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The ‘Soft Tyranny’ of Hidden Taxation

THE issues of scandals, term limits, Haiti, Iraq and crime dominate the news and TV ads this campaign season. However something deeper and mostly unarticulated may be doing more to shape the nation’s politics. The decisive issue of 1994 could well be people’s continuing frustration over their inability to get ahead financially – and their conviction that government is both directly and indirectly hampering them.
If so, it would explain why voters give President Clinton and his party so little credit for the current recovery. The president may point to improved economic statistics, just as George Bush did in 1992, but what counts is how people feel about their own lives. It does not cheer voters to know that the economic expansion is continuing if their families still cannot make ends meet.

Moreover, even the economic numbers are not all encouraging. Real family income is down. New Census Bureau figures show poverty increasing to 15.1 percent, with few well-paying jobs being created for unskilled workers. The brief drop in interest rates that was supposed to be the payoff for last year’s higher taxes is gone and even the best loans are now 5 percent over the inflation rate.

The large, increasingly middle-aged middle class finds salary increases scarce and restructuring layoffs common. If these are prosperous times, people wonder, what will the next recession bring? With many ordinary families turning over to government at various levels almost half their incomes (roughly 25 percent federal income tax, 15.3 percent Social Security, 8 percent state and local sales tax, plus property taxes and assorted special taxes and fees), it becomes harder and harder for the baby boomers who have so shaped political trends in the past to see how they can afford to send their children to college or save adequately for retirement.

It is not surprising, therefore, that charitable giving has now dropped 11 percent below its Reagan-era high, according to the nonprofit group, Independent Sector.

Polls show that voters no longer are impressed by politicians’ offers to satisfy their personal concerns with still more government programs. That is part of the reason why Democrats, as the party that traditionally defends the utility of government action, are in particular trouble this year. Even now-standard efforts by congressional candidates to avoid a negative national trend by “localizing” campaigns may backfire. Localizing usually means showing how the incumbent can “bring home the bacon.” But as voters watch television accounts of this going on all over the country – Sen. Ted Kennedy holding up giant posters of federal checks he is delivering to particular constituencies and Speaker Tom Foley boasting of road contracts and police positions brought to Spokane – they see that it is they who are paying for all that bacon and that the price is too high. Yesterday’s bacon is becoming today’s pork.

The issue is not just direct federal spending and taxation, however. Several years ago, recognizing citizen resistance to new taxes, proponents of government action sought new ways to achieve what they felt were worthy ends. Various forms of indirect or hidden taxes have resulted.

For at least the past decade, Congress has pursued indirect taxation by mandating new services at the local level without providing funding to cover them. Congress gets the credit, and state and local authorities get the bill.

Another tactic is to force specific kinds of business to pay subsidies for expanded federal services to favored classes of citizens, or for government itself. This was a theme of the telecommunications legislation recently promoted by Sen. Fritz Hollings (D-S.C.). In this approach, the congressman again takes a bow – “Look, I’ve given you the information superhighway!” – and no one is supposed to notice that the costs are passed along to ratepayers and pension funds and individuals who have invested their savings in the business’ stock.

Regarding stockholders, federal lawmakers wanted to appear hard-nosed about stock manipulation by business managers, so they made it easy for lawyers to round up a few supposedly aggrieved stockholders to bring “class action” suits against companies that have unpredicted rises or drops in stock prices – as if a manager could always know what a stock will do. The consequence is that high-tech start-up companies are being forced by a vague and speculative law to settle one suit after another, mostly to enrich the lawyers involved. The cost, typically about $5 million per case, is money that otherwise could have been invested in the product or hiring new workers.

Other examples of government’s increasing drag on the economy can be found in the backlog of 92,000 discrimination cases at the federal level and the rising number of expensive and often meritless product-liability, malfeasance and malpractice lawsuits that have broken away from reason and are loading billions of dollars of loss on companies. The odds of hitting the jackpot in a tort lawsuit, for example, are better now than in the lottery, and the justice is often as random. Sen. Slade Gorton has led the fight to bring the law into line with common-sense standards of fairness, and despite the fervent activity of the plaintiff bar that benefits from the current situation, legislative reform may be possible next year.

Granted that the issue of hidden taxes is difficult to explain; the effects on ordinary citizens, after all, are indirect. The nominal goals of government action, furthermore, almost always sound worthy. But, fortunately, the health-care battle of the past year was long enough and deep enough that it performed a valuable educational service. It helped Americans realize that when government provides private benefits it does so at the ultimate expense of the taxpayers and consumers, and often does so inefficiently, burdening the economy in ways unanticipated by over-eager politicians.

The price of too much government regulation, lawsuits and categorical funding of programs is paid by the job that isn’t created in the private sector because a business hesitates to add to its government-generated overhead. It is the raise that doesn’t happen because profits have been slashed by frivolous lawsuits. It is the struggling enterprise that is strangled in red tape while still in its infancy.

Voters who are angry at government may not have analyzed all the ways that over-regulation and litigiousness place a restraint on economic growth and individual economic advancement. But people do see the result in their own reduced ability to improve their lot. They see an expansive government becoming what Alexis de Tocqueville called a “soft tyranny.”

If Republicans can explain how the hidden-tax issue is connected with voters’ open disenchantment with government, this could be their year.

Bruce Chapman, a former director of the U.S. Census Bureau, is president of the Seattle-based Discovery Institute.

Bruce Chapman

Cofounder and Chairman of the Board of Discovery Institute
Bruce Chapman has had a long career in American politics and public policy at the city, state, national, and international levels. Elected to the Seattle City Council and as Washington State's Secretary of State, he also served in several leadership posts in the Reagan administration, including ambassador. In 1991, he founded the public policy think tank Discovery Institute, where he currently serves as Chairman of the Board and director of the Chapman Center on Citizen Leadership.