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Economics & Regulatory Issues

    Economic Rankings and the Freedom to Grow
    Two different state economic rankings showed Vermont as 12th and 50th. Why the discrepancy? What can be done to push Vermont up the rankings? And why are the present legislative leaders unlikely to do it? (January 2008)

    The Disgraceful Fairness Doctrine
    Liberals (Dean, Sanders, Welch) are clamoring for reinstatement of the FCC's "Fairness Doctrine", to silence right wing talk radio. It's disgraceful that they support government regulation to suppress the free discussion of ideas, just because their side is losing so badly. (August 2007)

    The Petroleum Panic
    Gas has hit $3 a gallon, and politicans are falling over themselves to name a scapegoat or prescribe a silly "solution". Wouldn't it be nice if just one of them had the wit and courage to stand up and tell Americans that letting the market work is the only available remedy? (May 2006)

    Price Gouging Foolishness
    The Vermont Senate is at work on a foolish bill (S.228) to control "price gouging" of petroleum products. Passage would enlarge Vermont’s reputation as an anti-business state governed by the economically ignorant. (February 2006)

    Economic Freedom in Vermont
    If Vermont changed its economic policies so as to gain just one point on the 10-point economic freedom index, it would move from 38th into a tie with Indiana for 13th in the state rankings, and our per capita income would increase by $5,907. That seems worth doing. (July 2005)

    Why Vermont is Permit Hell
    A Vermont radio station spends nine years and nearly a million dollars to win an Act 250 battle just to keep on using its existing tower - and the Environmental Board didn't even have statutory jurisdiction over radio broadcasting. Is it any wonder that people think Vermont is "permit hell"? (January 2005)

    The Mandatory Seat Belt Debate
    Since 1992 the Department of Public Safety has strenuously argued for giving law enforcement officers the power to stop and ticket motorists for not wearing seat belts. There's a good reason for the legislature to keep on saying No. (October 2003)

    It's Back: Taxpayer Financed Parental Leave
    A liberal coalition (partly financed by tax dollars) wants taxpayers to pay for government-mandated paid parental - and eventually medical - leave. It's not a good idea. (February 2001)

    Strict, Fair, Swift and Certain
    Vermont's Act 250 has become a weapon of choice for extortionists. Land use regulation ought to be made "strict, fair, swift, and certain." (August 2000)

    The Livable Wage Movement: Where It's Headed
    The "Livable Wage" legions are marching, with "mandated wages" on their minds. (November 1999)

    Nobody Cares About Her
    Liberal legislators increase the minimum wage supposedly to help the working poor, and pro-business legislators concoct new subsidies for business as their price for going along. But who cares about the unskilled worker whose job is wiped out? (May 1999)

    A Better Path Toward the Livable Wage
    A Burlington-based group wants the government to make sure everybody gets as much pay as they need. Imagine what this would do for our economy. (January 1999)

    Increasing the Minimum Wage
    Who will explain it to the unskilled worker priced out of a job? (February 1996)

    Understanding the Flat Tax
    How it works, and taxes everything at once. (February 1996)

Economic Rankings and the Freedom to Grow
January 2008

Two recent and quite divergent rankings of Vermont’s economic prospects have perplexed many Vermonters.

First, the free-market Beacon Hill Institute of Boston released its State Competitiveness Report. It showed Vermont at a very commendable 12th position. The BCI index is composed of eight subindexes. Vermont ranked very well on human resources (2nd), technology (5th), openness (5th), and environmental policy (3rd). On security (crime rate) we ranked a middling 20th, and on infrastructure a middling 23rd.

The bad news came in government and fiscal policy (47th) and new business incubation (43rd). However the good news from largely non-government factors propelled Vermont into the 12th spot. Much of this is a reflection of the fact that we are a rural northern state. At 12th, Vermont came in behind the Dakotas, New Hampshire, Idaho and Wyoming.

The contrasting view came in the newspaper headline: “Vermont’s economic index ranks last.” This unenviable finding came from a study by the conservative American Legislative Exchange Council. The ALEC study ignored the “quality of life” components of the Beacon Hill study. Instead it focused heavily on taxes, spending, and government regulations.

The good news: ALEC ranked Vermont 7th in low sales tax burden, and 19th in debt service as a percent of total tax revenue. Our highest ranking was in growth of personal income per capita 1996-2006, a surprising 9th.

But on all the other indices relating to government fiscal, tax and regulatory policies, Vermont was a bummer. Contributing to Vermont’s last place finish were our highly progressive income tax, top marginal income tax rate, property tax burden, and workers compensation costs.

The authors of the ALEC study pointedly observed that “states are in competition with each other for human capital and business investment. State governments that think they can attract jobs and people, and grow their economies, by taxing their citizens at a higher rate than their neighbors are sadly mistaken.”

For comparison, the ALEC study ranked New Hampshire 20th. It still has a positive in-migration rate, while Vermont’s is negative and growing.

House Speaker Gaye Symington put her spin on the findings. She lamented that Vermonters are “arguing over whether economic growth is desirable at all.” She wants growth, of course, but not unless it produces high job quality and reduced income disparity. That is reminiscent of the comment made by a liberal senator a decade ago, that if businesses are going to complain about Act 60, we don’t want them here. Take a hike!

But Symington and her political friends miss an important point. That point is that the production of new wealth in today’s economy – as in yesterday’s – cannot be engineered by an all-wise government manipulating incentives and penalties. The production of wealth requires a legal climate favorable to property and contract rights, a reasonable tax and regulatory climate, and a political culture that views economic growth as a good thing.

Legislators can’t engineer a preferred outcome. If they want wealth production, they’ll have to take a chance on freedom.

Symington reports that business leaders around the state have told her that their leading problems are workforce quality, affordable housing, and workers’ compensation and health insurance costs. (Apparently they didn’t mention taxes to her.) But each of these problems is a direct result of government rules and mandates.

Consider: our near-monopoly public education system is spending $200,000 on each child who goes through it, but businesses can’t find workers with basic skills and good work habits. Can that money be better spent to get better results? Or are we mindlessly spending it just to feed the appetite of the public education establishment?

Consider: affordable housing has long been a victim of overly zealous environmental requirements ($50,000 surveys to look for arrowheads and bones) and NIMBY zoning laws. Can’t we roll back some of the most aggravating requirements and come up with a land use regulation process that is strict on real environmental issues, but also swift, impartial, fair, and certain?

Consider: health insurance and workmen’s comp costs have been dramatically increased by twenty years of corporate welfare, protected monopolies, and reverse Robin Hood rating mandates. How about giving the market a chance to work efficiently?

None of these thoughts will be congenial to Speaker Symington and her political friends. They are determined to fine tune our economy to create the Perfect Little State, including its own taxpayer-financed charitable foundation.

But alas, that Perfect Little State won’t have much room for freedom, or the entrepreneurial wealth production that depends on freedom.

The Disgraceful: Fairness Doctrine”
August 2007

Imagine a hot statewide debate on same sex marriage. The Vermont Right to Marry organization goes to a radio station and says, “we wish to buy 30 radio spots making the case that same sex marriage is a matter of justice for Vermonters of alternative sexual orientation.”

The station manager, pleased to have more advertising revenue, replies, “We would be pleased to air your messages. The price for the 30 spots is $600, payable in advance.”

“Very well,” says the same sex marriage spokesperson. “Here’s the tape of the ad we wish to run, and here’s our check for $600. We’d like them to start next Monday. ”

But the day after the first ads run, the spokesperson for the (hypothetical) Moral Majority Campaign to Defend Traditional Marriage shows up at the station.

“I understand you are running ads from the gays and lesbians pushing same sex marriage,” says he. “My organization thinks that same sex marriage is an abomination. We want you to give us 30 spots to denounce this wicked idea.”

“Very well,” says the station manager. “That will be $600, payable in advance.”

“No,” says Mr. MMCDTM, “we aren’t interested in paying for these spots. We expect you to run them for free.”

“Wait a minute,” says the station manager. “Our policy is to air ads on any side of a public issue, but we expect your organization to pay just like that other organization did. Why should we have to give you free time to respond?”

“You have to do it because the Federal Communications Commission says so. It’s called the Fairness Doctrine.”

The station manager consults the station’s legal counsel, who advises him that that is exactly correct. The station is forced to air 30 free spots in response to the 30 paid spots.

The next time a person of any group comes in to buy spots advocating on any public issue, the station manager has a ready answer: No. “If we sell you spots, the Fairness Doctrine forces us to run free spots for whatever group opposes your views. That makes us sell the spots for half price, and we don’t care to do that. Get thee hence.”

Ridiculous? Certainly. But that is precisely what happened in 1974 when the FCC’s Fairness Doctrine was in effect, except that the group that paid for the spots (opposing a state land use plan) was the Landowners Steering Committee, and the environmental group demanding the free spots was Vermont Tomorrow. (Both groups are long gone.)

The FCC repealed the Fairness Doctrine in 1987, primarily because it forced radio stations to run away from public controversy – whether advocacy spots, paid programs, or talk shows with opinionated hosts. But this year prominent leaders of the Democratic Congress are agitating to reinstate it.

Their argument is, to put it baldly, that right wing talk show hosts like Rush Limbaugh have been enormously effective in mobilizing lethal resistance to numerous left wing schemes, most recently the Bush-Kennedy immigration amnesty bill. Left wing talk show hosts, like those on Al Franken’s Air America, have had little effect.

With the Fairness Doctrine back in place, stations would be forced to kick the right wing winners off the air to protect the left wing losers – or lose their broadcasting licenses. A more disgraceful and cowardly scheme to silence the critics of left wing politics can scarcely be imagined.

Democratic National Chair Howard Dean has declared that “we need to re-regulate the media.” In the Senate, Sen. Bernie Sanders is sponsoring legislation to mandate reinstatement of the Fairness Doctrine. But that cause suffered a setback in the House on July 28, when 113 Democrats and 196 Republicans joined to prohibit the FCC from doing so. Vermont’s Peter Welch was on the short end of this 309-115 vote. .

The American Civil Liberties Union, usually the watchdog of the First Amendment, takes the side of Dean, Sanders and Welch. Alan Gilbert, the Vermont ACLU executive director, argues that only FCC re-regulation can counter “the alarming trend in media concentration” that he believes is producing a largely right wing radio talk diet. (As if everyone got their news and opinion only from AM radio.)

Bringing back the “Fairness Doctrine” (so called) will not produce “balance” in public debate. As it did in 1974, it will drive issue advertising off the airwaves. More importantly, it will throttle talk show discussion. That’s just what today’s ill-named “liberals” want, because they are losing the talk show war.

It’s disgraceful that Howard Dean, Bernie Sanders, Peter Welch and other liberals lack the courage to do battle in the realm of ideas, and instead support government regulation intended to suppress discussion of controversial ideas altogether.

The Petroleum Panic
May 2006

Gasoline prices hit $3.00 a gallon at the pump, and the stampede is on. Unfortunately it is a stampede by politicians to propose goofy big government “solutions” to ease the suffering of motorists who vote.

Vermont’s irrepressible Congressman Bernie Sanders hit the front pages early, with a demand that President Bush convene an “emergency summit” of congressional leaders, oil executives and “consumer advocates” to “address the soaring price of gasoline.”

The Congressman also reiterated his demands that oil companies pay higher royalties for oil extraction on public lands, and that their CEOs take pay cuts for earning record profits for their shareholders, a lot of whom are pension and retirement funds. He stopped short, however, of demanding that Uncle Sam nationalize the oil industry, a plank of the Socialist Workers Party platform on which he ran in 1980.

Sanders ally Rep. Michael Obuchowski promptly submitted a House Resolution (JHR 74) that repeats all of Sanders’ points, and goes beyond them on to demand government control of the commodities markets and price controls on gasoline.

None of these “solutions” produces any more oil. They just punish the oil companies, expand government control over the economy, and in the case of price controls, guarantee less oil at higher prices.

Not to be outdone in foolishness, President Bush jumped in with instructions to the Federal Trade Commission to go looking for “illegal manipulation” of gasoline prices by the oil majors. This, despite the fact that the FTC has carried out just this study at least a dozen times in the past forty years, and every time its expert investigators have been unable to find any evidence whatsoever of illegal price manipulation.

Republican House Speaker Denny Hastert and Senate Majority Leader Bill Frist, who like Bush ought to know better, have jumped on the price gouging bandwagon, along with numerous legislators of all three parties in Montpelier.

The President also called for repeal of some piddling tax provisions of last year’s atrocious energy bill (that he without complaint signed), notably the rapid depreciation of geophysical research expenses. The President once again touts ethanol as an alternative to gasoline, pleasing Corn Belt farmers (but driving up the price of feed grain to Vermont farmers).

Besides, ethanol costs more per unit of energy than gasoline. When the full costs of producing and distributing it are taken into account, ethanol is probably is a net energy loser, not a resource. Repealing the 54 cents a gallon tariff on cheap ethanol from Brazil would actually lower the price of gasohol blends, but no one dares to propose that.

Sen. Charles Grassley, chairman of the Senate Finance Committee, has demanded that the IRS turn over the tax returns of the oil companies so his committee can determine if they are making too much money and paying their employees too much compensation. This ought to unnerve civil libertarians. Senate Judiciary committee chair Arlen Specter wants the Attorney General to sue OPEC. That ought to be amusing.

The real prize for nuttiness goes to Sen. Frist, who wants Uncle Sam to appease angry motorists by handing out $100 checks. Add to that a three-month federal fuel tax holiday, as proposed by Sen. John Thune, and motorists would have about $150 more in their pockets by August 30.

The hard facts are that world demand for petroleum is dramatically rising, especially in industrializing India and China. Unnoticed by critics shrieking about “tax cuts for the wealthy”, the energy-dependent U.S. economy grew at a startling 4.8 percent rate in the first quarter of 2006.

World supply is uncertain, with unrest in Venezuela and Nigeria, sabotage in Iraq, war worries in Iran, hurricane damage in the Gulf, and Al Qaeda plotting to blow up pipelines. These concerns are naturally reflected in the petroleum futures markets, where the result is higher oil prices.

For years Congress has thwarted market forces in energy. Its fuel economy regulations paradoxically set off the gas guzzling SUV boom. For years Congress has refused to allow drilling in the largest untapped oil pool in North America (ANWR), banned production of oil and natural gas far off the Florida and California coasts, required 17 costly boutique gasoline blends for summer driving, and looked the other way as the Patent and Trademark Office rejects unconventional but promising new energy patents.

Yes, it’s worth taking back some unjustifiable tax giveaways to the oil industry. But that won’t produce what consumers want – motor fuel at less than $3.00 a gallon. Only letting the market work will do that. It’s a pity that so many politicians are so eager to concoct goofy big government schemes, but lack the wit and courage to advocate the only practical solution.

“Price Gouging” Foolishness
February 2006

The Vermont Senate is well on its way to passing bill to stop “price gouging” in petroleum products. The closer one looks at this, the more foolish it gets.

The economic fact underlying this effort is, obviously, the steep rise of gasoline and heating oil prices that begin last July. On the Fourth of July regular unleaded gas in Burlington sold for $2.20. It crept steadily upwards over the late summer, reaching $2.54 on September 1. Then, when Hurricane Katrina devastated the Gulf oil industry, the price shot up to $3.24.

Not surprisingly, motorists screamed. A Pew Research poll taken in mid September revealed that 73 percent of Americans believed that the high prices were a manifestation of oil companies taking advantage of consumers. Even when by Thanksgiving new oil supplies brought about by the high prices had forced the retail price down to $2.14 – lower than it was in July - the politicians rushed to give state governments new power to respond sternly to the evil of “price gouging”.

Thirteen states already have laws on the books to prohibit “unconscionably high” petroleum prices. Interestingly, seventeen states, including Maine and Massachusetts, have laws prohibiting excessively low gasoline prices. (Six states have both laws! What were they thinking?)

The proposed Vermont law (S. 228) emerged on a 6-0 vote from the Senate Economic Development, Housing and General Affairs Committee and now rests in Senate Finance. It authorizes the governor to declare a petroleum “market emergency” whenever he espies “abnormal disruption” of the market, or any “actual or threatened shortage or price increase” resulting from almost any conceivable circumstance.

Once the governor so declares, it becomes an unfair and deceptive trade practice for any gasoline, fuel oil or propane dealer to sell any product at “an unconscionably high price.” And what price would that be? It would be a price that represents a “gross disparity” between the price of the product before and after the issuance of the governor’s order, or a price that exceeds what a buyer could find somewhere else in the “trade area”.

There is an out: the price is not illegal if it is “substantially attributable to increased prices charged by the suppliers [to the retail businesses] or increased costs due to a market emergency.” If a fuel dealer or gas station charges “too much”, whatever that may mean, the bill would instruct the attorney general to get an injunction, complete with penalties of up to $10,000 for each violation.

It is a maxim of law that persons regulated by the law have to be reasonably able to figure out if they are acting within the law, or in violation of it and subject to penalties. Suppose Muslim oil producers, enraged by a Western cartoon showing Mohammed with a bomb in his turban, shut down half of the West’s oil supply. The market price of crude shoots up to $200 a barrel. The refineries and suppliers have to triple their prices overnight. If they don’t, they will be unable to bid for the scarce product, and will simply go out of business. The governor of Vermont declares a “market emergency”.

You own a Vermont gas station. To just break even selling the suddenly higher priced gas, you have to charge $6 at the pump. Is that price “unconscionably high”? Or is it “substantially attributable” to the higher price charged by your supplier?

If the former, you get fined. If the latter, it’s not your fault that you have to charge the higher price, and you can go ahead. You have a right be nervous.

You hire a lawyer. She calls the governor’s office. “Is my client’s price unconscionably high?” “We don’t know. We just declare emergencies. Ask the attorney general.” She calls the assistant attorney general for harassing business. “Well, that depends on how the courts interpret those phrases.” “So how do the courts know what is unconscionably high?” your lawyer asks. “It’s the business of the courts to give meaning to such phrases.” “My client thinks it is the business of legislators who we elect to do such things, so we can vote them out of office when they do something stupid.” Click.

It’s an iron law of economics that unless government intervenes to screw things up, in a competitive market like that of petroleum, high prices call forth new supply. That’s why gas prices at the pump plunged 33% in three months after the Katrina spike. Imposing price controls – as in “price gouging” legislation – merely guarantees that there won’t be enough gas, as everyone found out in 1973 when President Nixon tried to control oil prices.

Price gouging laws, like price controls, never benefit the consumer. They prevent competitive market forces from driving down the price with new supplies. The unconscionably fuzzy proposed law would place all Vermont fuel dealers and gas stations over the barrel, and would, alas, enlarge Vermont’s reputation as an anti-business state governed by the economically ignorant.

Economic Freedom in Vermont
July 2005

Does economic freedom have anything to do with the standard of living of a society? This question has long produced sharp divisions between libertarians and socialists.

Socialists believe that a society where individuals are allowed to do whatever they want to get rich will quickly become a society controlled by “the rich and the big corporations” that will mercilessly grind down working people and expropriate from them the fruits of their labor. The more ardent socialists view almost everything – food, shelter, health care, transportation, etc. - as “public goods” that all people ought to have rights to enjoy, and that government ought to provide, distribute, and cross-subsidize these goods according to some standard of “fairness”.

Libertarians – at least the less doctrinaire variety – believe that there is a legitimate need for government to protect society against invasion, violence, and disorder. They acknowledge the importance of an independent and impartial legal system that punishes force, theft, and fraud, resolves disputes according to established rules, and protects the human rights of liberty and property ownership. They concede that government can legitimately raise taxes to pay for “public goods” that private enterprise could not produce at a profit. To libertarians, “public goods” may include roads, police and fire protection, and courts, wherever possible financed by user fees (for example, motor fuel taxes).

Libertarians argue that “economic freedom” leads to a dynamic, wealth producing society, with an always-improving standard of living not only for a few successful entrepreneurs, but for everybody. Socialists argue that only control of the economy and society by a democratically accountable government and its expert planners will assure that the right things are produced in the right amounts, and distributed fairly among all the people.

To shed some light on the debate, the National Center for Policy Analysis (Dallas) and the Fraser Institute (Vancouver) have produced a new econometric study of the effects of economic freedom in Canada and the U.S., and in the provinces and states. As proxies for economic freedom, the study used various measures of the size of government, taxation, and labor market freedom.

The authors conclude that “economic freedom fosters prosperity and growth. Economic freedom increases the affluence of individuals.” It correlates with increased per capita incomes and life expectancies, and with reduced child mortality.

At the state level, Delaware ranked as the most economically free state (based on 2002 data). New Hampshire tied for fourth. Vermont ranked 38th. West Virginia was firmly stuck at the bottom.

Delaware’s per capita Gross Domestic Product was $58,503, first in the nation. New Hampshire’s was third, at $36,447. Vermont’s was 38th, at $31,804.West Virginia’s was 50th, at $25,219.

Observe the report’s authors, “The evidence and theory favoring economic freedom match intuition: it makes sense that the drive and ingenuity of individuals will produce better outcomes through the mechanism of beneficial exchange than the designs of a small coterie of government planners, who can hardly have knowledge of everyone’s values and who, being human, are likely to consider first their own wellbeing and that of the constituencies they must please when making decisions for all of us.”

Sagacious American (and Vermont) politicians, whose practical views fall between the socialist and libertarian extremes, grasp a central fact: you can only allow government to restrict economic freedom so far. At some point, the combination of high taxes, extensive regulation, government price fixing, mandates on economic producers, wealth redistribution from the productive to the nonproductive, and the suffocating presence of ever more intrusive government will trigger an exodus of the productive and a steady decline into stagnation. The socialist’s point that in such a society there is no more exploitation, and the poverty and misery are shared equally, is not much consolation.

How close is Vermont to that tipping point? No econometric study can identify that point. Still, if one examines the legislative majority’s 2005 wish list – headed by creation of a government-controlled health care system funded by $2 billion in new taxes – there is little reason to expect that Vermont will even hold its 38th place ranking when the next economic freedom study appears.

What’s the payoff for increasing economic freedom? If Vermont changed its policies so as to gain just one point on the 10-point economic freedom index, it would move into a tie with Indiana for 13th on the 50 state list, and our per capita income would increase by $5,907. That certainly seems worth doing.

Why Vermont is “Permit Hell”
January 2005

Another Act 250 ordeal has come to a close. The story is worth recounting, because it so perfectly illustrates why so many people view Vermont as “permit hell”.

The applicant in this instance was Burlington Broadcasters, the company that owns and operates radio station WIZN. Since 1987 the station has broadcast from a 199 foot tower on Pease Mountain in Charlotte, which it shares with the local fire and rescue service and Verizon.

When the tower first went up, the then-owner was told that it didn’t require an Act 250 permit. A decade later the company was told it did need a permit, and so it applied. Residents who had moved into the area of the tower objected, claiming that the broadcasting posed a health threat. Nonetheless, the district commission granted the permit in 1999. The residents’ group appealed to the Environmental Board.

The Federal Communications Commission has addressed the question of radio frequency emissions on human health. It set its regulatory standard for radio broadcasters at one fiftieth of the level at which the scientific consensus holds that adverse health effects begin. The vast majority of WIZN tower emissions are under one tenth of the FCC standard, or one five hundredth of the adverse effects level.

The strong scientific consensus didn’t faze the opponents. They hired a supposed expert who went around taking readings next to metal objects that magnified the results. They found another expert to testify that emissions as low as one billionth of the current FCC standard may have an effect on human cells. The expert told the Board that “cells talk to me”, and added by way of assurance, “I’m not crazy.”

While this sparring was going on, the Environmental Board addressed the question of whether this was any of the Board’s business at all. The Board has authority over air pollution, but radio broadcasting has nothing to do with air. Otherwise, we would not be hearing back from our satellites in space.

Surprise! The Board ruled that “no binding legal authority indicates that the board is preempted from regulating radiation” from radio towers. Therefore, since nothing preempts its jurisdiction, the Board can regulate radio broadcasting as air pollution, even though it has nothing to do with air.

But wait! Nowhere in Act 250 is any such jurisdiction given to the Board. For 33 years the Board had never noticed that it had jurisdiction over radio frequency emissions. No problem. The Board wanted to regulate broadcast emissions, and so it did.

What radiation standard was the applicant required to meet to get a permit? The Board had no idea whatever, and so invited the parties to recommend standards for its consideration.

This left the applicant facing a state regulatory body that invented its own jurisdiction to hear the case, and offered no standard that the applicant had to meet to get its permit approved.

This case perfectly exhibits much of Vermont’s regulatory problem.

An applicant can be told that no permit is required, only to find out years later that the regulators had changed their mind long after the project was in place.

Applicants can be told they need a permit, but are given no coherent standard to meet to qualify for the permit.

The regulatory body can invent its own jurisdiction, even when nothing in the law supports that jurisdiction.

Almost any group of citizens can drag an applicant into a lengthy legal process that can drag out for eight years – even in a case where the development in question, the Charlotte radio tower, had been up and running for a decade before the process even began.

On technical questions, the regulators will countenance bizarre arguments founded on no recognizable science, just the vague imaginings of objectors.

On legal questions, an appeal would go to a Vermont Supreme Court notorious for its disregard for the plain language of the statutes and the Constitution.

Last year’s heralded “permit reform” bill, so called, took the Environmental Board out of the appeals business, but did little or nothing to correct the problems so well illustrated by the WIZN case.

For Burlington Broadcasters, there was at least a relatively happy ending. On October 29 the Environmental Board ruled that the objectors had not made a strong enough case for it to put WIZN out of business. The company won’t say how much it had to spend on legal and engineering fees to win its case, but approaching a million dollars would be a very good guess.

Does anyone wonder why there is not more economic growth in Vermont? Look no further.

The Mandatory Seat Belt Debate
October 2003

The Department of Public Safety will try again in 2004 to persuade the Vermont legislature to pass a primary seat belt law for adult drivers and passengers.

Under a primary law, a law enforcement officer could stop and ticket the driver of a vehicle if the officer spots the driver or passengers not wearing a seat belt. Under the secondary law, the officer can write a “failure to use safety belt” ticket only if the officer stopped the vehicle for some other violation.

The controversy over the type of seat belt law has a long history. Under pressure from Gov. Howard Dean, the 1992 legislature produced two versions of a “safety belt” law. The House on a 70-69 vote passed a primary law. The Senate passed a secondary law. Eventually, after a series of bitter floor battles, the House, exhausted, let the issue die.

The following year Gov. Dean unsuccessfully tried again for a primary law, using as a club a putative reduction in federal highway funds for failing to act. The legislature responded by passing the Senate version of the previous year, the present secondary law. Last May the House once again voted down a primary law, this time 73-64.

The main argument for a mandatory seat belt law has always been the mantra “seat belts save lives.” In most types of vehicle accidents this is clearly true. Seat belts not only restrain passengers, but also demonstrably improve driver control of a swerving vehicle. Still, there are certain types of accidents – low velocity neck jerkers and cars submerged in water - where seat belts contribute to injuries and deaths.

The resistance to a mandatory seat belt law flows not so much from rationally balancing benefits, costs, and probabilities, but from resistance to the Dooley Principle. Named after the prominent Vermont Supreme Court Justice, the Dooley Principle holds that the state can and should regulate, control, and prohibit peoples’ personal lifestyle choices whenever there is any chance that bad choices might result in higher costs to society as a whole. This extraordinarily wide-ranging principle appeared in a Dooley opinion upholding the mandatory motorcycle helmet law in 1994.

There is no doubt but what the state can impose conditions on the privilege of using the state’s public highways. Nonetheless, a lot of Vermonters who have no problem with requirements about age, eyesight and sobriety see a primary seat belt law as a serious overreaching, one more step toward a too-powerful state.

Their view is bolstered by reports from New York of cops using a primary seat belt law to harass people, including lovers necking in parked cars. As Speaker Walt Freed observed, “It becomes a very easy reason to stop you even if it’s an unwarranted stop.”

The trouble with the Dooley Principle is that it can be made to justify almost any state restriction on private behavior, like smoking at deer camp, having a gun in the home, gay sex, or getting too fat from too many snack foods. Most Vermonters vocally object to the creation of such an intrusive Nanny State. The primary seat belt law looks to many like one more step down that dismal road.

Seat belt usage has increased steadily over the years. Children who have grown up wearing seat belts tend to become seat belt wearing drivers. Charging lower car insurance premiums to seat belt users has already had a positive effect. The Senate’s original incentive plan of 1992 – a $10 reduction in fine if the motor vehicle offender is wearing a seat belt when ticketed for a different offense - would probably influence driver behavior.

But should the cops be authorized to stop a car and ticket the operator solely because adults in the care are not buckled up? On balance, no. The benefits of increased seat belt usage are growing as more people freely choose to use them. The potential for abuse of a primary seat belt law has been demonstrated.

Leave the law as it is. This problem will eventually disappear, and it’s definitely worth keeping the Dooley Principle in check.

It's Back: Taxpayer Financed Parental Leave
February 2001

Led by Vermont's only taxpayer-financed ($265,000) lobby group, the Governor's Commission on Women (GCOW), a coalition of liberal groups is preparing to attend to some of the unfinished business of the 2000 session: paid parental leave.

Federal law passed in 1993 requires employers with more than 50 employees to give employees 12 weeks of unpaid job-protected leave for the birth of adoption of an employee's child, or for a "serious health condition" of an employee or family member. The leave time can be intermittent, taken even a few hours at a time. The employer must maintain the employee's health coverage.

Vermont's liberal leadership, including Gov. Dean, the labor unions, the progressives, and GCOW, want state law to require that employers pay the employee while on parental leave. So far similar coalitions in 15 states have pushed for this, but it has yet to be adopted anywhere.

Last year's game was to send the tab for the parental leave payment to the state's Employment Security Fund. Thanks to good times, this fund is full of cash, and thus a tempting target for spenders. The Senate voted 16-15 (Lt. Gov. Racine breaking the tie) to pay for parental leave out of the Fund. Only then did the backers of the idea, notably Sen. Peter Shumlin (D- Windham), discover that under federal law, raiding the Fund to pay for family leave would disqualify the Federal tax credit employers get for contributions into the Fund. Amid some embarrassment, parental leave advocates were forced to back off until this year.

Gov. Dean and Sen. Shumlin recently went before the Vermont Chamber of Commerce to promote this year's version: Although specifics have not been publicly announced, their proposal is expected to apply to all employers of whatever size. Maximum payments would be on the order of $195 per week, and (at first) only lower income workers would be eligible. The Governor's budget contains $750,000 to underwrite "a trial".

Even though the budget proposal states that the "trial" is over when the money is gone, the word "trial" is misleading. Once anybody becomes entitled to a government benefit, that entitlement is not easily terminated. Typically, ever more people get into the program and qualify for ever higher benefits (in this case, the next step would be paid medical leave).

This has already happened with Gov. Dean's Vermont Health Assistance Plan. It's running deeply into the red. The Governor vows that no one in the program will be put out, so he has been forced to ask the legislature for a huge cigarette tax increase to pay its bills.

How could anybody be opposed to such a nice thing as the government mandating employers to keep their employees on the payroll while they are welcoming a new baby, or suffering from a "serious" health condition?

Employers want to retain good workers. Especially in a tight labor market, they are willing to make allowances for family situations and illnesses. But once paid leave becomes a government mandate, unfortunate things began to happen.

It's not at all simple to keep track of paid leave when it's taken in chunks as small as half an hour. What constitutes a "serious" medical condition is a dicey question. A crippling car wreck? Sure. The flu? Indigestion?

Industry surveys have shown that 60 percent of presently unpaid leave-takers do not schedule the leave 30 days in advance, as they are supposed to. When they disappear from work, the employer may face sudden and serious workplace disruptions, and other employees are saddled with the extra workload. One Vermonter who worked at a large company with a liberal (unpaid) leave policy reports that " a woman in my department spent 18 months appearing and disappearing as she pleased, and since I was the only one who could cover for her, I was doing about 1.8 jobs for 1.0 pay, and nearly losing my marbles."

The existence of a mandated paid leave benefit encourages the least responsible employees (and their unions) to contrive ways to game the system, and to bring grievances or even lawsuits when the employer refuses to go along with their desires. It invites elected attorneys general to bring well-publicized actions against "irresponsible corporations".

In the eyes of people who make decisions about locating or expanding facilities, the first state to legislate mandatory paid leave, regardless of how it's paid for, will bear the Mark of Cain They will know that the legislature is under the control of a liberal coalition eager to move on to the next costly anti-business nostrum. They will see that state as a politically unfriendly, high-cost economic environment, and take their employment and tax revenues to a more congenial place. Let us hope that Vermont does not become the pioneer.

Strict, Fair, Swift and Certain
August 2000

A month ago another important redevelopment project in Vermont hit the wall. This time the project was Burlington's $8 million waterfront redevelopment. If ever a large project was ardently desired by the great majority of the people of a city, incuding all levels of city government from the Mayor on down, this project was it. As proposed, the complex of inn, cinema, solarium and amphitheatre near the existing boathouse and train station would make Burlington's waterfront a major attraction, a small city version of Baltimore's Inner Harbor or San Francisco's Fisherman's Wharf.

But the waterfront project is, alas, stalled. One fifth floor condo owner within view of the project has vowed to take his objections into the Act 250 process. A determined objector and his lawyers can use that process to tie up a project for years. The promoter of the waterfront project, Burlington businesswoman Melinda Moulton, was quoted as saying "I can't believe that one person has the power to hold this thing up now."

Believe, Ms. Moulton. This is Vermont.

The unhappy fate of the waterfront project illustrates once again what every developer in Vermont, except possibly the incredulous Ms. Moulton, has come to know well. Act 250 has become a regulatory Vale of Tears that can swallow an applicant whole. To put it bluntly, Act 250 has among other things become a weapon of extortion for any adjacent resident, threatened competitor, anti-growth group and affected sorehead who can insinuate itself into the process and hold a project for ransom. Consider these examples.

When C&S Wholesale Distributors in Brattleboro sought additional plant space in the town's existing industrial park, it was opposed by several adjacent building owners who offered to withdraw their objections if the company would buy their buildings at an astronomical price. After spending half a million dollars on engineering and legal fees, C&S got a permit with so many unacceptable conditions that it expanded in Massachusetts instead.

When OMYA sought a permit to expand its Middlebury limestone mining operation, it was blocked by Brandon innkeepers whose lawyer explained that their objections would evaporate if OMYA would buy them out at an astronomical price. OMYA refused; it is still in court seeking to overturn an Act 250 limitation on truck trips on US 7 through Brandon.

A small business in Fairlee sought to expand a truck maintenance yard. A disgruntled former employee who lived across the road tied the project up for two years. The business moved to New Hampshire..

To stop a project, the objectors don't have to persuade a District Environmental Commission to deny a permit . They may only need to get a Commission to attach costly or impractical conditions to a permit. Or they can hold the project hostage until the applicant agrees to a cash payoff. Perhaps most commonly, they can simply drag the applicant through month after year of costly proceedings before commissioners who often seem oblivious to the time, money, and the pressures of a changing marketplace.

As one now retired manufacturer recently put it: "I've built plants in Vermont, Mississippi and New Jersey. I would never advise anyone to build a plant in Vermont. Manufacturers who invest in plants have to know when the plant's product will come off the line. In Vermont, you can never know."

There are few if any fly by night, slash and burn developers in this state. Vermont's developers and plant builders are perhaps unmatched in the country for their awareness of social and environmental implications of their projects. They are willing to live with strict regulations, and even some silly regulations. But they deserve a regulatory process that is is fair, swift, and certain.

Act 250, like many other state regulatory processes, has long since failed those tests. Whoever is elected Governor this year ought to make remediation of the regulatory process a top priority. The anti-growth lobby groups and extorting objectors have had it their way for 30 years. But enough is enough. Vermonters are entitled to demand "fair, swift and certain" from their government regulators, and a process run so efficiently that its length and cost can't be used for the purpose of extortion.

The Livable Wage Movement: Where It's Headed
November 1999

With the publication of the most recent "Vermont Job Gap Study" by the Peace and Justice Center in Burlington, the "Livable Wage" legions are on the march. Their goal is higher wages for Vermonters. Just exactly how to get those higher wages is a question that rightly excites considerable controversy.

The main conclusion of the "Job Gap" study is that thousands of Vermonters are not earning enough to pay for the "basic needs" defined by the authors of the study. The amount needed is said to range from $8.68 an hour for a single person in rural Vermont to $15.49 for a single parent with two children.

The traditional public policy solution for the problem has two main features. The first operates on the demand side: encouragment of a state economy where the demand for labor bids up its price. This means stimulating the high wage sectors of the economy, notably manufacturing. The stimulation consists of low and stable tax rates; reasonable, swift, and certain regulatory requirements; modest and predictable business mandates; good transportation and communications infrastructure; public safety; and the preservation of the environmental and lifestyle amenities that attract business managers and decision makers.

The second operates on the supply side: investment in a skilled and dependable labor force. This means spending tax dollars on elementary, secondary, technical, and adult education, and expecting individuals to equip themselves to take advantages of a strong demand for their skills and labor. Certainly in today's strong labor market almost anyone of near normal intelligence, good character and reliable work habits can go to work at well above the current $5.75 minimum wage level. Employers are crying for such employees. Rep. Dean Corren (P-Burlington), speaking recently in Lyndonville, offered a radically different policy to guarantee "livable wages". He would simply have the legislature mandate by law that employers must pay "livable wages". In addition, employers would be required to provide and pay for employee health care and child care. Employers who refused would be subjected to a new tax, based on the difference between what the employer paid in wages and what the employer would have had to pay to give each employee what the government has decided is a "livable wage." Corren didn't say what would be done with the proceeds of such a tax, but presumably the government would spend most of it (after the usual handling charge) to benefit the employees in whose name it was levied.

Wouldn't that drive out employers? No problem, says Corren. If it drove some firms out of the state, there would be more opportunity for the better sort of firms to succeed in their place.

Ellen Kahler, the Peace and Justice Center project director for the study, is more cautious. In remarks at public meetings in Bellows Falls and Brattleboro, she recognized the challenge of improving the productive skills of employees, and conceded that simply raising the minimum wage (and by implication, imposing any other mandated wage) is not the solution. Corren is apparently several pages ahead of her in the "livable wage" playbook.

Progressives like Corren love government because it has a monopoly on coercive power over its citizenry. They yearn to control the government so that they can simply mandate their preferred results. But unless the Progressive-controlled state is able to seal off its borders, Corren's "livable wage" policy would drive out high-wage firms competing in a national market, taking their jobs, capital, profits, tax payments, and productive and entrepreneurial people with them. The certain result would be a high-cost, all-service Vermont economy, and a retail and service boom just across our borders.

There is really no workable alternative to the traditional demand and supply policy prescriptions: creating a favorable free market climate for economic growth and wealth creation, and investing in a work force able to seize the opportunities that a growing economy offers, both as workers and entrepreneurs. The Livable Wage advocates may wish they could just use government power to order employers to pay higher wages; but if they were ever able to do so, the result would be "livable wages" for a few, and an economic catastrophe for all.

Nobody Cares About Her
May 1999

Vermont is enjoying the strongest labor market in living memory. Many employers are begging for even marginally qualified employees who are honest, show up for work on time, and have minimal literacy skills. As a result, many unskilled workers, notably young people, have earned a firm grip on the bottom rung of the ladder that leads upward to middle class economic success.

In response to this situation, the Vermont legislature has conceived a remarkable policy initiative to price unskilled beginning workers out of the labor market. It's called raising the minimum wage.

The Senate-passed bill (S. 139) declares that no business in Vermont can employ anyone whose labor is not productive enough to earn $5.50 an hour this year, and $5.75 an hour next year. The House version decrees $5.75 an hour this year. And that's just for openers. Both versions include the creation of a "Livable Wage Rate Study Committee." This new body will conduct extensive research to find out, among many other things, how mandated pay scales can be increased even further.

Well, why not just force employers to pay whatever wage the legislators think would make their workers happy and prosperous? The minimum wage advocates are at least faintly aware that mandating higher labor costs will put Vermont employers who compete in a national or global market at a serious competitive disadvantage. So the bill charges the study committee with concocting some kind of tax credit scheme to compensate the businesses made non-competitive by the legislatively mandated increased wages. Who will be paying for this compensation?

Taxpayers, because every tax credit handed out by the legislature requires other taxpayers to make up the like amount. This is another excellent example of how one costly policy mistake leads to another. This effect can also be observed in Act 60 and Yugoslavia.

The minimum wage hike passed the Senate 30-0 and the House 137-4. The liberals voted to raise the minimum wage, all the while weeping over the low wage worker who needs (but is not initially skilled enough to earn) higher wages. Pro-business legislators voted to raise the minimum wage, all the while fighting to include a taxpayer bailout for small businesses that will be competitively crippled.

The steadily increasing minimum wage ensures that businesses which rely on low skilled employees will avoid Vermont, or if they are already here, will consider leaving Vermont, or turning to automation to reduce their labor force and thus their labor costs. (A sizable fraction of the legislature views this effect as a good thing, because "Vermont doesn't need that kind of employers anyway.")

Businesses which rely on entry level employees and cannot relocate will pass the higher labor costs on in what amounts to a hidden tax on every Whopper and Big Mac. Even businesses which pay well above today's minimum wage will look with growing apprehension at a legislature dominated by politicians excited by the prospect of mandating on every employer what the government thinks is a "livable wage" .

Does the higher minimum wage actually help the poor? Economist David Neumark of Michigan State University recently published the results of an extensive new study on this subject. "When we began our research," he writes, "we expected that the results would probably show some beneficial effects in reducing poverty... The conclusion we reached on the question of whether minimum wage increases help poor and low- income families is a fairly resounding No. Minimum wages instead appear to increase the proportion of families that are poor or near poor." There are probably very few legislators in Montpelier - quite possibly none at all - who are familiar with the Neumark or any other of the many economic studies on this question.

Perhaps the most tragic part of this regrettable act is that nobody is speaking for the young low-skilled worker willing to start at $5.25 an hour and prove herself. Thanks to the supposed "friends of the poor" in Montpelier, at the next economic downturn, if not sooner, she'll be out of a job, out of opportunity, and out of hope. Stanford economist Thomas Sowell, who grew up black and poor, knows well that an above-market mandated wage is the death of opportunity, especially for young blacks emerging from pathetic inner city public high schools. That's why he has termed minimum wage increases "economic insanity and social callousness masquerading as compassion."

The victim of labor price fixing will never amass the political power to fight back. It's a pity and a shame that with very few exceptions, nobody really cares about her.

A Better Path Toward the Livable Wage
January 1999

After two years of work, the Burlington Peace and Justice Center has pushed the idea of a "livable wage" to the political launch pad. Advocacy groups have sprung up in Central Vermont, Brattleboro, Randolph and St. Johnsbury. The campaign to put its prescriptions into effect is likely to achieve high visibility in 1999.

What is the "livable wage"? The Peace and Justice Center has now issued four very well researched reports on the subject. It defines "livable wage" as the hourly wage required to meet the basic needs of various kinds of families. The basic needs are determined by what various government agencies believe to be a household's reasonable living expenses.

For a rural two-parent, one-worker, two-child family, the study yields a "livable wage" of $14.94/hour, corresponding to an annual income of $31,082. This family would have to earn $7.50 to be at the federal poverty level . The study estimates that 43% of such Vermont families are earning less than the calculated "livable wage".

At this point the Livable Wage advocates ask "What can society (government) do to see that these people receive a livable wage?" The answers to that question have in the past included a higher minimum wage and the Earned Income Tax Credit. The first is a mandate on business which has the regrettable effect of disemploying low-skill workers who aren't able to produce enough value to cover the higher labor cost. The second is a tax expenditure entitlement which competes with other government spending. At their present levels neither comes close to the ambitious goals of the Livable Wage campaign.

The Peace and Justice Center report stops short of demanding a higher minimum wage, settling instead for a study of the costs and benefits of a substantial increase. (This is, incidentally, one of the most thoroughly studied phenomena in all economic literature.) The group also asks for a 12% increase in the EITC. Locally, "livable wage" advocates urge voters to insist that their municipalities and their contractors pay "livable wages" to their employees and to employees of companies which contract with the government. "Livable wage" activists got the Santa Clara County, California, council to agree to a $10.00 wage, their biggest success to date.

The "livable wage" campaign is unquestionably based on a genuine concern for the often hard life of the working poor. The concept appeals to everyone who knows a working family that is struggling to get by at a modest level of subsistence. Unfortunately the "livable wage" concern quickly becomes an argument for the government to force A and B to pay higher wages to C and D, regardless of whether C and D's work output can be valued at the higher amount. This sort of thing will work for employees of a government monopoly, albeit at taxpayer expense, but once it is attempted in the private marketplace it will have an enormously destructive effect on Vermont's economy. What business person will invest in a Vermont enterprise, knowing that the government is firmly wedded to the principle that it knows how much every worker deserves to receive, and will force the employer to pay it?

The truth is that there are thousands of "livable wage" jobs going begging in Vermont today. Employers are crying for dependable, honest, hard working employees with normal intelligence and even minimal job skills. The announcement of the recent IDX expansion in South Burlington was accompanied by a serious concern by the company that it will have a hard time finding trainable employees for the new high-wage positions opening up.

The sound way to achieve "livable wages" ultimately does not lie in government mandates on business to pay workers what the government thinks they are worth, regardless of what the market place says they are worth. It lies, first, in removing the government-imposed barriers to preserving a strong economy where employers bid up the price of labor, a strategy that runs in the opposite direction from the "livable wage" people's penchant for higher taxes, income redistribution, and government control.

Then, for people to take advantage of strong job market opportunities, they have to equip themselves to become productive to an employer or go into business on their own. Not long ago a Vermont college professor told me that half (!) of his students could not figure out how many females there were in a class if 30% of 150 students were females. Those students have been shortchanged by an educational system that is simply not preparing them to earn their way.

Give every child a real opportunity to acquire the values, skills and work habits needed for success in the 21st century economy. Give every entrepreneur the chance to invest and prosper, without suffocating him or her with costly government mandates, "crony capitalist " subsidies, maddening regulations, and high taxes. The two will find each other.

Increasing the Minimum Wage
February 1996

The latest in a long running series of efforts to thwart the hopes and ambitions of the young and poor sped to success on January 23, when the Vermont House passed and sent to the Senate a bill once again increasing Vermont's minimum wage.

Under it, the present state minimum wage would increase from the present $4.75 an hour to $5.00 in 1997 and $5.25 in 1998. That will put the Vermont minimum wage 23% above the Federal minimum, which despite the best efforts of the labor unions and Labor Secretary Robert Reich, Congress is highly unlikely to raise any time soon.

The battle lines on this issue have long been sharply defined, and there are three, not two, opposing views on the subject.

The proponents of an ever higher minimum wage, largely Democrats and labor union activists, argue that "a family can't live on $4.75 an hour. The state should thus mandate that all covered employers must pay all of their employees at least $X an hour."

The major group of opponents, made up mostly of pro-business Republicans and employers of low skill employees, object on the grounds that a higher minimum wage simply drives up labor costs and makes those businesses less competitive. It may not matter much for local fast food outlets, but where customers have the options of cross-border, mail order, telephone and now Internet shopping, the labor cost differential sends patronage away from the high-wage retail and service businesses.

Since the legislators who identify with this second group see higher minimum wages as a burden on businesses, they have an unfortunate tendency to yield to political pressure, vote to raise the wage, and then find some way to make it up to injured businesses by tinkering with the tax code or workmen's compensation rules.

The third group views the minimum wage (a wage fixed above the free market level by a government mandate) as a crime against low-skilled working people, particularly young people just starting out. The most eloquent among this group are the noted economists Thomas Sowell at Stanford University and Walter Williams at George Mason.

Sowell and Williams, both of whom grew up black and poor, know that an above-market minimum wage is the death of opportunity especially for young blacks emerging with low skills from pathetic inner city public high schools. Sowell calls minimum wage increases "economic insanity and social callousness masquerading as compassion." Williams, in his remarkable book "The State Against Blacks", shows in detail how the minimum wage was deliberately designed by labor unions in the Thirties (and in apartheid South Africa) to tilt the scales against black workers competing for "white" jobs.

Even the liberal New York Times finds itself in this third group, editorializing that" legislators are right to search for ways to help the working poor, but wrong to think that raising the minimum wage is one of them." President Clinton himself took that position until pressure from the labor unions critical to his reelection forced him to come out for a minimum wage increase.

Sadly, this small and unorganized third group has virtually no influence on minimum wage debates. There is, alas, no powerful lobby of poor people who are fighting for opportunity to work their way into the middle class in a growing economy. In Vermont what passes for the "poor lobby", the Vermont Low Income Advocacy Council, is pretty much a mouthpiece for the anti-poverty bureaucracies, the unions, the redistributionists, and assorted indemnity-seekers.

The Council's counterpart in California, however, is made of better stuff. ACORN (Associations of Community Organizations for Reform Now) bills itself as "the largest low-and moderate-income membership organization in the country." Last year it filed suit in San Diego against the State of California, arguing that the state's minimum wage is unconstitutional under the First Amendment.

ACORN's argument is that the State, by forcing ACORN to pay its political action workers $4.25 an hour, puts an effective limit on the number of advocates that can be hired with the group's limited funds, thus reducing the strength of its advocacy. An appeals court rejected the argument, but whether or not one buys the first amendment rationale, ACORN has figured out that minimum wages force would-be employers to cut back on their entry level workers.

Here in Vermont, the Democrats will weep over the low wage worker who needs more money. The Senate Republicans will reluctantly go along, looking meanwhile for some tax plum for business to redeem themselves for supporting increased labor costs. Nobody will speak for the young, low-skilled worker willing to start at $4.25 an hour and prove herself. And as a result, she'll be out of work, out of opportunity, and quite possibly onto welfare.

But this victim of labor price fixing will never amass the political power to fight back. It's a pity - a tragedy -that almost no one in Montpelier cares about her.

Understanding the Flat Tax
February 1996

Rarely has a public policy proposal been more tortured and abused than the so-called "flat tax".   Like any sweeping change, the flat tax contains numerous features that are distasteful to one group or another and thus wonderfully inviting for demogoguery.   It is thus worth the effort to understand exactly what is proposed by flat tax advocates, and what a national flat tax  might mean for Vermonters.

Here are ten important things to understand about the flat tax, using the model first proposed by Stanford economists Robert Hall and Alvin Rabushka, and currently advocated by House Majority Leader Dick Armey and Republican Presidential candidate Steve Forbes.

  1. Unlike our present Federal and Vermont taxes on what comes in ("income") to the taxpayer, the flat tax taxes what is consumed; it does not tax what is saved and invested. Individuals are taxed on what they take out of the economy (when they spend money to consume) and not on what they produce (reflected in working and saving.) The flat tax is a consumption tax that favors saving and investment, and thus economic growth.
  2. The flat tax includes both a tax on businesses and a tax on individuals. The two are inextricably linked. What may appear to escape taxation at the individual level will already have been taxed at the business level.
  3. The flat tax system taxes all economic flows once, and only once, wherever possible at the source. For example, it does away with the present double taxation of dividends and interest.
  4. The flat tax is extremely simple. Both businesses and families can fill out a return on a postcard. Ordinary people can comprehend the system, where the IRS itself has great difficulty in explaining the 7000 pages of law and regulations that define the present income tax system. It would save over $100 billion now spent every year by taxpayers trying, often vainly, to comply with the law.
  5. "Flat" is a misleading description. A true flat tax, like the Biblical tithe (10%), would be levied at one single rate, with no exemptions. All current "flat" tax proposals allow a generous individual and dependent exemptions. Thus they actually have two rates: zero up to the total of the exemptions (in the Armey-Forbes version, $36,000 for a family of four), and 17% above that. This feature makes the flat tax progressive. A family of four with an income of $36,000 will pay no tax at all. The higher its income above that, the higher an effective tax rate it will pay.
  6. The flat tax gets rid of all the special interest loopholes which, under the present graduated income tax system, help high income taxpayers to shelter their income from taxation. In doing so it gets rid of all the Washington lobbying and influence peddling centered around corrupting the tax code, and the Congress, for the benefit of well-heeled clients.
  7. Because of the very broad base the flat tax rate can be low - in the 17-19% range - to equal present income tax receipts. This low marginal rate will unquestionably spur economic growth, job creation, wealth production, and government revenue collections.
  8. Because there is only one tax rate, there is no incentive to try to convert ordinary income into capital gains which are now taxed at a lower rate. This alone gets rid of thousands of pages of tax regulations.
  9. All capital gains, dividends and interest are subject to tax once, at the business level. Because they are not taxed at 17% when received by individuals does not mean they have escaped being taxed. They are included in the tax base once, at the source, at the 17% rate. The only thing not taxed is the capital gain on the sale of an owner-occupied home.
  10. The elimination of the most popular individual deductions (charitable contributions, home mortgage interest, and state and local taxes) will be offset for virtually every taxpayer by the lower tax rate, lower interest rates, and stimulation of the economy as a whole. Under current tax law these deductions must exceed $6,550 per couple to make it worthwhile to itemize, and the deductions are worth 2.4 times as much to a $118,000 taxable income family (in the 36% bracket) as to the $11,800 family (in the 15% bracket.)

What effect would a national flat tax have on Vermont? Since Vermont has very high state income taxes and local property taxes, itemizing Vermont taxpayers would lose more from the elimination of those deductions than residents of low-tax Tennessee. But taking into account all of the benefits of replacing the present system with the flat tax system, it seems to me to be a fair guess that almost all Vermonters would come out well ahead economically.

Those who oppose economic growth in Vermont would have reason to be apprehensive, however, because the flat tax is a major investment generator. Their obvious strategy would be to make land use control and business regulation more severe, so that newly-favored investment flows out of the state to improve the economy somewhere else.

What about a flat tax system for Vermont, whether or not the national government adopts it? Given the present tax and regulatory barriers to economic growth in the state, shrewd Vermonters seeking tax-favored investment opportunities would probably export much of their newly-available capital instead of investing it in Vermont. If that occurred, most of the economic benefits of a Vermont flat tax system would be captured by other states.