points" by voting for a new spending proposal than against it. Because of the general misconception that the price is cheap, the man who votes against the program is accused of "putting the almighty dollar above humanitarian concerns." He is made to look like a tightwad, a flinty-eyed monster, a cruel and heartless curmudgeon, and so on.
In all fairness we must add that the average lawmaker is a quite intelligent person who can follow this line of reasoning just as easily as you can. The trouble is that the lawmakers as a group, whether Democrat or Republican, are powerless to correct the basic flaw. Furthermore, the politicians as a group have no interest in correcting the basic flaw, because they have learned how to prosper with it. They gain political advantage by voting for economic programs with obvious benefits and hidden costs. Being human, they see quite logically that their own political careers can rest very comfortably on this flawed system. They have no immediate incentive to change it.
This structural flaw—the lack of any limit on government's power to tax and spend—has led to enormous increases in the size of government. In state after state the growth of government has far exceeded the growth of the nation's economy, or even the growth of that state's economy.
The point is now being reached when this process must be stopped—while we still have the political power to stop it.
There have been attempts to control the size of government by reducing expenditures on a program-by-program basis. These have always failed because of the illusion that each separate program is cheap.
But, while the average taxpayer may think a certain program is cheap, he never thinks government as-a-whole is cheap! Do you know anyone who thinks taxes, in general, are a bargain? Do you know anyone who thinks he's really getting his money's worth for the taxes he pays?
Therefore, the corrective action must take place on the level of government as a whole. We must control and restrict the total size and cost of government at all levels.
Because taxes are a great burden, there have always been movements for "tax reform." But these efforts have never been directed toward controlling the total size and cost of government; rather, they have been attempts to shift the burden from one set of productive citizens to another set of productive citizens. The prolonged fight among the producers has led to 14,000 pages of tax statutes and 40,000 pages of IRS regulations—while the total burden has kept right on growing. The situation has deteriorated into one of warfare amongst the productive citizens—a general social conflict that is the opposite of good government, which should aim to harmonize the interests of the productive members of society.
Many taxpayers who are pained by the total burden of taxes may think that they benefit, nevertheless, from some particular program that affects themselves. But this feeling is only the result of the illusion that each program is cheap. The total cost of government is high and rising, and no one thinks the total cost is low. It is here, on the level of the total cost, that the feelings of the great majority of the taxpayers are harmonized. This is where the growing movement for constitutional tax limitation finds its majorities and its potential for victory at the polls.
In addition to creating general social conflict, the present level of government spending reduces the total efficiency and therefore the total income of the economy (see, e.g., Martin Feldstein's study, "Social Security, Induced Retirement and Aggregate Capital Accumulation," Journal of Political Economy, 1974). It reduces the pool of talent that's willing to go to work. It kills the drive to work hard. The tax law becomes so important that it becomes the controlling factor in many of our most important financial decisions. When government tax regulations become the controlling factor in our decisions, what has happened to freedom?
No wonder there has been a great growth in taxpayer protest movements in recent years!
The most fundamental and disturbing result of all this is that the productive citizens become discouraged and suspicious. Each program seems a bargain, but all the "bargains" put together are a burden! The producers feel robbed. They feel that they are in conflict with their fellow producers. They feel despair, and out of despair is born a mood of revolt.
Some people may ask if there is really a serious problem. Won't it solve itself at some point, the way most problems do? And if it doesn't, what's the danger after all?
The danger is that there's no law on the books to stop government from taking 100 percent of your income. They can take it all, and as things now stand it would be perfectly "legal."
ENOUGH IS ENOUGH
This may sound like an alarmist's threat, but a little bit of thinking will prove that it's painfully real. Back in 1913 when the Constitution was amended (the 16th Amendment) to permit a federal income tax (there had been a short-lived one during the Civil War), the tax rate was one percent—and people cried out that this was confiscation! Tax rates now go as high as 70 percent, and the people tolerate this burden.
Actually, there have been moments of cheer. The top tax rates rose to 91 percent, during the Second World War and afterward, until President Kennedy wisely reduced them and thereby released a tremendous productive surge in the economy. But the top tax rate is still 70 percent. As a people, we are right now permitting a high degree of confiscation—permitting it, against our will, because we have not discovered a political means of defeating it.
Granted, this is the top tax rate on the top bracket of income. The total tax take from all kinds of taxes—state, local, and federal—is about 42 percent of our income. We are approaching the point where the problem will become irreversible. As a widely circulated study made by the Ford Motor Company shows, there are already more people dependent on government than there are productive workers paying taxes to government!
In 1974, Roy Ash, federal Budget Director at the time, calculated that government spending at all levels was 44 percent of personal income (35 percent of Gross National Product). He estimated that by the year 2000, combined federal-state-local budget outlays would account for 80 percent of personal income (two-thirds of GNP).
There is no law against the majority voting to strip the producers of 100 percent of their income!
This has actually been approached in England, where some 60 percent of the total personal income is taxed away. The top bracket in England pays a tax rate of 98 percent. There is a direct tax on capital. "Death duties" take just about everything away from the surviving family. The result of this war against productivity in England has been, of course, stagnation in production, great social and political upheavals, departure of productive and energetic citizens, and a general feeling of ugliness, envy, and whining. And yet there was a time when England was productive and energetic, when the people were permitted to hang onto their wages. England moved into its present situation gradually, and we are now where England was in about 1965.
So don't say it cannot happen. It has already come close to happening in the country that is most like us in social and political traditions. It is happening there by reason of the same basic flaw that we see in our own system. And here, as there, we taxpayers have no protection—as yet—against 100 percent confiscation. The normal political mode is useless: this candidate or that, this party or that, won't correct the basic flaw. A recent survey shows that 82 percent of the English people wish taxes were lower—82 percent!—and yet they keep voting for governments that only increase their burdens!
If we do nothing, we shall inevitably have nothing.
NEEDED: A PLAN OF ACTION
Granted, the lion's share of taxes and expenditures occur at the federal level, although in recent years the total expenditures by state and local governments have been rising faster than the total federal expenditures. Still, you may wonder why you shouldn't attack the problem, first, at the federal level. The reason is that the problem must be solved through constitutional amendment, and amendments to the federal Constitution are most easily brought about by action that starts at the state level.
Why must the problem be solved by amending the federal and state constitutions? Because every other method is either impossible or undesirable.
Consider all the possible channels of political action:
• Judicial—the courts
• Executive—the governors, the president
• Legislative—the state legislatures, the US Congress
• Revolutionary—mass violence
• Constitutional—a change in the basic law
Let's look at these one by one.
The judicial approach would require a court case. If you're lucky, you'll be permitted to appeal all the way to the state supreme court or the US Supreme Court. But, even if the highest court hands down a ruling that's favorable to the idea of limiting the government's power to tax, this would be inadequate, undesirable, and uncertain: inadequate because a limitation must be worded very precisely; undesirable because the judicial branch should not, and by its own decisions cannot, engage in writing new tax laws; uncertain because what one court can affirm the next court can deny. Besides, the Supreme Court has already ruled unmistakably in support of the present taxing principles and has, furthermore, ruled that the judiciary "can place no restraint upon this power."
There is a further, practical, objection to judicial action even if it were appropriate: it is slow, and we are running out of time. Remember: the number of people dependent on government is already greater than the number of people gainfully employed in the private sector.
The executive approach is too uncertain. It simply involves electing a president (or governor) who promises to use his powers of persuasion on Congress (or the state legislature) to rewrite the tax laws. You might be successful in putting your man in the governor's mansion or the White House, but will he actually carry out his promise? Almost every candidate for governor or president in the last 40 years has promised to balance the budget and stick to sound principles of finance. and what has happened?
If your man does try to influence the legislature, will he succeed? If he does get the legislature to act, will it really write the kind of law you had in mind to start with? If the legislature does write a new tax law, what's to stop the legislators from changing it in the next session? (The tax laws have been rewritten and expanded so often that they are now beyond comprehension.) If your man is defeated in the next election, or dies in office, is there any certainty that the tax reform will survive?
Finally, and most importantly, it's impossible to work for an individual candidate for governor or president without choosing sides in the partisan politican scramble. The idea of constitutional limitation on taxing and spending is genuinely nonpartisan; the idea gets its strength from the fact that a majority of Democrats and a majority of Republicans are in favor of it. If a nonpartisan campaign succeeds in writing a tax-limiting clause into the basic Constitution, that clause will have a very fine chance of remaining the basic law of the state or the nation for one whale of a long time to come.
NEITHER LAWS NOR BOMBS
The legislative approach doesn't promise much, either. For one thing, we have already discussed the basic flaw in our system, the flaw that permits irresistible pressure to be brought to bear on legislators to vote for new spending programs. It is illogical to suppose that legislators who, as a group, vote for new spending every time they have a chance, will vote against new spending as a constitutional principle. The same pressure groups that urge the legislators to vote for spending in the first place will keep them from controlling the total spending in the second place.
Also, it is a very sound constitutional doctrine that one session of a legislature may not bind the hands of the next session. So, even if you could get one session to write a law to limit its taxing power, the next session would have full power to repeal that law.
The problem is too serious for us to rest content with temporary, capricious, or superficial relief. The cure must be basic and long-lasting. To some minds, there may be an apparent contradiction in urging action through constitutional amendment while arguing that the various legislatures are incapable of limiting their taxing power: the contradiction arising because in many states the only way to get an amendment proposal on the ballot is to have the legislature vote to place it on the ballot. Legislators can, and do, get around this problem by the usual bit of fancy footwork, saying, "I didn't vote for or against the proposal as such, I only voted that the people have a right to express their opinion on it." That is, in fact, a respectable position to take. Indeed, as will be pointed out below, most legislators would secretly like to have a constitutional amendment to limit the spending and taxing powers of government. They are, as a group, just as patriotic as the rest of us; and they are in high income brackets, and they pay taxes too!
The revolutionary approach isn't in the cards. True, this wonderful country got its start with an act of violence, in the Boston Tea Party of 1773, but that was hardly an attempt to overthrow the domestic American political arrangements. It was an attempt to confirm the home government's taxing powers. Shays's Rebellion and the Whiskey Rebellion were local—though potent and successful—protests. During our own War of Independence, the portion of our people who remained loyal to the Crown and fled to Canada or the Bahamas or elsewhere was five times the proportion of the French royalists who fled from France during the French Revolution. We are not revolution-loving people. Besides, when we have a legal and constitutional way to correct the problem, it is our duty as citizens to exhaust all legal avenues before even thinking of such romanticized notions as a full-fledged tax rebellion.
OUR ONLY HOPE
This leaves only the constitutional approach, in which we strive to adopt a tax-limiting amendment in each state constitution and eventually in the US Constitution. Since this is the only remaining choice, we can now see why Milton Friedman calls it "our only hope." It is in fact the only avenue remaining to us, short of outright revolution.
But, just because all other choices have been rejected, we haven't proven that the one remaining choice will work. It may be that, upon examining this last choice, we shall find that it too is inadequate or unsuitable. In that case the situation would be hopeless, or at best, agonizing: for the choice then would be between tyranny and revolution.
Well, how can we tell whether constitutional tax limitation is a practical proposal? Since this method requires very broad public support, it is easy enough to find out whether it will work: find out if the people are in favor of it. The news is good. People in every walk of life are in favor of some kind of control over government spending and taxation.
Whether you divide the population according to income groups or educational level or blue-collar or white-collar job or color of skin or age, you find only a small fraction—running about 25 percent—flatly opposed to tax limitation. In almost every category you find an actual majority in favor.
If this is so, they why did the tax-limiting proposal fail, for example, in Michigan, in 1976? The short answer is that the media blitz against the proposal convinced many fed-up taxpayers that the proposal would, somehow, increase taxes. When confused, people vote No. The voters were easily confused because (1) those who said they favored the tax-limiting proposal didn't hold their beliefs with the unshakable conviction the comes from a thorough understanding of the problem (the basic flaw) and the details of the proposed solution, and (2) those who had "no opinion" fell easy victims to the distorted and passionate appeals of the opposition in a saturation propaganda-blitz in the last seven days of the campaign.
The tax-limiting campaign failed to get its message to the people. It failed for the simplest of reasons: not enough money (the opposition spent about 10 times as much). That failure of money, however, does not alter the historical fact that a majority of the people, in almost every category of age, education, income, color or job, are in favor of constitutional tax limitation once they know what it's all about.
So the potential popular support is there. It's real, it's strong, and it needs only to be informed and encouraged.
This alone would be enough to persuade a prudent man that the idea is filled with hope. But there is more. The average legislator is just as intelligent as the rest of us and just as patriotic. The average legislator understands what's wrong but doesn't know what to do about it. The legislators, themselves, would be just as happy if the flaw were corrected, but they admit they're not the ones to correct it.
The reasoning runs this way. When a special-interest group puts pressure on a legislator, thanks to the basic flaw that gives that group an undue influence, the legislator is faced with two choices: spend more money or look like a heartless skinflint and eventually be thrown out of office. You can't expect men to be saints. They'll crumble under pressure.
But the point is that they don't enjoy crumbling. It saps their self-respect. They would much prefer to be able to resist the special pressure without jeopardizing their careers and without taking responsibility for their actions. They would like to be able to say: "I understand your humane goals, and I do see that your proposed new program may do some real good. But it would take the budget beyond the limit imposed under the formulas written into the Constitution, and my hands are tied. If you, however will show me where we should cut the budget in some other program, I'll be happy to take the entire package to the floor and present it to my colleagues."
And now the legislator is happy. He can appear to be sympathetic, while running an orderly financial ship. And the business of who gets what is decided, as it should be, by the political process, while the taxpayers as a group have delivered the major decision as to how much of their wealth is to be spent by the political process.
It is right for the political process to decide the priorities of political spending programs. It is wrong for the political process to get to the point where one group of people enjoy the power to take an unlimited share of the others' income. It is right for the taxpayers as a group to decide where the line shall be drawn.
The constitutional approach, therefore, holds out a strong promise of success. It rests on broad popular support, and that support is known to exist: a majority of the people are in favor of limiting taxes and spending. It requires strong support among legislators, and that support can be shown to exist, among legislators of both political parties.
The idea of constitutional tax limitation is truly an idea whose time has come.
All it needs, for success at the polls, is careful drafting of the amendments and professional campaigning to put them over the top.
Mr. Rickenbacker is an author and economic consultant; Mr. Uhler, an attorney, businessman, and consultant. They are respectively, the chairman and president of the National Tax-Limitation Committee. This article is adapted from chapters one and two of their "Taxpayer's Guide to Survival."
This article originally appeared in print under the headline "How to Draw the Line on Taxes".