September 6, 2007

Sometimes What is Old is New: Misguided Incentives Drive Public Sector Taxation

Donald B. Hawthorne

As we debate the teachers' strikes, some of the issues at stake took me back to my second post ever on Anchor Rising:

Talking about a pro-tax ballot initiative defeated in Oregon during 2002, a Wall Street Journal editorial stated:

When the budget issue is framed in terms of higher taxes, voters don't understand why government should be exempt from the same spending discipline the rest of us live by. "I am a normal person and when I don't have enough money I have to change my habits," 26-year-old Heather Bryan told the AP, explaining her vote against the measure. "Government should be the same way."

But it isn't and that begs the question of why?

Terry Moe offers this opinion of why government behavior is problematic (PDF):

Public agencies usually have no competition and are not threatened by the loss of business if their costs go up, while workers and unions know they are not putting their agencies or jobs at risk by pressuring for all they can get. Governmental decisions are not driven by efficiency concerns, as they are in the private sector, but by political considerations, and thus by [political] power.

In comparison, when faced with competition in the private sector, irresponsible management action eventually results in loss of market share, lower profits, and loss of jobs. In other words there are direct and dire consequences to bad behavior.

Or, as Wendell Cox wrote last year in a National Review Online article:

How different government is to the real world of the private sector. When [corporations get] into financial trouble, they cut costs and get concessions from their unions, while doing everything they [can] to maintain service levels. When government gets into trouble, it threatens deep service cuts, all too often cuts aimed at the programs that cause the greatest public consternation, in a calculated strategy to obtain the additional funding necessary to maintain the status quo.

The bottom line consequences for working families and retirees are clear: When taxes increase, your standard of living declines.

Practically speaking, the decline in your family's standard of living results in some combination of the three following outcomes: (i) you incur new debt; (ii) you use some of your savings; and/or (iii) you reduce your current spending for items such as food, clothes, heating oil, medical care, car repairs as well as savings for college and retirement. All three outcomes are direct and tangible costs incurred by every family - you have less of your hard-earned income to spend on your family's needs.

It is worth noting that politicians, bureaucrats, and public sector unions suffer no similar consequences when they act irresponsibly. This creates a curious lack of incentive for them to change their behavior.

It was what led Calvin Coolidge to say:

Nothing is easier than spending the public money. It does not appear to belong to anybody. The temptation is overwhelming to bestow it on somebody.

Or, as Lawrence Reed said in his October 2001 speech to the Economic Club of Detroit:

When you spend other people's money to buy something for someone else, the connection between the earner, the spender and the recipient is most remote - and the potential for mischief is the greatest.

The mischief is clear when you see powerful interest groups (including both corporations and unions) manipulate the system for their advantage, all to the detriment of individual families who lose more of their freedom through ever-increasing tax burdens.

So, what can we do about this problem? Any solution requires a vigilant citizenry that makes the mischief transparent to the voting public. And then it comes down to engaged citizens gathering enough political power to bring about change.

Do we have the courage to do so in Rhode Island?