Tax Revolt: California Copes

In the wake of the two to one victory of Proposition 13, Californians are relearning an old lesson: politicians lie. Prior to the June 6 election, mayors and legislators painted pictures of gloom and doom: massive layoffs, severe cutbacks in police and fire protection, libraries closed, transit lines shut down. And Governor Jerry Brown told voters that the state would not bail out cities and counties if they were so foolish as to pass Proposition 13.

But faced with an overwhelming mandate on June 6, the politicians' tune changed, as if by magic. The state's surplus, pegged by Brown at only $3.4 billion before the election, was revealed to be $5.8 billion. A widely publicized preelection forecast by the UCLA Graduate School of Management that 450,000 people would lose their jobs if 13 passed was revealed to be a vast overstatement—since it failed to even take into account possible use of the state surplus to bail out local governments.

And that, of course, was what the legislators decided to do. Five billion of the $5.8 billion surplus was promptly allocated to local governments, meaning budget cutbacks will be limited to a few percent. Police and fire departments, for the most part, are not being cut at all, nor are many school districts (except for summer school). The bail-out covers only the current fiscal year, however. Real economies will have to be instituted in subsequent years—but for now the cities and counties have some breathing space. To lay the groundwork for such economies, Los Angeles County voters will be asked in November to approve a measure allowing County Supervisors new freedom to contract with the private sector to provide public services.

Meanwhile, California politicians are falling all over themselves trying to join the tax revolt bandwagon. Governor Brown has proposed a constitutional limit on state spending; he has been joined in this objective by Paul Gann, co-author of Prop. 13. Gann has put together the California Committee to Limit Government Spending to lobby the Legislature to get such a limit onto the November ballot. Failing that, he vows a grass-roots campaign to do so in 1980. Given the mood of California voters, such a measure is virtually assured of passage.

Tax Revolt: Going Nationwide

Although California has received the most publicity, the tax revolt is catching fire all across the country. In Oregon a property tax limitation measure similar to Prop. 13 appeared to have qualified for the ballot at press time. It would limit property taxes to 1½ percent of market value and require 2/3 votes to raise either state or local taxes. A state spending limit constitutional amendment has qualified for the November ballot in Michigan. A similar measure two years ago was defeated by a last-minute scare campaign. In Massachusetts a tax limit initiative, having garnered the necessary signatures, overwhelmingly passed the first of two required legislative approvals in June. It must be approved by the legislature again next year in order to go on the 1980 ballot. In Colorado a similar tax limitation amendment has qualified for the November ballot. Three alternative initiative measures are circulating in the state of Washington, which already has a constitutional limit on property taxation. Overall, reports the National Taxpayers Union, efforts of this sort are under way in 27 states.

Tax Revolt: Washington, Too

State politicians aren't the only ones climbing aboard the tax revolt train. Members of Congress—all 435 House members up for re-election in November—are doing their best to appear responsive to the new trend. The House OK'd spending cuts of from two to five percent in the budgets of the Departments of Labor, State, Commerce, Justice, and HEW. Both foreign aid and public works spending were cut. The Senate imposed two percent cuts on the Treasury Department, the White House, and several smaller agencies. It also voted 49 to 39 to forbid the President from imposing import fees on oil. This move was aimed at blocking Carter from getting around the expected defeat of his proposed tax on crude oil. How many of these cuts will survive House-Senate conference committee negotiations, which are much less visible to the voters, is anybody's guess.

Congressmen are also proposing and endorsing limits on federal taxes and spending. Rep. Philip Crane has introduced a constitutional amendment to limit federal government spending to one-third of national income. If in effect at present the measure would reduce current spending by $10-12 billion. More than one-third of all House members (160 of them) have signed on as cosponsors of another constitutional amendment, this one requiring the federal government to balance its budget. As of June, 24 state legislatures have passed resolutions calling for a constitutional convention to enact such an amendment. And California appears likely to become the 25th, since the measure passed its Senate 25-2 in May and has 27 cosponsors in the Assembly (where it will be taken up this summer). Delegates to the 127th national convention of the American Medical Association endorsed the balanced budget amendment in June, as have a variety of other organizations and individuals.

If sustained, the rising sentiment for tax reduction will have succeeded in changing the terms of political debate. We can welcome the spectacle of politicians competing for our votes by telling us not how much more they can "give" us, but how much they can save us.

Free Trade Victory

In a unanimous decision, the US Supreme Court has upheld the principle of free trade. It did so by rejecting a claim by the Zenith Corporation that "countervailing tariffs" should be imposed on Japanese electronics imports because they are not taxed in Japan.

Zenith's position was opposed by representatives of the US Treasury Department. They contended that the 1897 law under which Zenith had brought its case had never applied to a foreign government's refusal to collect excise taxes. A change in interpretation at this point "would disrupt trading and cause economic confusion," and "would undoubtedly lead to retaliation against American exports." These views were seconded by many economists and trade experts. The Court decided the issue on the rather narrow grounds that "It is not the task of the judiciary to substitute its views as to fairness and economic effect for those of the [Treasury] secretary."

The Supreme Court's decision removes a major potential stumbling block to ongoing international trade talks. Had Zenith's position been upheld, the prospects of a new trade war akin to that set off by the Smoot-Hawley Tariff of the 1930's were very real. During 1976 over $50 billion of goods were exported to the United States without the collection of excise taxes. All would have been vulnerable to imposition of countervailing tariffs, virtually guaranteeing retaliation. Instead, the Court's vindication of free trade paves the way for a new round of cuts in tariffs and non-tariff barriers.

Stimulating Savings

A funny thing happened to the American economy over the past decade: people stopped investing. In 1968 over 300 high-technology companies were founded; in 1976 none were. In California only $6 million in venture capital was raised last year, compared with $360 million in 1969.

In 1967 Americans were saving 7.5 percent of their incomes. By 1977 the savings rate had dropped by one-third, to 5.1 percent. And that savings rate remained by far the lowest among all Western industrialized countries. While our savings rate was dropping to 5 percent, the savings rate in Japan was increasing, from 18.5 percent to 21.5 percent; in France, from 15.9 to 16.1 percent; in West Germany, from 11.3 to 14.0 percent over the decade.

It isn't too hard to discover why. The United States has the highest capital gains taxation in the industrial world. The maximum US rate of 49 percent compares with zero in Italy, France, Japan, and West Germany. The maximum US rate had been "only" 25 percent until the egalitarian Tax Reform Act of 1969.

The stock market, too, has reflected the effects of punitive taxation. Economist Martin Feldstein and colleague Joel Slemrod have studied the tax returns of a sample of investors who sold stocks in 1973. Extrapolating to the economy as a whole, they found that investors paid taxes on $4.5 billion in nominal capital gains that year. But when inflation is taken into account, the apparent gains become capital losses of nearly $1 billion. Since adjusting for inflation is not permitted in computing capital gains taxes, investors are forced to pay taxes on gains never actually realized. With inflation running at much higher levels since 1973, it's no wonder the Dow Jones industrial average has declined by 0.2 percent since then.

The solution is obvious. If Americans are to begin saving and investing again, they need to be rewarded rather than penalized. Consequently, many economists have been urging that the capital gains tax be reduced or eliminated. Michael J. Boskin of Stanford has found that a 10 percent increase in the real after-tax return on savings will generate a 4 percent increase in the amount saved. He estimates that eliminating capital gains taxes would increase the GNP by $100 billion a year. Data Resources, Inc. estimates that such a change would actually increase total federal tax revenues by $38 billion over a five-year period.

Rep. William Steiger has proposed cutting the maximum capital gains tax rate back to 25 percent. Among those who have analyzed his proposal is Michael K. Evans of Chase Econometric Associates. Within five years, he finds, the increased investment from just this minor change would generate 440,000 new jobs. Increased production would lead to higher corporate income tax collections, reducing the federal budget deficit by $16 billion.

Oblivious to these economic realities and reflecting his usual populist egalitarianism, Jimmy Carter earlier this year called for increasing capital gains taxes still further. Backing off from this idiocy in the face of mounting support for the Steiger proposal, Carter still saw fit to denounce the latter as providing "huge tax windfalls for millionaires and two bits for the average American."

We can only hope enough average Americans are smart enough to realize that rewards for investors—millionaires or otherwise—are what lead to new jobs and economic growth, things that even most populist egalitarians still consider worthwhile.

Communications Bill—Partial Deregulation

The growing momentum for deregulation has found another industry: communications. The House Communications Subcommittee has released its long-awaited revision of the Communications Act of 1934, the basic statute authorizing the Federal Communications Commission and its controls over both telephones and broadcasting. While not proposing to restore a free market in communications, the bill takes a number of strides toward deregulation. Highlights:

• Radio—The bill would deregulate radio almost completely, granting licenses in perpetuity (though not establishing actual property rights in frequency assignments, as the free market would). Regulation would be limited to such technical matters as power levels and frequency limits. Stations would no longer have to provide equal time for "opposing views" or for political candidates.

• Television—TV station licensing would be deregulated 10 years from now; meanwhile, license terms would be extended from three to five years. The fairness doctrine would be abolished, and TV stations would no longer have to give equal time to candidates for federal or statewide offices, only to local candidates. On the negative side, new licensing fees would be collected from broadcasters, to pay for (1) the costs of regulation, (2) a loan fund for minority broadcasters, and (3) subsidies for public broadcasting.

• Cable TV—The bill would deregulate cable TV altogether. It would also permit telephone companies, for the first time, to offer cable TV services.

• Telephone—Here, too, the bill would make major changes, generally aimed at promoting competition. All local phone companies would be required to provide interconnection to all intercity carriers. AT&T would no longer be barred from offering data processing services (as it is now under an antitrust consent decree). On the issue of divestiture of manufacturing subsidiaries (like Western Electric), the bill would give parent telephone companies like AT&T a choice: give up monopoly status and keep the subsidiary, or retain the monopoly and dump the subsidiary. The bill would also direct the regulatory body to determine the extent to which one type of telephone service should subsidize another. "Connection charges" would be levied to fund these subsidies.

• Bureaucracy—The bill would replace the seven-member FCC with a five-member Communications Regulatory Commission with somewhat restricted duties, in line with the changes listed above.

The basic aim of the bill, according to Rep. Lionel Van Deerlin, the subcommittee's chairman, is to regulate the communications industry only "to the extent that marketplace forces are deficient." Though his judgment of where the marketplace is deficient may owe more to political than to economic considerations, the bill at least represents a start at deregulating the complex communications industry. Amendments over the next year could move the bill farther from—or closer to—the free market ideal.

Malpractice Revisionism

Most of what you think you know about the medical malpractice problem is wrong, according to two researchers for the Rand Corporation. Writing in the New England Journal of Medicine the researchers—a doctor and a lawyer-economist-found that:

• Less than a fifth of malpractice incidents result in claims, despite a perception of excessive suing.

• The average malpractice award—in 1974, for example—was slightly less than the medical expenses and lost earnings of the patient, despite the image of gigantic settlements.

• A small percentage of physicians is involved in a large percentage of all claims successfully prosecuted, despite the fact that all physicians' malpractice premiums have been drastically increased.

But these facts, particularly the last, are not properly taken into account in the present malpractice insurance system, say the researchers, Dr. William B. Schwartz and Neil K. Komesar. Instead of singling out those physicians repeatedly found negligent, insurance companies raise rates across the board. As a result, the feedback signals provided by the system are too weak to deter carelessness. Patients end up losing two ways. Negligent doctors continue undaunted instead of either reforming or being forced out of business. And all patients must pay the higher fees doctors charge as a result of blanket insurance rate increases.

The solution is not to adopt no-fault insurance or abolish contingency-fee legal practices—both sometimes urged as malpractice reforms. No-fault is not necessarily cheaper and might weaken the deterrence of negligent doctors even further. Contingency fees enable less-affluent patients to engage a lawyer, thereby ensuring that more malpractice cases are actually pursued. They therefore help to strengthen deterrence of malpractice.

The key to reform lies in changing insurance practices so that repeatedly negligent physicians bear the brunt of higher premiums. That way the marketplace would deal with the problem.

Useless Boards

When the government takes it upon itself to control entry into a profession and promulgate standards via licensing, people assume they are being protected from incompetents. In fact, what often happens is that those being regulated come to dominate the regulatory board, and the public is lulled into a false sense of security.

That's exactly what has happened in California, according to a special task force of the Consumer Affairs Department. Appointed by Governor Brown, the task force spent a year and a half studying 18 of the state's 39 regulatory boards. Its reports, released in May, constitute a scathing indictment of the whole system of licensing and regulation. For example:

• The Bureau of Employment Agencies leaves the consumer who uses these businesses "virtually unprotected" from fraudulent advertising, misrepresentation of available jobs and applicant qualifications, discrimination, and fee splitting.

• The main function of the Architectural Board of Examiners is "to support the profession of architecture…by protecting title and entry into that profession."

• The Certified Shorthand Reporters Board uses its power "to maintain a closed guild which excludes otherwise competent people from having a chance at the practice of their profession."

• The boards regulating barber colleges and cosmetology schools abuse students who wish to enter these fields by forcing them to obtain expensive training; the main beneficiaries are not members of the public but the operators of the state's 225 private cosmetology schools and 24 barber colleges.

• The boards licensing psychologists, social workers, and counselors license persons to practice psychotherapy who possess vastly different amounts and quality of training. The state license obscures these differences, to the detriment of consumers.

• The Contractors Licensing Board licenses incompetent contractors and does little or nothing to discipline them. Its examinations are outmoded, and the answers are widely available at schools which teach contracting.

• The Board of Dental Examiners "has been conspicuously incapable of protecting consumers from incompetent and negligent dentists." Last year it disciplined only eight dentists, even though the major liability insurer paid out over $1.4 million in 550 malpractice suits against dentists.

In the face of all this evidence, what did the task force recommend? Unfortunately, it did not call for replacement of government licensing with private certification by professional associations—a voluntary, marketplace type of solution that would restore consumer sovereignty. Instead, it recommended that the most flagrantly incompetent or industry-controlled boards be drastically overhauled. It did, however, recommend immediate abolition of the boards regulating shorthand reporters and landscape architects, and the eventual abolition of the boards of architectural examiners, geologists and geophysicists, and employment agencies—unless they can prove their worth within a certain time period. But until such groups as the task force come to recognize the inherent defects of regulation, as opposed to voluntary certification, their "reform" proposals are likely to remain mostly wishful thinking.

Sue Them!

The right of citizens to defend themselves against the depredations of bureaucrats has received two welcome boosts from the US Supreme Court. In two recent decisions the Court further decimated the traditional immunity of public officials to suits by citizens.

In a 7-2 decision the Court ruled that citizens may sue city governments that have violated their civil rights. Writing for the majority, Justice Brennan declared, "Local government bodies…can be sued directly…for monetary, declaratory, or injunctive relief.…" The case arose over interpretation of the Civil Rights Act of 1871.

Three weeks later the Court ruled 5-4 that federal officials may be sued for damages in civil cases if they deliberately and knowingly violate the Constitution. In so ruling, the Court rejected the Justice Department's argument that officials should be absolutely immune from civil suits. "We see no substantial basis for holding…that executive officers generally may with impunity discharge their duties in a way that is known to violate the United States Constitution," wrote Justice White for the majority.


Air Bags Deflated. The US House has voted 237 to 143 to prohibit the Transportation Department from using any funds to enforce any requirement that air bags be installed in all automobiles. The House margin was so overwhelming that Senate conferees agreed to keep the ban in the Transportation Department's appropriations bill. The present DOT regulations call for air bags or automatic seat belts to be installed in all new cars starting in 1982. But they are now forbidden to enforce the regulations, at least as far as air bags are concerned.

Porn Cuts Crime. Easy access to pornography has cut the incidence of most sex crimes in Denmark and Sweden. This is the principal conclusion of a new study by Prof. Berl Kutchinsky of the University of Copenhagen's Institute of Criminal Science. Kutchinsky also found that once the initial shock value had worn off, "Pornography has found its very modest place as something quite indifferent to most people, as entertainment and a spice of daily life to a minority." (Source: Reuter's, April 19, 1978.)

Eliminating Childishness. If we're going to have censorship, at least it won't be based on childish concerns. That's what the US Supreme Court recently decided. By an 8-1 vote the Court held that when juries attempt to define "contemporary community standards" in deciding what books and films are obscene, they should consider only the views of adults, not children. The decision should mean at least a little less censorship of what people can see and read.