Restoring Freedom at Home II

The Heartland Institute’s 21st anniversary benefit dinner, held on September 13, was a wonderful event thanks to the 580 people who turned out to help us celebrate “Restoring Freedom at Home.” The event’s theme was taken from President George W. Bush’s second inaugural address, in which he said “America has need of idealism and courage, because we have essential work at home–the unfinished work of American freedom.”

In last month’s Heartlander I described the slow but steady progress being made to restore freedom in three arenas: school choice, health care, and environmental protection. This month I look at the much more difficult cases of tax and budget issues, lawsuit abuse, and the digital economy.

Taxed to Death?

Governments in the U.S. take approximately 40 percent of the country’s total income in taxes. In other words, nearly half of all the income generated each year is sent to governments to spend.

How free are you when governments take half of your income? Serfs in the 16th and 17th centuries typically owed their feudal lords only a quarter of their crops and livestock, and often much less. Our forefathers fought a war for independence over tax levels that were far lower than those we now pay without complaint.

The good news is that a growing number of people pay no federal taxes at all. According to a recent Tax Foundation report, 29 million people had no federal income tax liability in 2000, and the number was expected to reach 44 million in 2004. The bad news is that people who do pay taxes pay much more to make up for those who pay nothing.

Daniel Mitchell at The Heritage Foundation writes, “According to data from the Internal Revenue Service, the top 1 percent of income earners pay nearly 35 percent of the income tax burden; the top 10 percent pay 65 percent; and the top 25 percent pay nearly 83 percent. The bottom 50 percent of income earners, on the other hand, pay barely 4 percent of income taxes.”

Federal income taxes are only a small portion of the taxes we pay. We also pay federal payroll taxes for Social Security and Medicare, state income taxes, state and local sales taxes, property taxes, death taxes, and excise taxes.

Spending Drives Tax Hikes

The growth of government spending is what makes this tax burden necessary. The federal budget grew 14 percent in President George W. Bush’s first three years, with discretionary spending growing nearly 50 percent. The 2006 Bush budget would increase the Department of Education budget by 40 percent since 2001 and the Department of Commerce by 85 percent.

Bush’s 2006 budget was supposed to be an “austerity” budget that finally would rein in spending, but it started with a proposed 3.6 percent increase in federal spending and has taken wing from there. The energy and transportation bills signed by the president are budget busters, and the just-announced spending to “rebuild New Orleans” is likely to make 2006 another record-breaker.

Meanwhile, state governments have been indulging in their own spending orgy. Between 1990 and 2000, total state spending grew by a staggering $512 billion, or 89 percent. All of that new built-in spending is moving through today’s budgets like a pig through a python, causing state politicians to cry about “budget cuts” even as they reap record revenue increases due to the reviving national economy.

Work to Be Done

Voters need to hold to the fire the feet of elected officials, and especially Republicans who pretend to be pro-taxpayer. Officials who cut taxes and balance budgets must be rewarded with success at the ballot box, and those who raise taxes and increase spending should be targeted by taxpayer groups and lose elections.

Tax and expenditure limits, such as Colorado’s Taxpayers Bill of Rights (TABOR), are a structural solution to the problem of too much spending during good economic times and tax hikes during bad times. Efforts are underway across the country to adopt TABOR through referenda and initiative where they are allowed, or legislatively if not. Those efforts deserve everyone’s support.

Voters need to be far more aggressive in opposing excise taxes and so-called “sin taxes.” These taxes often pass by dividing the public–pitting smokers against nonsmokers, beer drinkers against nondrinkers, tourists against residents, and so on. They are also easily hidden from taxpayers, a good example being the Spanish-American War tax on telephone service.

Legal Reform

Back in 1999, former secretary of labor Robert Reich wrote, “In the old days, state legislatures or Congress would enact laws, which would be administered by regulatory agencies. But now the era of big government is over. ‘Regulation’ is a bad word. So how are these regulatory issues being handled? Through lawsuits.”

Unfortunately, Reich was right. Environmental groups sue corporations and the government in the name of clean air, endangered species, and even “global warming.” Gays, feminists, ethnic minorities, and the disabled sue for special accommodation of their needs and wants. Parents sue when their children don’t do well in school, or when they are punished for misbehaving.

Tort litigation costs about $233 billion a year, amounting to an annual “tort tax” of approximately $800 per person. Recent targets have included the manufacturers of guns, prescription drugs, lead paint, tobacco products, alcohol, cars and trucks, and even soda and fast food.

Examples of Lawsuit Abuse

Some examples of lawsuit abuse are so outrageous as to be almost humorous. For example, a fan of NBC’s “Fear Factor” reality television show is suing the network for $2.5 million in damages, claiming an episode in which contestants ate rats pureed in a blender made him dizzy, lightheaded, and nauseous and caused him to crash into a doorway, “causing suffering, injury, and great pain.”

A Milwaukee jury recently awarded $17 million to an 84-year-old man who was paralyzed in a car accident caused by a volunteer for the Legion of Mary–a Catholic lay organization that meets on church property of the Archdiocese of Milwaukee. The jury somehow concluded that the volunteer–who was delivering a statue of the Virgin Mary to an invalid at the time of the accident–should be considered for legal purposes an employee of the Archdiocese.

A New Jersey jury awarded $850,000 to a man who got drunk after a New Year’s Eve party and passed out in a snow bank, suffering severe frostbite to his right hand as a result. Two local police departments were held liable because they had responded to a 911 call about a drunk who had been hit by a car, had responded, but could not find him. He was discovered some nine hours later by a passer-by.

Small Steps Toward Reform

There are some signs of progress in efforts to limit lawsuit abuse. More than 30 states have passed caps on damages and some are passing tort reform measures designed to discourage certification of classes when alleged victims vary considerably in their damages or assumption of liability. Several states, including Colorado, Texas, and Virginia, have passed laws prohibiting state attorneys general from hiring outside counsel to litigate on the state’s behalf under contingency fee contracts.

Plenty of work remains to be done to halt lawsuit abuse. Robert Levy, a legal expert with the Cato Institute, says states can take away from juries the power to determine the dollar amount of punitive damage awards, or require a showing of actual malice, intentional wrongdoing, or gross negligence. They can require a higher standard of proof (beyond reasonable doubt) for these awards. And they can eliminate the doctrine of “joint and several liability,” which holds the defendant with the deepest pockets liable for the entire amount of the award.

Levy also says Congress should act to limit the jurisdiction of local courts to business activities occurring in their own states. That would have prevented the abuse at the center of State Farm v. Campbell, where a Madison County jury was able to extend Illinois’ consumer protection laws to consumers in all 50 states. Congress also could give manufacturers who face multi-state litigants the right to choose to be tried in the state where the firms are located. States then would have an incentive to make sure their laws are reasonably defendant-friendly.

The Digital Economy

Advances in information technology, particularly involving the Internet and microprocessor design, have made the creation and transmission of text, sounds, and video in digital form extraordinarily fast, inexpensive, reliable, and flexible. That in turn has caused the convergence of technologies that previously delivered each type of information: printing (text), telephone and radio (sound), television and cable (video).

This convergence is transforming virtually all industries and institutions. E-commerce allows manufacturers to become retailers and retailers to become value-added consultants. Electronic Data Interchange (EDI) has allowed companies to radically reduce their inventories and engage in customized production.

Convergence demands similarly dramatic changes in public policy, yet many state and federal regulations still follow a “command and control” model reflecting the Progressive Era’s faith in central planning and well-trained elites. This top-down model doesn’t work well when applied to the Internet, with its millions of users and trillions of transactions taking place each year.

Small Steps in the Right Direction

At the national level, Congress recognized that the separate communications markets defined by regulations were swiftly being made obsolete by the Internet and other technologies of convergence. The Communications Act of 1996 lifted many of the restrictions on entry into the telecommunications industry, sparking significant new investment, intense competition in some markets, and a wave of mergers and acquisitions.

While federal regulators loosened their grip on these entities, most states failed to follow suit. Only a few states, such as Texas just in the past month, are aggressively deregulating local monopoly cable franchises and welcoming new competitors into formerly protected markets. Most states are placing roadblocks in the path of industries seeking to compete successfully against companies armed with the latest digital technologies.

Bizarrely, local governments seem to be moving in the opposite direction, away from empowering consumers and encouraging competition and toward government-owned and -operated broadband utilities. Cities ranging in size from hamlets in Iowa to Philadelphia and San Francisco either operate municipal broadband networks or have on the table proposals to create them.

What Needs to Be Done

The Heartland Institute has been leading the battle against municipal broadband, publishing policy studies and shorter commentaries and speaking at conferences and seminars across the country. But we need federal and state regulatory reform to avoid strangling the digital economy in its cradle.

Six principles put forward by the Secretariat on Electronic Commerce at the U.S. Department of Commerce back in 1999 are still sound guides for public policy:

1. Governments must allow electronic commerce to grow up in an environment driven by markets, not burdened with extensive regulation, taxation, or censorship.

2. Where possible, rules for the Internet and electronic commerce should result from private collective action, not government regulation.

3. Governments do have a role to play in supporting the creation of a predictable legal environment globally for doing business on the Internet, but must exercise this role in a non-bureaucratic fashion.

4. Greater competition in telecommunications and broadcast industries should be encouraged so that high-bandwidth services are brought to homes and offices around the world and so that the new converged marketplace of broadcast, telephony, and the Internet operate based on laws of competition and consumer choice rather than those of government regulation.

5. There should be no discriminatory taxation against Internet commerce.

6. The Internet should function as a seamless global marketplace with no artificial barriers erected by governments.

To this list I would add:

7. Protection of private property rights is an essential condition for effective planning and the long-term growth of the digital economy.

8. Effective public policy advocacy and education are required to overcome opposition to change by special interest groups if the public is to benefit from the many opportunities and efficiencies made possible by the digital revolution.

Each delay and barrier raised to the deployment of a national broadband infrastructure translates into lost opportunities for economic growth and wider access to markets. Policymakers need to act quickly to help the new converged digital economy reach its full potential.

Conclusion

When you look at the world from the perspective of freedom, and especially freedom from unnecessary government interference and coercion, you quickly realize the work of American freedom is very much unfinished. There is so much more to be done!

The Heartland Institute is one of only a handful of groups–a few hundred–devoted to restoring freedom at home. Thank you for your generous support of our work.