During the 18th century only England practiced free trade, the rest of Europe and the USA kept up their tariffs. In fact customs and duties on foreign goods provided ninety to 100 percent of America’s total federal revenue up to the time of the Civil War. After that customs provided 50 percent or more until the end of the century. Quotas were non-existent and there was ample movement of both people and capital.
Prior to 1820, government at all levels was modest; limited not only by ideology but also by the extremely low tax revenue. Of the approximately three percent of GNP spent by the federal government, half was for the military. One method of measuring government’s role in the economy is the ratio of government spending to national income. In the early 19th century this was just under 10 percent in both England and the United States. Two-thirds of that government spending was by the states and local governments and only one-third of the revenue was spent by the federal government. Fifty percent of all government spending was for local education.
(D-1) In the early days of our country, what was the greatestest source of government revenue?
The following is from The Deficit: 12 Steps to Ease the
Crisis by H. P.
Rogers:
Europeans in general scoffed at the new government on the other side
of the
Atlantic as too anarchistic. But the founding fathers never intended
for the
United States of America to be an anarchy. The new Constitution
attempted to
resolve the inadequate taxing power in the ill-fated Articles of
Confederation, while at the same time seeing that the individual was
not
sacrificed to the State. They severely and intentionally limited the
State’s
taxing power. Article I Section 9 Clause 4 says specifically that no
direct
tax shall be laid unless in proportion to the census. A direct tax
is a tax
attaching directly to the individual or his private property as
opposed to a
tariff or excise tax on goods as purchased or services as hired. “In
proportion to the census” means the levy of a million dollar tax
would be
divided equally among the population without regards to the relative
wealth of
individuals— each would be expected to carry his share. Share did
not mean
according to the individual’s ability to pay; it meant share as a
citizen
counted in the census and accountable for a portion of the State’s
need. That
was a safeguard to the rights of individuals.
(D-2) Define anarchy. Why do you suppose the Europeans thought
our form of
government was anarchistic?
In 1894, Congress passed a bill imposing the first-ever peace time
income tax.
It required all citizens with incomes of more than $4,000 (at that
time only
about one percent of the population) to pay a one percent tax. The
New York
Times called the income-tax law " a vicious, inequitable,
unpopular, impolitic
and socialistic scheme" and on top of it all it heaped the epitaph
'un-American.' The Washington Post said the graduated aspect
of the tax
"represents a repudiation of the spirit as well as the letter of
Democracy _
it punishes everyone who rises above the level of mediocrity _ The
fewer
additional yokes put about the necks of the people, the better for
the
commonwealth."
In 1895 the Supreme Court ruled that the Constitution explicitly
stated that a
tax should be levied in proportion to population, and not
differentiate by
income level. The New York Times editorialized that the
nation had seen the
end of attempts to tax incomes. _An amendment which would allow
taxation
based on incomes was sent to the states for ratification in July
1909. The
New York Times responded with "When men get the habit of
helping themselves to
the property of others they are not easily cured of it. The
Washington Post _
argued that an income tax was needed to "wipe out the deficit without
impairment of the public service or calling a halt to needed public
improvements."
Both New York and Massachusetts rejected the 16th amendment.
Nevertheless,
in February 1913, after three and a half years of intense debate,
the 16th
Amendment to the U.S. Constitution was enacted, overcoming the
Founders
prohibition against taxing income.
The New York Times predicted the new income tax had
established a "rock of
credit from which abundant streams of revenue will flow whenever
Congress
chooses to smite it_ We may be sure that it will be smitten hard and
always
harder, until the national conscience, if there is such a thing,
revolts
against the inequality and injustice of such a plan of taxation."
But one wonders if even the New York Times could have foreseen
the
acquiescence of the population to the changes that would occur in
just 50
years. In 1887 there was no federal income tax and more than 60
percent of
the federal receipts, which amounted to only about three percent of
GNP, came
from customs. Almost all of the remaining 40 percent of total
revenue came
from excises on alcohol and tobacco. By contrast, in 1937 the
federal
government took about 5.5 percent of GNP with 45 percent of the total
supplied
by taxes on the incomes of both individuals and corporations. The
new tax on
employment (Social Security) accounted for about five percent of all
federal
revenue in 1937. Going another 50 years into the future we find that
in the
1980s the federal government has had no qualms about helping itself
to revenue
accounting for about 20 percent of the GNP with 55 percent of that
revenue
coming from income taxes and 35 percent from payroll taxes. But what
the New
York Times would really find incomprehensible is the government's
practice of
spending more than it has the courage to collect in taxes.
(D-3) What is meant by a graduated income tax? What is mean by a progressive tax? A regressive tax?
Today government mandates and taxes consume a tremendous amount of the nation's resources, while government functions add only about five to 10 percent to our living standard.
(D-4) Name two government mandates and two government functions.
With less than half the resources, private enterprise is
responsible for 90 to
95 percent of the nation's standard of living. Every year the
federal
government ends up with more revenue and a larger deficit. Osborne
and
Gaebler shed some light on the probable cause in the following
excerpt from
Reinventing Government:
For the past 50 years, most public leaders have assumed that
government's role
was one-dimensional: to collect taxes and deliver services. Before
1930, of
course, many "public" services had been provided by non-government
institutions: religious groups, ethnic associations, settlement
houses. But
the Progressives and New Dealers believed governments should use
public
employees to produce most of the services they decided to provide.
They
worried about the tendency of religious and other private
organizations to
exclude those not of their own faith or ethnicity. They were
determined to
stop the widespread corruption that had discredited government
contracting.
And they lacked the information technology we have today to monitor
the
performance of contractors. So they put virtually everything in
public hands.
By the 1970s, few mayors or governors or legislators could even
conceive of
another way. They were chained to the wagon of taxes and services.
This was
fine as long as tax revenues were rising 5.3 percent a year, as they
did from
1902 through 1970. But when economic growth slowed and fiscal crisis
hit, the
equation changed. Now when problems appeared and voters demanded
solutions,
public leaders had only two choices. They could raise taxes, or they
could
say no. For officials who wanted to be reelected, this was no
choice at all.
(D-5) How were services provided before government took over? Explain the motivation for putting "everything in public hands".
In 1993 July 17th was declared Tax Freedom Day by taxpayer groups around the country. They claimed that from January 1st through July 16th taxpayers worked for government. From July 17th through December 31st they would finally be working for themselves. Taxpayer groups often point out that the United States government today demands more than the nobles demanded of the serfs during the middle ages.
(D-6) State in your own words, what Tax Freedom Day signifies. Devise a "tax freedom day formula" showing the amount an American citizen was taxed in 1993. Let T = tax and I = income.(Round the governments' share to six and a half months .)
(D-7) If your income was $20,000/year, how much according to the freedom day formula would you get to keep for your own personal use? How much would go to pay all types of taxes?
The following quotation is from an article by Alan Ehrenhalt which
appeared in
the March 1993 issue of Governing magazine.
Last November, the California Tax Reform Association did, as
promised; go to
the voters with Proposition 167, an initiative to further raise state
income
taxes on the wealthy. The marginal rate on individuals with incomes
over
$250,000 a year and couples over $500,000 would have gone to 12
percent. The
compensation packages of the state's highest-paid executives would
have lost
much of their tax deductibility. That initiative got 42 percent of
the
statewide vote.
(D-8) Explain "marginal tax rate" and give an example.
One has to be careful in viewing that particular result as a sweeping
repudiation of soak-the-rich populism. Proposition 167 went far
beyond
wealthy individuals to target major corporations, allowing business
to claim,
with some credibility, that the higher rates would simply be passed
on to
consumers in the end. _ citizens of the nation's most economically
shell-shocked state were given a chance to squeeze some more money
out of
banks, insurance companies and a small fraction of the highest
personal
incomes, and they wanted no part of it.
Colorado approved a measure that will require the legislature to win
the
approval of the voters for any future tax increase it wants to enact.
Arizona
decided to make the legislature obtain a two-thirds majority for tax
increases. Florida voted to restrict future property tax assessments
to no
more than a three percent increase per year.
Welcome to the inside-out populism of the 1990s. Not only do the
voters
refuse to tax the rich, but they do everything they can to make it
hard for
their elected representatives to tax anything at all---income,
property,
corporate profits.
Why enact a tax that will make it hard to enjoy yourself once your
ship
finally comes in? Americans hold unrestrained individual enterprise
as sacred.
The Horatio Alger story--poor boy makes good--- is embodied in our
culture
along with a typically American attitude towards government. It's
not so much
that people are against higher taxes as it is that they just don't
think
government uses money cost-effectively. That's why turning down tax
the rich
schemes should be viewed as a decision by the people that it is
better to
leave the money in the hands of the rich than to risk turning it over
to
politicians.
Alan Ehrenhalt
(D-9) Give 3 reasons why people might not want to raise rates
on the
wealthiest taxpayers.
Our money is the basis of our ability to translate our will, our
choices and
our values into action. In a real sense, it is the foundation of
self
government and of a free society. And the more that our money is
removed from
our control, the less responsibility we exercise, the less freedom we
enjoy.
Alan Keyes at Hillsdale College from a speech in Oct 1992
For a long time the Swedes were content to pay one of the world's highest tax rates in return for health, education and extensive social services. But in 1990 the bill became unbearable and the 60 year social experiment began to fall apart. Unemployment benefits were reduced as well as payments to workers who were injured on the job. Eligibility for pensions were tightened and deferred and subsidies for housing and education were curtailed. Sweden even considered shifting some health and unemployment costs to employers. It is no longer possible for Swedes to receive more money by staying home sick than by going to work.
The following is from Rogers' Taking A Stand On Taxes:
Taxpayers with an adjusted gross income (AGI) of more than $1 million
in 1985
paid 260 percent more in taxes than in 1981, while tax payments from
those
middle-income Americans earning between $25,000 and $50,000 fell
slightly.
Tax payments from the rich rose in every year during Ronald Reagan’s
first
term. Correcting for inflation, they rose 19.2 percent over the four
years.
In 1981 the rich paid $2.42 in income taxes for every dollar paid by
the poor;
by 1985, that ratio had risen to $3.12, an increase of 29
percent.
According to (Internal Revenue Service) IRS records, in 1981 the
top one
percent of taxpayers, measured by AGI, (adjusted gross income =
tax after
allowable credits) paid $51 billion , whereas the lowest 50
percent of
taxpayers, again, measured by AGI, paid only $21 billion. That means
the top
one percent of income earners shouldered 18.05 percent of the
nation’s tax
burden and the bottom 50 percent were responsible for 7.45 percent of
total
taxes paid in 1981. By 1985 those numbers had changed to show an
increase in
the first group’s share of the burden from $51 billion and 18.05
percent to
$72.1 billion and 23.1 percent. The less affluent group, although
their tax
payments rose from $21 billion to $23.1 billion, saw their percentage
of the
entire tax bill drop from 7.45 percent to 7.1 percent.
(D-10) According to Rogers, the rich paid more or less of the
national tax
burden in 1985 than in 1981?
The rich paid more or less than the poor in 1981?
The rich paid more or less than the poor in 1985?
What percent of income-earners paid 18.05% of the national tax burden
in 1981?
The top one percent of income-earners paid what percent of taxes in
1985?
What was the percentage rise for this group between 1981 and
1985?
The bottom 50 percent of taxpayers paid more or less of the entire
national tax burden in
1985 than they did in 1981?
The bottom 50 percent of taxpayers paid more or less in actual
dollars to the tax collector in 1985 than they paid in 1981?
(D-11) Are you surprised by these figures? How might you check
them out?
In contrast to the IRS data, the Congressional Budget Office (CBO)
produced
a study during the final quarter of 1987 which showed the “poor” paid
slightly
higher average tax rates in 1987 than they did ten years earlier
before all
the reform. But the higher average rates were the result of the
continual
large increases in Social Security taxes.
No one can deny that the wealthy are paying more tax dollars now.
However
dollar amounts don’t count in the minds of those who weigh
“fairness” in
terms of percentages. It is also interesting to see how carefully
results
from tests must be read and how futile it is to compare, or even
accurately
cite, findings. In the appendix of the CBO study we find that the
richest 10
percent of American families (notice families as opposed to taxpayers
and 10
as opposed to one percent) paid 37.5 percent of all federal taxes in
1984,
compared with 35.9 percent in 1977, and they’ll pay 38.6 percent in
1988. The
bottom 50 percent of all families, on the other hand, saw their
share of all
taxes fall — to 12.9 percent in 1984 from 13.3% in 1977.
It’s also interesting to note that the CBO study only documents
figures for
1977 and 1984. (1984 is a year noted by statisticians for its high
unemployment) Here less percentage-wise equates with more actual
dollars
because the income of the top 10 percent has increased about 15
percent. The
study claimed the income of the top one percent will have increased
40 to 50
percent before taxes and as high as 63 percent after taxes.
Taking the nation as a whole, the study found that in 1977 people
were paying 22.8 percent of their income to the federal government
in taxes,
and in 1988 they were paying 22.7 percent. No mention of state,
local, excise
and property taxes.
(D-12) Does the preceding paragraph mean people were paying
fewer taxes in
1988 than in 1977? Explain.
Taxes over all increased during the Reagan years _(here is) a brief
rundown:
TEFRA, the Tax Equity ad Fiscal Reform Act of 1982 increased taxes by
$311
billion, the Social Security amendments enacted in 1983 were
responsible for
another $377 billion, there was a gasoline tax hike in 1983 for $28
billion
and the Deficit Reduction Act of 1984 brought in another $101
billion. The
1986 reform, advertised widely as "tax neutral" increased the
government's
revenue by $30 billion and the 1987 budget accord accounted for $23
billion
with miscellaneous increases amounting to $9 billion.
Then there was the bracket-creep due to inflation which occurred
between
1981-85. Before indexing took effect, bracket-creep added another
$650
billion to the federal coffers. _ (and) the Social Security payroll
tax, in
the early 1980s, shifted about $80 billion in annual revenue
collection from
progressive to regressive taxes.
(D-13)Define "inflation" and "bracket-creep". If inflation is 10 percent in one year, what would be the inflated worth at the end of the year of a vase purchased for $200 at the beginning of the year? Give your own example of "bracket-creep".
Some men put up bail money for a friend who was eventually convicted of a crime. The Internal Revenue Service (IRS----tax collector) confiscated the bail money. The judge was required to honor the IRS levy without questioning its validity. The friends were out $100,000!
(D-14)Does the IRS have to prove its case before it collects
money?
What happens when a tax payer is sure he doesn't owe the money the
IRS claims is
delinquent?
Do you think the IRS may have too much power?
The term "Capital gains" refers to a provision in the income tax laws that profits from the sale of capital assets are taxed at separate (generally lower) rates than the rate applicable to ordinary income. The intent is to preserve capital, promote its growth and encourage investment. Favorable tax treatment is an incentive to the holder of capital to back new ventures. All legislators understand the importance of expanding our economy and most legislators are aware that expansive economies require capital. Capital is needed to pay researchers and workers. Legislators constantly change rates based on the kind of assets and how long the asset is held before a profit or loss is realized. Today only the USA and Australia treat capital gains as ordinary income and at least Australia indexes the purchase price. To index is to adjust for inflation. On the other end, the USA is the only nation to try and limit the deductibility of capital losses.
Example showing how indexing works in principle
Capital gains tax without indexing:
X purchases a painting for $10,000
Inflation rate is 10% making the painting worth $11,000 in adjusted
dollars.
X sells the painting for $15,000.
Profit looks like $5,000.
Tax rate 20% = $5,000 x .2 = tax due of $1,000
Same situation only indexed:
X purchases a painting for $10,000
Inflation rate is 10% adding an artificial value of $1,000
Painting sells for $15,000
Profit looks like $5,000 but we deduct the artificial value due to
inflation
Tax rate 20% = $4,000 x .2 = tax due of $800
(D-15) How much was saved by indexing in the above example?
The lower the
inflation rate the less important indexing. What tax is owed in the
following situation, first without indexing and then with:
B buys stock for $1,000
Inflation is 6%
B sells stock for $2,000
Profit looks like $1,000 Tax rate 20%
tax due=_______________________
Same situation only indexed-tax due= _________________
According to Professor Robert Barro of Harvard, "The right policy would be to lower permanently the rate of taxation of capital income. This would be good for the recession, good for long-term growth and good for the stock market."
In a speech in 1963, President Kennedy advocated dropping the 25
percent
capital gains rate to 19.5 percent:
The present tax treatment of capital gains and losses is both
inequitable and
a barrier to economic growth. The tax on capital gains directly
affects
investment decisions, the mobility and flow of risk capital from
static to
more dynamic situations, the ease or difficulty experienced by new
ventures in
obtaining capital, and thereby the strength and potential for growth
of the
economy.
Opponents of capital gains base their opposition on three objections; cost, effectiveness and equity or fairness. They believe the wealthy get a disproportionate share of the savings. There are numerous and conflicting statistics. The ones most often cited by opponents claim the wealthiest two percent of the population receive more than 25 percent of their income in the form of capital gains, and that nearly 75 percent of all capital gains are realized by taxpayers with incomes over $100,000. Forty-five percent of these gains go to those with incomes in excess of $500,000. According to the Joint Taxation Committee, 67 percent of the direct benefits from a capital-gains tax cut would go to people making more than $200,000 a year.
(D-16) Ask your parents or another relative how they feel about lowering the tax rate on capital gains. Give a synopsis here of what they told you.
It may be worthwhile to deviate from our prime subject for a
minute because
people are going to try and persuade you with statistics all your
life.
Statistics are tricky because it is not always clear what is and is
not
included. On pages 24-28 of Taking A Stand On U.S.
Competitiveness, Rogers
says:
I can't emphasize enough how misleading statistics can be. There are
many questions that need to be asked when comparing one thing with
another.
For example, the U.S. share of only its manufactured exports between
1950 and
1990 dropped from 17.5 percent to 13 percent, whereas Japan's share
climbed
from 2 percent to 8 percent and West Germany's rose from 4 percent to
13
percent. That could be made to sound like a calamity. But there are
several
things to notice here.
First, we're talking not about all exports, but only about
manufactured
exports. Secondly, we're not behind the rest of the
industrialized world, but
we're even with West Germany and way ahead of Japan.
Our exports nearly
doubled during those nine years. In world manufacturing the shares
break down
just among the three biggest competitors: USA = 32 percent, Japan =
10 percent
and Europe = 20 percent.
You might have heard that the number of patents granted to Americans
dropped
from 62 percent of all patents in 1980 to only 53 percent in 1990
when 7 of
the top 10 corporate recipients were foreigners. _ But the
number of patents
(not percentage) issued to individuals (not corporations) rose
37 percent from
1986 to 1990; from 13,000 to 18,300. _ In 1989 the patents granted to
American
universities climbed 50 percent to 1,216.
The user fee is another popular method of taxation. User fees are said to be regressive because they fall most heavily on lower income people. As the name implies, the tax is paid when a thing is used or consumed –– paid by the user. The average local government derives more than 25 percent of its revenues from user fees. Sunnyvale, California, generates 37 percent of its operating budget from fees, another three percent from franchises and concessions.
The gasoline tax is a user fee. The Department of Energy claims that a new 50 cent per gallon tax on gasoline could (a) reduce gasoline consumption by 10 to 15 percent over a period of time (b) reduce oil imports by 500,000 gallons per day and (c) generate $40 billion in new revenue.
(D-17)Give three examples of user fees, other than the tax on gasoline.
Osborne and Gaebler claim
'Collective goods,' which benefit society at large, should not be
charged in
full to paying customers. Mass transit, for instance, benefits
everyone ––
whether they use it or not –– by limiting traffic congestion and
pollution.
If it were priced to cover its costs in full, fewer people would use
it and
the society would lose much of this collective benefit. RIG p 204
The public was told that if gasoline taxes were increased to a high enough level Americans would be forced out of their cars and into cleaner and more energy efficient mass transit which would result in improved air quality. Not so, according to Charles Lave, an economics professor at the University of California at Irvine. He studied data from Western Europe where such policies have been in effect for 30 years and where passenger car usage is steadily increasing. Further, says Dr. Lave, "on an actual per-passenger basis, U.S. cars are about as energy efficient as buses and subways."
(D-18) Reconcile what Charles Lave has to say with the assertion made by Osborne and Gaebler on p. 204 of Reinventing Government. (See above.) If you can't reconcile the two views, who, in your opinion, has the best argument?
(D-19) Could one conclude that anything that "limits traffic congestion and pollution" is a collective good? Name three other collective goods.
Kent Jeffreys, director of environmental studies at the
Competitive Enterprise
Institute has another observation concerning gasoline taxes:
In years past, the federal gasoline tax was justified as a user fee
to fund
highway construction. Now some environmentalists are recommending
increases
in the federal gas tax to solve a remarkable range of problems.
These include
traffic congestion, urban air pollution, greenhouse gas emissions and
excessive oil imports. ... As to congestion, a true market-based
approach to
heavily trafficked highways would be to price the roads directly.
Gasoline
taxes do not properly 'price' heavily traveled roads. They raise the
cost of
driving anywhere, regardless of the traffic flow or the purpose or
importance
of the trip.
If urban pollution is the problem, why not use on-road emissions
monitoring
devises such as those developed by Professor Donald Stedman of the
University
of Denver? Rather than imposing costs on every member of society in
a
fruitless effort to punish the few polluters, on-road testing makes
it
possible to identify gross polluters and design cost-effective public
policies
to deal with them.
Government wants to encourage people to provide for their retirement. Legislators realize that Social Security cannot --and was never meant to-- provide all the resources for a comfortable retirement. Personal savings and private pensions were always meant to be the other two legs on the three-legged Social Security stool.
We have witnessed a 40 year explosion in private pensions in this country. These private retirement funds grew from $17 billion in 1950 to $3 trillion in 1991. Unfortunately, many businesses now find the law too complex and the regulations too expensive to maintain a private pension fund for their employees.
IDAs (individual development accounts--sometimes advertised as "invest in your dream") have been proposed. They are like IRAs except they would be available to all Americans, not just wage earners. They would allow people to invest money over time for specific purposes, such as post-secondary or graduate education, health insurance and home ownership. Government, private corporations and charities could be encouraged to match the funds of low and moderate income earners. "IDAs would help the poor accumulate assets, rather than focus solely on income and consumption."
When Lynn Martin was Secretary of Labor during the Bush administration, she advocated POWER (Pension Opportunities for Workers' Expanded Retirement) to help workers without pensions. The plan was intended to encourage companies with less than 100 employees to set up pension plans by eliminating a lot of paperwork. Under the plan, employers would contribute two percent of an employee's pay. The employee would be allowed to contribute up to approximately $4,200 on a pretax basis, as much as 50 percent of which could be matched by the employer. If a worker changed jobs he or she could transfer pension benefits by telling a new employer to roll the money into an IRA.
(D-20)Find out what happens now to the contributions a worker makes toward a private pension plan when he changes jobs. Ask a relative or neighbor, or call the personnel office of any good size company.
The following is offered to counter the myth that Reagan made
deep cuts in
social spending:
1980 non-defense spending was $456,925,000
1989 non-defense spending was $838,775,000
This is often described by the media as a "deep cut."
The following is from a Wall Street Journal editorial "Quit
Feeding the Flab"
August 26, 1992:
An organization of conservative elected representatives, the American
Legislative Exchange Council (ALEC) _ found that though Washington is
sending
the cities less to administer, overall federal aid to urban residents
increased in the 1980s. _ the biggest gainers, more than the woeful
schools
and hospitals, were the public-housing bureaucracies and mass
transit.
Osborne and Gaebler provide some history regarding public housing:
Public housing began as transitional housing for working people who
had come
upon hard times, during the Depression. It was an inexpensive, safe,
stable
environment for families while they got back on their feet. Public
housing
authorities had rigid standards, and residents had clear
responsibilities:
they had to pay their full rent; they were generally not welcome if
they were
on welfare; if they had children, they had to be married; and if they
found
jobs and could afford better housing, they had to move.
Public housing worked well for two decades, even though it was a
classic
example of the centralized, top-down, bureaucratic model. Then,
during the
prosperity of the 1950s, a dramatic change took place. Working
families moved
out of public housing, and poor, illiterate blacks from the rural
South poured
in. Bureaucratic organizations are slow to respond when conditions
change,
and housing authorities were no exception. As this radically
different
population moved in ... few housing authorities changed anything.
Regarding mass transit, Rogers offers this:
Miami residents turned down a penny increase in their sales
tax to help pay
for their Metro rail by a vote of almost two-to-one. Despite this
repudiation
by the resident-voters, local officials built the subway anyway,
using mostly
federal funds. There was no local commitment. This and many other
projects
would not have been built except for federal subsidies.
A report by the Joint Center for Urban Mobility Research found
federal
subsidies encouraged city officials to expand services into
low-density areas
and do a lot of other things without weighing the economic
consequences.
The heavily subsidized subway and commuter rail systems which reach
out into
the suburbs are used most by upper-income persons. A 1983 study
revealed that
only 23 percent of operating subsidies benefited persons below the
poverty
level, or about a 12-cent subsidy per trip for poor riders, compared
to a
20-cent subsidy for persons with annual incomes over $50,000.
The subsidies served as a catalyst to escalate wages for local
transit
workers.
The tax base in cities is shrinking, while the demand for unemployment compensation, welfare, Medicaid, AIDS, homelessness and the fight against teen-age gangs are all accelerating.
Those that see a need-driven government rather than a fixed-resources government would probably have no problem with the following quote from Reinventing Government page 342: "... governments constantly shape the private marketplace to meet citizens' needs."
(D-21) Define need-driven government and fixed-resources government. How do you imagine they would differ? Which would you personally favor and why?
Even though California has only 12 percent of the nation's population, it accounts for more than a quarter of the nation's welfare spending. There is a gap between what current law says the state must spend on entitlements and what the tax system can produce. Raising taxes would put the burden on those who are not likely to receive the services directly (older, white, middle to upper income taxpayers). Some experts believe that higher taxes will drive the "payers" out of state.
Federal subsidies reach low-income people in the form of food stamps and vouchers for rent and child-care. But a lot of both private and public dollars earmarked for the poor never reach their destination. Osborne and Gaebler claim that in New York City in 1983, only 37 percent of the $7,000 set aside for each low-income person ever reached its destination.
We find the following on page 69 of Reinventing Government:
According to a 1984 study of Cook County, Illinois, conducted by
Northwestern
University's Center for Urban Affairs and Policy Research, "federal
state and
local governments spent $6,209 per poor person ... yet only 35
percent of this
money reached the poor in the form of cash. Another 13 percent came
as food
stamps and rent vouchers. The majority, 52.6 percent, went to
service
providers: hospitals, doctors, nursing homes, social service
agencies, job
trainers, lawyers.
In 1985, non-cash benefits to the poor were valued at $56.2 billion;
almost
double the $30.2 billion cash benefits. If, according to a 1986
study by the
Census Bureau, non-cash federal assistance was to be considered, the
number of
citizens living in poverty might be 11.5 million lower than
officially
estimated. Every year beginning in 1979, the non-cash portion of
public
assistance has resulted in a lower number of poor people than
officially
published. To include even the insurance value of Medicare-Medicaid
benefits
in counting non-cash aid, would lead to the ridiculous result that in
eight
states the value of those benefits would put an elderly person with
absolutely
zero cash income in the "above poverty" level. Counting Medicaid
could
mean that "the sicker the richer".
Elsewhere, Osborne and Gaebler contend,
Our tendency to reward failure has literally crippled our efforts to
help the
poor. Most of the money we spend on the poor---welfare, food stamps,
Medicaid, public housing, housing vouchers, child care
vouchers---rewards
failure, because it goes only to those who remain poor.
If a welfare recipient saves enough to buy a car so she can look for
work, her
grant is reduced. If she finds a job, she not only loses her welfare
check,
she loses her Medicaid coverage (after a year), her food stamps are
reduced,
and if she lives in public housing, her rent often triples. One
study, done
in Louisville, showed that a public housing resident with two
preschool
children had to earn $9 an hour in 1989 just to break even with her
total
welfare package. ... elsewhere the figure would (might) be
higher.
Congress decided to deny welfare to most families if the father was
present---thus driving many fathers away. It also gave welfare
mothers in
public housing subsidized rent, which meant that their rent often
tripled or
quadrupled if they left welfare to work. These changes created
powerful
incentives to stay single and unemployed. RIG on p 59
(D-22)List five incentives to remain in poverty.
"If you want to multiply wealth, multiply the number of minds at work in creating it." Ownership invites people to blend themselves with their work. Any new war on poverty might be directed at helping people gain assets, not maintain income. They need a chance to own their homes and become accountable for their own decisions.
More and more people are beginning to sense that self-help is one way to attack poverty in an age when there are too few dollars and helping hands. According to census data, Asian-Americans, Pacific Islanders and Native Americans owned 376,711 U.S. businesses in 1987, up 87 percent from 1982. Hispanic owned businesses were up 81 percent, black-owned business were up 38 percent and overall business ownership increased 14 percent between 1982 and 1987.
As we've determined, statistics can be skewed to substantiate anything. For example, zero was the median income of individual Americans not long ago (half above and half below) simply because housewives and children didn’t show any income at all. In the 1970s the GNP rose, but so did inflation. If one looks closely at any rapidly increasing income one may see that its cause is nothing to celebrate. What is hidden beneath the healthy looking GNP is the disruption of American families. More housing, more fast food sales, more use of day-care centers and domestic help, psychiatric and social services of every kind and more job holders are a product of divorce and staying single longer. The example of the man who marries his housekeeper is often used to show how GNP can be diminished. In marriage, the money that was previously paid to the housekeeper is now voluntarily shared but is not reportable income and does not show up in GNP statistics as before. Examples like these should put us on guard and make us aware of the illusions that surround us
(D-23)Who are the poor? Is this a stagnant group? Do you personally know anyone who was poor (less well off financially) once and is now rich (more well off financially)? Do you personally know anyone who was rich once and is now poor?
According to the most recent Census the number of Americans below the poverty line amounted to 13.5 percent of the U. S. population. The poverty figures released in September, 1991 showed the poverty rate for children under the age of six stood at 23.6 percent. The official poverty line, which varies according to such factors as family size and age, averaged $6,652 for an individual and $13,359 for a family of four.
And now we're back to statistics when we try and define "poor."
Again we turn
to Rogers:
Poverty was one of those subjective words until policy makers stepped
in and
made it "whatever they want it to mean." Many people are counted as
poor who
are not deprived by any objective standard ... Almost half our
population was
poor in the 1930s, using the current poverty line deflated for 1930s
dollars.
By 1950 the poverty rate had fallen to thirty percent; to twenty
percent by
1964 and to twelve percent by 1969.
Poverty thresholds were first set in 1961 when the Social Security
Administration, along with the Agricultural Department, determined
the income
necessary to adequately feed the number of children and adults in any
given
household and multiplied by three---food took approximately one-third
of most
people's household budgets back then. It takes far less today.
Figures for children in poverty were first calculated in 1929. In
1959, the
figures stood at 26.9 percent and in 1985 at 20.1 percent meaning
that
although poverty had declined since the fifties, close to 13 million
children
were living in families below the 1985 government's official poverty
line
cut-off of $10,989 for a family of four. Of those 13 million
children, 43.1
percent were black, 39.6 percent were Hispanic and 15.6 percent were
white.
(D-24)Ask your research librarian to help you find the
threshold for poverty
benefits for a family of four in 1993.
In 1974, children became the poorest group in our
population--whatever that
means. Children have never had any money and money is what is
counted in
determining the statistics relevant to poverty. If children and
adults were
evenly distributed there wouldn't be a difference in their poverty
rates.
According to Victor Fuchs, Economics Professor at Stanford
University, 40
percent of all children and nine percent of all adults live in
households with
three or more children and 57 percent of all adults live in
households
containing no children.
(D-25) Would that mean even if incomes of adults are similar,
the per capita
income is much lower in homes with children? Explain.
Non-labor income attributable to pension and Social Security benefits
has
grown more rapidly than labor-income, which has in fact declined in
recent
years. Children are clearly more dependent on the labor-income of
their
parents, which helps account for the statistics showing an increase
in
childhood poverty in recent years.
(D-26)Name 3 kinds of income considered to be non-labor
income.
Poverty figures are not accurate measures of anything. Families
supported by
sales and investments often receive large sums of money one year and
then
nothing for two or three years. If net worth were considered, the
poverty
statistics would be more accurate. They would also show a more
accurate
picture if housing, health and food subsidies were considered It is
well
known that some people are better off financially by being on the
dole, than
they would be working for low pay. Many low-income families, while
their
earnings may put them above the poverty level, do not have as high a
standard
of living as those with lower incomes supplemented by government
subsidies.
(D-27)After reading the preceding paragraph, how do you feel about the message goverment is conveying?
Patricia Ruggle, of the Urban Institute, advocates using a new method to measure poverty. She believes today's poverty level is too low because it is estimated using minimum needs. Instead of the 1989 level of $9,885 for a family of three, using her revised levels, the poverty rate would have been set at $15,000. She criticized the old level because it left no margin for clothes, taxes, transportation, work expenses and health care. If her revised poverty figures had been used, the 1988 poverty rate in this country would have encompassed 23 percent of our citizens instead of 13 percent. The rate for children would have been 31 percent. The poverty rate for those 65 years old and up would have gone from 12 percent to 29 percent. More than 50 million Americans, including 20 million children, would have been considered poor under her criteria.
(D-28)What would happen to the federal budget deficit if Ruggle's criteria for defining poverty were adopted today? Explain why and include in your explanation a definition of "entitlement" as used by government.
A woman wanted a child but didn't want to get married. She entered into a contract with a man in which both parties agreed that if the man made it possible for the woman to have a child, the woman would release him from any responsibility for the child's support. When the child was five years old, the courts voided the contract, saying the woman did not have the legal ability to deny her child the economic support otherwise imposed by law.
(D-29)How would you feel if you were the man in the above true example? How do you personally feel about the uncertainty of contracts? How important are reliable enforcable contracts to the conduct of business? Does our U.S. Constitution make any mention of contracts? What does it say?
Even if a woman could sign away her right to sue an employer for
damages,
nowadays the unborn child could sue the company at a later date.
The Catch-22 of fetal protection vs. sex equality are excellent
examples of
how our legal system fails its most basic duty of setting out
reasonable rules
for reasonable people to follow.
Wall Street Journal Gordon Crovitz 10-10-90
You have cases where businesses are forced to permit women to work in jobs that threaten the health of unborn babies. For complying with civil rights laws, businesses are exposed to punitive, as well as compensatory damages.
(D-30) Define "punitive damages" and "compensatory damages." Make sure you know the difference.
A 1990 case is an example: A woman working in a battery manufacturing plant was exposed to levels of lead which she claimed caused grievous birth defects to her newborn. She sued her employer. There are exceptions to civil rights laws called BFOQs----bona fide occupational qualifications. The BFOQs were a recognition that if it was impossible to prevent women from working on potentially dangerous jobs, tort liability might drive U.S. businesses overseas. Even if a business did not move, they lost market share to foreign competitors who don't face the same liabilities. No purchaser of parts wants to be at the mercy of a supplier who can be driven out of business by the courts. Plaintiffs used to have to prove bad intent in order to obtain punitive damages, but that requirement was dropped in the 1960s. In 1989, in California, one third of jury verdicts awarded punitive damages averaging $3 million.
(D-31)Ask two local businesses the cost of their annual liability insurance premiums. Choose one business from a profession such as engineering, medicine or law.
An average California business paid 50 percent more than the U.S. average to insure against employee injury in the work place, according to Workers' Compensation Monitor. Average workers' comp costs may have doubled between 1985 and 1991. No one really knows the total obligation incurred because sometimes claims are filed long after a worker has been terminated. California is one of the few states that allow claims for stress disability and the claim is made most frequently against government agencies. The average cost per litigation has been $7,000 per case in California which meant in the state suffering from a $14 billion budget problem, allowing stress disability cost $1 and half billion dollars in 1990.
(D-32)Find out the average premium a businessman in your state pays to insure his employees against injury.
A lot of things government is now doing could be done by the private sector except for the disincentives.
The threat of litigation is one of the biggest disincentives to solutions.
(D-33) Define "litigation." Define "litigious society."
What follows are not typical but are some of the more outraeous examples of litigious America.
1) A construction worker and a police officer pulled a pregnant woman in labor from an overturned car only moments before it exploded. For their good deed they were sued for negligence by another accident victim they didn't have time to help. The two "good samaritans" only had seconds to act. The police officer is certain that if the construction worker hadn't stopped and acted quickly, a lot of people would have died on the San Diego freeway in early November, 1990. The suit claimed the two "good samaritans" were negligent in not setting up flares to warn oncoming motorists and in not caring for the second person in the car. This "second person" somehow got out on her own and was injured further when another car careened into the overturned car. The person bringing suit was only 17 years old so you might assume a lawyer played a significant part in the decision to sue.
2) A convicted felon attempted to sue the owners of a bar, claiming that, but for their negligence in allowing his under-aged victim into their establishment, he would not have shot and killed him.
3) Ruth Jandrucko of Miami was awarded $40,000 in worker's compensation because her fear of black people made it impossible for her to work in a racially integrated office. She had once been robbed and beaten by a black man. Her employer paid for psychological counseling.
4) The DC Superior Court ruled that a landlord was liable for failing to stop the noise from neighbors that drove a former tenant to move. Even though the managers had sent memos and had meetings with the noisy tenants and even started eviction proceedings (successful a few weeks after the plaintiff left) they were ordered to return the plaintiff's security deposit and pay his court costs. The decision is unique because previously landlords have only been liable for things they could affect directly; like plumbing or electrical problems. The victorious attorney said, "We tapped a previously untapped opportunity."
5) No one dares operate any type of business in a litigious society without insurance coverage. A business offered a safe ride home to drinkers, charging $12.50 for trips up to 10 miles. The business had never put a claim in for insurance and was insured for $1,500,000 per vehicle. Nevertheless its premiums were continually raised until they reached $10,000 a year. After 125,000 trips the business was about to fold because of insurance costs.
6) Town officials in Amherst, Massachusetts, allocated $125,000 for the removal of bird droppings from the Town Hall attic. Residents were outraged and formed a group called Pigeon Busters (they were dressed in Ghost buster paraphernalia which included gas masks, respirators and rubber boots) and offered to clean up the mess for free. The town officials refused because the cleaners needed to have insurance to cover the town and themselves. The volunteers offered to sign waivers, but the town said it would still be liable. Bids, ranging from $50,000 to $260,000, had come in from professionals with insurance.
The problem started when a town employee thought she had contracted a disease transmitted by birds. Her supposition turned out to be false but it spurred the officials to action. The volunteers came up with a brilliant idea that apparently hadn't occurred to the elected officials---fix the broken window frame that had let the pigeons enter the attic!!!
7) A dyslexic student sued a school for having multiple choice questions. The pleading stated that the school was negligent in not providing alternate testing to accommodate his handicap.
8) A Florida man sued over a haircut he claimed was so bad that he needed psychiatric help to overcome an ensuing panic-anxiety disorder that deprived him of his right to enjoy life.
9) An oil rigger sued the state of Texas for waiting six years before arresting him. The suit charged the state with lack of due diligence in trying to find him after his appeal from a conviction for armed robbery was denied.
10) A fortune teller supposedly lost her psychic powers following a CAT scan. She was able to persuade a Philadelphia jury to award her $1 million, even though the judge threw out the verdict.
11) In 1986 hundreds of claims were filed blaming automobile accidents on an unidentified design defect in the Audi 5000. By 1989 Audi was facing demands totaling $5 billion. After comprehensive studies by the National Highway Traffic Safety Administration, and its counterparts in Canada and Japan, the cause of the sudden acceleration in the Audi was determined. The extensive studies showed that the cause was the same as in any other car---a foot placed accidentally on the wrong pedal. Despite this total vindication, a California court brought in a $3.7 million verdict because Audi should have made its car idiot-proof!
(D-34) List by number the 11 examples given above starting with the one you find the most outrageous and ending with the one you consider the most reasonable.
You need to know what people are talking about when they discuss tort reform.
It is a crime to intentionally inflict physical injury on another person. Sometimes gross negligence is also criminal. Action in a criminal court is initiated by the state (police power) and not the injured individual. In order for the state to have an actionable case, the injured person must press charges. The wrong however, is considered to be against society and the injured party cannot sue for damages. The objective in a criminal court is punishment and/or rehabilitation of the criminal.
An individual can seek damages on different grounds in a civil court. A civil injury is called a tort. Torts are not crimes against society. Torts are often caused through negligence. Tort law used to require a monetary loss in order for an injured party to have a legitimate "cause of action"----in order to bring suit. Doctor bills, loss of pay from missed workdays and repair bills are all evidence of monetary damage. Tort law has evolved so that today apprehension, fear or anxiety that an injury might occur is all that is required to seek a civil judgment. There is evidence that courts are used excessively to settle even minor conflicts today. Since most claims are paid by third-party insurers, insurance coverage is required in almost every conceivable situation. Demand and constant claims cause premiums to rise. This in turn causes the cost of almost every activity and product to rise. Perhaps worst of all, constant court actions breed antagonism and contempt.
(D-35) Read these examples and give four examples of your own:
two torts and
two crimes.
Tort: Mary fell through a rotten landing when visiting in an office
building.
Tort: Jim made a contract with Bill and then refused to go through
with the deal.
Crime: Jack hit Dick on the head with a baseball bat.
Crime: Ann passed a forged check in a department store.