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8/9/2019 NewsLinkV5N3

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NEWSLINKIDEASAN DUPDATESON PUBLICPOLICY

NEWSLINK

FWhy do we have water bans?Price system means real water conservation

continued on pa

continued on pag

BHI enters New H ampshire tax forayGovernors sales tax plan would have killed jobs

Vol. 5, No. 3 Spring 20

I

n a state know n for its tax re-

sistance, imposing a sales tax

is no small challenge. New

Hampshire Governor Jeanne

Shaheen learned this when she backed a plan

to establish a 2.5% sales tax as part of her EX-

CEL NH progr am to fund state public schools.

Governor Shaheens plan, announ ced

in February as a long-term fund ing and im-

provement solution for public schools, was

expected, according to the governor, to yield

$365 million in net revenu e in FY 2003. She

based h er projections on estimates by the New

Hamp shire Department of Revenue Ad minis-

tration and by her blue ribbon tax commission

show ing that her tax package, wh ich includ ed

the 2.5% sales tax, wou ld cover the states ed

tion costs.

She ha d t he suppor t o f e duc a

and m anufac tur ing groups , who saw a s

tax as the least object ionable m ethod of r

ing the fund s .

Retai lers, however, disagreed w

her. They fel t the plan wou ld resul t in a

o f s a l e s f rom ou t -o f - s t a t e r e s i de n t s w

shop in N ew H amp shire to avoid sales ta

This would lead to grea te r revenue loss

the s ta te than ant icipa ted.

In March, the Beacon Hill Insti

joined the deba te. ABHI FaxSheet, Sales

Facts: Revenue Gains and Job Losses in N ew

IN THIS ISSUEFrom t he Executive DirectorThe 'Living Wage': Harvard 's

dilemma...................................2

News AnalysisOpting in, tun ing out:Voluntary checkoffs................3

Shifting capital gains taxes....6

BookMarkBasic Economics,

by Thomas Sowell, reviewed.....7

or ap proximately 55 Mas-

sa c huse t t s c i t i e s a nd

town s, the arrival of sum-

m e r h a s f o r y e a r s b e e n

marked n ot only by Memorial Day but

a l so by the advent of outdoor water

bans. This year wil l be no different .Towns like Gloucester, Chelmsford and

Rockpor t in the East, Lanesborough in

the West, and Attleboro, Dartmou th an d

Falmouth in the South may face the

prospect of browned lawns.

If you live in one of these com-

munit ies and think that the deluge in

March and the rains in late May wil l

avert the prospect of browned lawns and

dirty cars, think again. Massachusetts

h a s e x p e r i e n c i e d o n e o f t h e d r i e s t

springs in recent mem ory, thus guaran -

teeing that, once again, the w ater police

will be on patrol.

For tuna te ly , most c i t i es and

towns in th e Bay State do n ot impose wa-

ter bans. Not one city or town in the Mas-

sachusetts Water Resources Author ity dis-

trict, long plagued by

high rates and Boston

Har bor clean-up costs,

wil l impose a water

ban. And , according to

the state Department of

Environmental Protec-

tion, many of the towns

that deploy water bans

rely on the good will of

their residents for en-

forcement. Last year,

app roximately 20 town s

with restrictions made

them volun tary.

But resid ents of other tow ns face the

sum mer ritual of leafing throug h local news-

pap ers for information on wh en and how they

may w ater their lawns.Why does i t have to be this way?

Fuels like gas and oil are not now rationed, and

food and other hou sehold necessities are easy

to find. Why this asymmetry?

The solution: A market system.

The answer is that, as with oth er sho

ages, water shortages result from provid

keep ing p rices artificially low. Because the p r

is kept low, people consume more water

bathing, cooking and watering their lawns th

is available for those purposes.


2/8

New sLink is published quarterlby the Beacon Hill Institu te for Pub

lic Policy Research at Suffolk Un

versity. The Beacon H ill Institu te fo

cuses on federal, state and local eco

nom ic policies as they affect citizen

and businesses, particularly in Ma

sachusetts. The institute uses state

of-the-art statistical, m athem atic

and econometric methods to pro

vide timely and readable analysethat help voters, policy makers an

opinion leaders understand today

leading p ub lic policy issues.

PUBLISHERD AVID G. TUERCKEXECUTIVEDIRECTOR

PRODUCTIONELLEN F. FOLEYDIRECTOROFCOMMUNICATIONS

EDITORFRANK CONTEPUBLICATIONSEDITOR

(ISSN 1094-0707)

2001 Beacon Hill Institu te forPublic Policy Research, Suffolk

University, 8 Ashbu rton Place,

Boston, MA 02108-2770. Voice,

(617) 573-8750; fax, (617) 720-4272;

e-mail, [email protected]; web

site, http:/ / ww w.beaconhill.org.

PAGE 2 / SPRING 2001

BEACON HILL INSTITUTE

From the Execut ive Director

H

The "liv ing w age"

threatens t o t urn un-skilled w orkers w ho

w ork for $6/hr. into

unemployed w orkers

w ho w ork for nothing

at all .

David G. Tuerc

arvard Square i s qu ie te r

now th a t the s tudent s i t -

in a t Massachuse t t s H al l

is over. For three weeks

in Apri l and May, s tud ents deman ding

a l iving w age for Harvard

Univers i tys lowest p a id w orkers

staged a high p rofi le , celebri ty en-

dorsed p rotes t tha t drew sup port f rom

elected officials and org anized labor

and drew coverage f rom papers across

the country.

The camp aign for a l iving

wage h ad been cente red

thu s far on U.S. cit ies

and count ies (inc lud ing

Boston and Cambridge) ,

the aim being to forcef irms d oing bus iness

wi th loca l governments

to pay work ers a t some

leve l deemed to repre-

se n t t he min i mum wa ge

ne e de d t o suppor t a

fam ily. The Boston

ordinance def ined th e

wa ge as one su fficient

for a family of four to

l ive a t or above the federa l pover ty

level and set th e wage ini t ial ly at

$8.23/ hr .Now t he ca mpa i gn wa s

extend ed to the count ry s most

prest igiou s un iversi ty. The 30 stud ent

protes tors wanted a comm itment f rom

Harvard to pay work ers the $10.25/ hr .

se t by the Ci ty of Cambridge .

Harvard respond ed ini t ia l ly

by defending i t s employment p rac-

t ices, saying th at non e of i ts ful l -t ime

employees makes less than $10.25/ hr .

in tota l comp ensa t ion and tha t , of a ll

i ts 13,500 regu lar emp loyees, only

seven m ake as l i t t le as $8.05/ hr.

Harvard app eared to concede tha t

some of i ts contract wor kers mak e less

than thi s but pointed out tha t many of

these w orkers are covered by col lec-

t ive barga ining agreements .

In the end , the protestors 21

days of behind-the-barricades act ion

brought some resul t s . The un ivers ity

agreed to es tabli sh a pane l to s tud y

the i ssue and p ledged not to subcon-

t rac t fur ther w ork.

The problem with living wages.

Although H arvard might have

shown su rprising fortitude in stand ing up to

the p rotestors, it would have been justified in

showing far less symp athy than it did. The

reason is that the living wage campaign h as

nothing to d o w ith assuring families a living

wage and everything to do w ith benefiting

workers w ho already live well above the

poverty line.

First and m ost obviou sly, a

univers i ty, even a r i chly end owed un iver-

si ty, has an ob l igat ion to use i ts resou rces

wisely. Stu-

de n t s do no t

pay tui t ion and

a l umni do no t

dona t e fund sto conduct a

social pol icy of

income

redis t r ibut ion.

Rather, they

pay or a t

least so we

hop e for

instruct ion,

research and

the other th ings un iversi t ies are created

t o do .

And th en there a re the workersthemselves. Suppose an employer can

hi re a worker to do a job for $6/ hr . Whi le

the employer might be content to hi re a

low-ski l led wor ker to fi l l that job at that

wage ra te , i t might very w el l dec ide to

hire a d ifferent , more high ly ski l led

worker i f i t is compel led to p ay $10/ hr .

ins tead.

While a city contractor or gr oup

of protes tors might force an emp loyer to

p ay some workers to d o a job for $10/ hr .,

no one can guaran tee tha t the worker

actual ly hired to d o that job wil l be the

$6/ hr . worker for whom the l iving

wa ge wa s i n t e nde d .

The l iving w age threa tens to turn

unsk i ll ed worke r s who w ork fo r $6 / h r .

i n t o une mpl oyed worke r s who w ork fo r

nothing a t a l l.

By d riving u p th e cost of labor, a

l iving-wage ord inance or p ol icy di scour-

ages an emp loyer f rom cont ract ing wi th a

nonuni on ve ndor a nd we a ke ns empl oye r

res is tance to un ion dem ands for

higher wages . Thus the living

wage benef it s union workers wh o

have protec ted jobs and w ho mak

far more than the un ski ll ed workewh o might lose hi s job because th

l iving wage i s mand ated.

Wages u l t imate ly d epend

on w orker prod uct ivity, as en-

hanced by technica l progress and

the w i ll ingness of ent repreneur s t

save and take r i sks, not on

someones good intent ions .


3/8

NEWSLINK


Media Ment ions

D

Voluntary taxes: Who checks off in Mass.

axpayer check-of f pro-

p o s a l s s e e m t o b e t h e

Spring f l ing on Beacon

Hill . As NewsLinkgoes

to press, several check-off propos-

als have mad e their way through the

Hou se, includ ing a controversial tax

f o r m check - o f f f o r t he so - ca l l ed

Clean Elect ions Fund, a campaign

f inance re form measure approved

by the voters in 1998. In add i t ion,

the Massachuse t t s Hou se recent ly

passed a bi l l that w ould en able tax-

p a y e r s t o v o l u n t e e r t o p a y t h e i r

taxes at a high er rate. The legisla-

ture also approved yet another check-off that would earmark dollars for a

Commu nity Preservation Fund .

If signed into law, the vol-

un tary in come tax rate bill initially

f i l e d b y H o u s e M i n o r i t y L e a d e r

Francis Marini , would al low indi-

vidu al taxpayers to opt for a higher

5.95% tax rate. Last Novem ber, vot-

e r s d e c id e d o v e r w h e l m i n g l y t o

Ellen Foley an d Frank Con tes op in

editorial, The Space Race, app eared

th e Boston S unday Heraldon May 20

David Tuerck d iscussed the energy

sis on WRKO radio on M ay 17.

Th e Boston Phoenix story, Beacon H

Institute celebrates 10 years, appea

in the May 410 edition.

Th e Boston Globe cited BHI on May

Congress to weigh fa te of di spu

dairy comp act.

Our ana lys i s of the New Hampsh

sales tax proposal received coverageMarch 29 in the following New Ham

shire newsp apers:Berlin Daily S un , C

cord Monitor Online, Keene Sentinel, Po

mouth Herald, The Union Leaderan d T

graph Online. Vermont newspap ers

cluded Brattleboro Reformeran d Va

News. The Caledonian-Record,Daily N

( N e w b u r y p o r t , M A ), Eagle Trib

(Lawrence, MA), Fosters Daily Democ

(NH), Portsmouth Heraldan d The Un

Leaderprovid ed coverage on March

Citizen (NH), Concord Monitor, Fost

Daily Democrat, Su n (Lowell, MA), Tgraph an d The Union Leadercovered

story on March 27. Keene Sentinel S

day (NH) and Sunday Telegraph cove

the story on March 25. On March

David Tuerck discussed the propo

sales tax on WSNW rad io (Nashua).

WPTT-AM radio (Pi t t sburgh) int

viewed Frank Conte on bu sinesses s

ing money using high-speed Inter

access (April 24). Yahoo! News cove

our high-speed Intern et access analy

on February 19 and 20. Eastern Penns

vania Business Journal (Allentown, P

cited th e analysis on February 12.

Our ed ucation study received cover

in theEnterprise (Brockton, MA ) on F

ruary 16. Also covering the stud y:No

Andover Cit izen ( F e b r u a r y 1 4 ) a

Milford Daily N ews (February 10).

0.0

0.5

1.0

1.5

2.0

94 95 96 97 98 99*

Source: Mass. Depar tmen t of Revenu e

Organ Transp lant

Natural H eritage

AIDS

Olympic

* Preliminary

Percentage of

taxpayers

wh o check off

scale back the income t ax rate to 5% by

the year 2003. Tax-cut prop onen ts say

this voluntary arran gement w il l a l low

peop le w ho voted against the tax rol l-

back the opt ion of sending more dol-

lars to fund pu bl ic services.

But if the p ast is any gu ide, few

taxpayers m ay opt for this form of al-

locat ing funds a la carte. Tod ay, tax-

payers have four choices for increas-

ing the amou nt of taxes they pay or re-

du cing the am ount of the i r annual re -

fund s: the Organ Transp lant Fund ; the

AIDS Fund ; the N at ional Heri tage and

E n d a n g e r e d S p e c i e s F u n d ; a n d t h e

Olymp ic Fund . But the rate of par t ici -pat ion is dismally small. For examp le,

last year less tha n 1% of the n early 3.2

mil l ion tax f i lers opted to make con-

t r ibut ions to each of the four funds .

Overall, contributions appear to fall as the

number of income tax returns increase.

T

Checking off in Mass: Opting in or tuning out?


4/8PAGE 4 / SPRING 2001


Hampshire, showed that the retailers

were correct. BHI found that the losses

would be broader than expected.

This is because when peoplecome to New Hampshire to

shop, they generally spend

mon ey on taxable items like

gasoline, tobacco, alcohol

and meals. Removing this

tax revenue would make

the collateral revenu e

losses to the state much

higher.

According to

BHI, New Hampshire

could expect to add no

more than $288 million

to its FY 2003 revenu e

collections by impos-

ing the tax. If the econo m y w ere to

slow below its expected normal rate of

growth, the state would add no m ore than

$283 million to its revenue collections in FY

2003.

This would result in the loss

of almost 33,000 jobs, of w hich m ore

than 22,000 wo uld be in retail, wh ole-

sale and transportation.

On March 28, at a standing-room-only legislative hearing in Con-

cord, Governor Shaheen made an imp as-

sioned case in favor of the sales tax. Her

pron oun cements followed a vigorous ad-

vertising campaign aimed at winning

public support for the tax. Putting off

F O R M O R E I N F O R M A T I O N

C A L L 6 1 7 - 5 7 3 - 8 3 0 2

In addit ion to cost ing

NH jobs, the sales tax

w ould generat e $80

million less in revenue

than expected.

Contributions of all sizes from individuals,

foundations and corporations support

the Beacon Hill Inst itut e.

Yes , I want to su pp ort the Beacon H ill Institute.

I enclose m y check for $_________

Name (p lease print): _____________________

Add ress ________________________________

City, State, Zip ____________________ _____

Phone _____________________

Fax ______________________

Please make checks payable toBeacon Hill Inst itut e

at Suffolk Univ ersity .

A ll contributions are tax deductible under

section 501(c)(3) of the IRS code,

as gifts to Suffolk University.

Beacon Hill Institute, Suffolk University,8 Ashburton Place, Boston, MA 02108-2770.

Make them listen! New Hampshirecontinued from page 1

the hard choices until another year w ill not

make [funding education] go away, she

said.

BHI Executive Director Dav id G.

Tuerck strongly op posed the sales tax in

his testimony. In add ition to costing N H

jobs, he pointed out that the sales tax

wou ld generate $80 million less in revenu e

than expected. We cant find evidence

that impo sing a sales tax will do wh at the

Governor says it will do. Indeed , it ap-pears that in terms of fund ing edu cation,

this plan is clearly not the w ay to go.

The New Hampshire legisla-

ture app arently agreed. In an April 18

vote, it troun ced the sales tax proposal

235 to 148.

In a related development, the

New H ampshire Sup reme Court upheld

the cons t i tut iona l i ty of a s ta tewide

pro per ty tax that collected $800 million

over the last two years to specifically

fund educat ion.

Though the threat of a sales tax

has gone away, funding education re-

mains. Said Tuerck, There are other w ays

to do this. Spending cuts remain an op-

tion, as do small increases in selective

taxes. Also being considered as a possi-

bility: an income tax. New H amp shire is

one of eight states with no income tax.

New Hampshire residents may be faced

with the p ossibility of a chan ge dow n the

road.



NEWSLINK

Water banscontinued from page 1

The same thing would happen an d

indeed has happened in the past with gaso-

line, when price restrictions led to rationing.

Then it was lines at gas stations and filling gas

tanks on alternate days.

As it happens, the price of gasoline

has gone up , so consumers are naturally buy-

ing less of it or going w ithout other th ings. Ac-

cording to on e recent poll, three in ten Amer i-

cans are planning to change vacation plans this

year because of high er gasoline costs.

When i t comes to w ater conserva-

tion, the best solution is to establish a pric-

ing sys tem of the kind th a t opera tes wi th

a lmost every other produ ct . This wou ld

a l low consumers to regu la te consum pt ion

and m ake the ir own choices . Is a greenlawn more important than a long shower?

Is green grass more d es irable than land -

scaping that requires less wa tering? Is a

pr iva te wel l the answer? A pr icing sys-

t e m t h a t r e f l e c t s s u p p l y a n d d e m a n d

wou ld enable consum ers to regula te con-

sumpt ion of water jus t as they regula te

consump t ion of gasol ine .

There a re ways to br ing ra t iona l

pr ic ing to the provis ion of water . Natu ra l

gas and electric services are metered for

tenants whi le water i s metered only for

landlord s. Metering water also for tenantswou ld di scourage use .

What about supp ly? With higher

pr ices, town s could exp and cap acity. In some

situations, they might truck in w ater supp lies

from outside the water district to meet de-

ma nd . For e xa mpl e , hom e owne rs i n

Provincetown rely upon trucked w ater to fill

their pools. Oth er towns encourage the use of

private wells for irrigation to lessen the de-

mand on the pu blic water sup ply.

Trading water rations?

Nobel laureate Milton Friedman once

offered a solution.

In 1979, Marin Cou nty, California ra -

tioned water to 37 gallons per d ay per p erson

in a household. Any hou sehold that exceeded

that amou nt was su bject to a steep fine. The

scheme was not unlike a pricing system. How -

ever, noted Friedman, the scheme d idn t pro-

vide an incentive for persons wh o use less than

the daily quota. If a family of four consum ed

less than 148 gallons per day, couldn t it sell

its daily surp lus to a willing bu yer?

Fr i e dma n propose d t ha t Ma r i n

County authori t ies

set a supplemental

price per gallon of

wa t e r a bove t he

quota. If a house-hold u sed less than

the quota, the au-

t hor i t i e s woul d

pay th is price to the

fa mi l y fo r us i ng

less.

W r o t e

Friedman: If the

price is set so that the am ount some families

save is equal to the excess amou nt other fami-

lies use, total water u se wou ld remain the sam e;

the revenues to water auth orities would be the

same; and every separate family w ould be bet-

ter off those saving water, because their ac-

As w ith other short -

ages, w at er shortages

result from providers

keeping prices art ifi-

cially low.

tions reveal that they p refer the mon ey

to t he water; those using extra water, be

cause their actions reveal the reverse.

So aga in

this summer, folk

i n be a u t i fu l Ne w

England town s like

F a l m o u t hF o x b o r o u g h

Ma ns f i e l d a nd

Sudbu ry w ill sit on

their porches won

d e r i n g w h y t h e y

can pu t all the wa

ter they want into

their mixed drink

but dare not offer a drop to thei

parched lawns. Such is the enlighten

me nt wi t h whi c h we ma na ge re

sources in the n ame ofconservation.

Needless to say, water ban s are

good for private well drillers.

Angelo Ciano, owner of

Avellino Well and Pump Co.

of Reading, MA, drills more than 200 pri-

vate wells a year. Ciano s business is ex-

pected to grow as more hom eowners recog-

nize the value of a p rivate well.

Ciano started h is comp any in 1990

wh en ratepayers were alarmed at the higher

costs imposed by the MWRA. Today he

d rills most of his pr ivate wells south o f Bos-

ton in towns that impose water bans. Abou t

80% of his wor k pro vides w ells for the i r-

r iga t ion of l awns , gardens and other out -

door u se s.

While the $7,500 cost for keeping

the lawn g reen and the car clean may seem

high , Ciano maintain s that private wells can

increase a hom es resale valu e. Moreov er,

homeowners w ho d raw from private wells

enjoy greater convenience. Since they aren t

covered by mu nicipal water ban s, they can

water w henever they like.

Some question the environmental

imp act of dr illing pr ivate wells because they

may tap the same overtaxed public reser-

voirs. Private wells don t solve the prob-

lem, one stat e official told th eBoston Globe

last year. It s l ike having many smal l

straws sucking ou t of the same ground w a-

ter as on e large pu blic well.

But som e think those straw

d on t amount to much. All in all,

d on t think the use of water by pri

va t e we l l s i n We s t boro r e a l l y

amou nts to a hill of beans in regard

t o o u r t o w n w a t e r s u p p l i e s ,

W e s t b o r o H e a l t h D i r e c t o r P a u

McNulty told the Worcester Telegram

and Gazett e in 1999.Some water an d sewer of

ficials welcome private well dri l l

ing. We encourage private well

to take the demand off our system,

Chu ck Mitchel l , the Water Sup erin

tendent for the town of Orleans told

BHI recent ly.

Ciano thinks the issue goes be

yond economics. We live in a free coun

try, he says. We shou ld have the free

dom to water when w e want to.

For some, stay ing green goes deep




ACapital gains taxes: Not just for the rich

June 1999 BHI FaxSheet

dealt what we though t was

a fatal blow to the myth

tha t increases in capi ta l

gains taxes hu rt high-income taxpayersthe most. BHI show ed that a state law

raising long-term capital gains taxes

wou ld have raised tax rates most for tax-

payers making less than $20,000 per

year. The legislature sustained Gover-

nor Celluccis veto of this law.

Like an android in the Termi-

nator m ovies, how ever, the capital gains

myth keep s coming back to life. Und er

current law, the state tax rate on long -

term capital gains falls in increments

from 5% (for assets held one to two

years) to zero (for assets held six years

or more). The latest attempt to mod ify

t h i s l a w , s p o n s o r e d b y t h e T a x

EquityAlliance of Massachusetts, took

the form of a proposal to create a flat

rate on all capital gains, rising to 5% by

2003.

This time the p roposal died in

committee.

H e r e a r e t h e f a c t s : O f t h e

732,127 Massachu setts tax filers wh o re-

ported capital gains or losses in 1998

(the latest year for w hich data are av ail-able), the distribu tion of filers across in-

come groups w as roughly even. Of these fil-

ers, 19% had an ad justed gross income (AGI)

less than $20,000. Forty-three percent had

a n A G I l e s s t h a n

$50,000. Only 26%had an AGI greater

than $100,000.

Hence, any

p r o p o s a l t o r a i s e

capital gains taxes

h u r t s t a x p a y e r s

across the income

s p e c t r u m . M o r e

impo rtantly, the lat-

e s t p rop osa l , l ike

the earlier one, harms rich and poor alike.

The net effective tax rate increases as sociated

with the prop osal follow a U-shape p attern,

with th e highest rate increases at the bottom

and the top of the income spectrum and the

lowest rate increases in the middle. The

chart below shows the 2001 rate increases

that wou ld have resulted from the latest pro-

posal.

Low -income taxpay ers suffer the most .

The rate increase is high est of all for

the very lowest AGI grou p. The rate wou ld

have r isen b y .8% for tax filers w ith an AGI

less than $20,000, as compared to .7% for

those w ith an AGI of $200,000 or mo re.

Any proposal to raise

capit al gains taxes

hurts taxpayers across

the income spectrum.

While this result might seem

counterintuitive, it is easily explained

Low-income households often sell as

sets in order to sup

port them selves oveperiods of economic

hardship (unemploy

ment , for example)

If a household see

i ts income fal l , say

f rom $40 , 000 pe r

year to $20,000 per

year, it is not likely to

reduce its consump

tion by half. Rathe r

the hou sehold i s l ike ly to f inance par

of its consu mp tion from capital gains

Raising th e capi tal gains tax imp osea g re a t e r burde n on t h i s house ho l d

than i t would on a midd le or high- in

come household.

Federal and state tax laws trea

long-term capital gains more favorably

than oth er kinds of income for this and

other reasons . Most fund amenta l ly

capital gains aren t income at all and

argua bly, should not be taxed at all. Tax

ing capi ta l ga ins amounts to double

taxation. The taxpayer p ays once wh en

he earns his wage and again when he

sells assets paid for out of his wages

This double tax can lead to h ardships on

the lowest wage earners, as we have

shown.

But that is not the only bur den

to bear. Increasing the capital gains tax

would also have adverse economic ef

fects on Massachusetts. A rise in the

capital gains tax deters business from

spend ing on capital factories, comp ut

ers, office bu ildings, warehou se space

and other equipment and s t ruc tures

BHI estimates that the latest proposawould have caused the Massachusett

stock business capital to fall by $5 bil

lion.

The c a p i t a l ga i ns myt h ha

been laid to rest for another year. Bu

stay tuned. As Nobel laureate Jame

Buchanan was fond of saying, econom

ics consists largely of impressin g alien

ideas on reluctant minds. So long a

that is true, the job of dispelling p opu

lar economic myths remains u nfinished

Net effective increase in capital gains ta x per d ollar of feder al taxable income for 2001

Source: U.S. Intern al Revenu e Service, Statistics of Income Bulletin, Spring 2000.

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

Under$20,000

$20,000 -30,000

$30,000 -50,000

$50,000 -75,000

$75,000 -100,000

$100,000 -200,000

$200,000or over

Proposed capital gains tax would have hurt lower income taxpayers


7/8


NEWSLINK

Learning curves, Sowell-styleBasic Economics: A Citizen's Guide to the Economy

Thomas Sowell, Basic Books, 2000, 366 pages. Reviewed by Frank Conte

For years economic journalist s

have promoted a v iew of entit le-

ment t hat ov erlooks anyt hing as

inconvenient as scarcity . To w it ,

they have ignored the brilliance

of the price sys tem.

More than two years ago, the

National Council on Eco-

nomic Education, with the

help of the noted pollster Lou

Har ris, released the findings of a survey thatunderscored the deep-seated problem of eco-

nom ic illiteracy in the United States. The

council reported that half of all American

adu lts and two-thirds of high school stud ents

received a failing grade w hen it came to un-

derstand ing basic economic concepts such as

scarcity, money and inflation. N ev er h as

t h e o u t l o o k f o r t h e d i s m a l s c i e n c e

looked so bleak.

Now comes an opportunity for

genu ine learning. Thomas Sowell, the noted

economist and sociologist, has w ritten a stel-

lar new introduction to the dismal science.

Basic Economics should be required reading

in every high school. Many thoughtful prim-

ers have withstood the test of time. Henry

Hazli t ts Economics in One Lesson an d

Leonard SilksEconomics in Plain English are

just two. But Sowells work stands apart.

Devoid of the technical jargon that

afflicts most economic wr iters,Basic Econom-

ics is an impassioned guidebook that lays

bare the d isreputable bu t accepted little fal-

lacies that stand in the w ay of true learn-

ing. One can imagine Professor Sowellearnestly writing on a blackboard

over and over again the classic defi-

nition of economics as the study

of the use of scarce resources

wh ich have alternative uses.

It is not surprising

then, given these levels of il-

literacy, that the American

pu blic is often lead astray by poli-

ticians, the media and even academe

wh en it comes to economics. Econom ic is-

sues are framed in patently non -economic

terms obscuring the r eal issues facing con-sum ers and taxpayers. Special pleading for

programs an d policies such as fair trade,

affordable h ousing, and living wages

dominate the headlines. Consumers and

politicians are qu ick to blame greedy en-

ergy compan ies and deregu lation for rolling

blackouts in California, conveniently ignor-

ing the most fundamental issue of supply

and demand.

But Sowell is no mere d isciplinarian

but a great expositor of ideas. The fallacy of

composition what is tr ue for a part is not true

for the whole is just one examp le he uses. In

a sports stadium,

any fan can see

better by stand-

ing up , but if ev-

eryone stands up

not everyone

will see better.

Applied to the

American steel

i n d u s t r y , t h e

bitter lesson is

learned easily.

W h e n

the American steel ind ustry w on special imp ort

restrictions, it succeeded in propping up the

price of steel. But American ma nufacturers of

refrigerators and automobiles paying mor e

for American steel wer e forced to raise prices.

This unintended consequence placed the manu-

facturers at a d isadvantage w ith foreign manu -

facturers of refrigerators and automobiles.

Thereafter, some m anu facturers found it easier

to shift their jobs abroad . In the final analysis,

American indu stry as a whole was worse

off because of the impor t restrictions.

The costs of preserving the jobsin steel come at the expense

of losing jobs in the manu-

facturing of refrigerators.

While some may say

that Sowell, a political conserva-

tive, is too much of a free market

polemicist, he is mind ful of the long

history of economic reasoning that

moves beyond labels. Econom ics, long

the stu rdiest of the social sciences, is more

than mere opinion. Sowell remind s us that

wh en it comes to the acceptance of basic prepo-

sitions, a socialist economist such as OskarLange does not d iffer in an y fund amental way

from Milton Friedman, the pre-eminent free

market econom ist of our time.

But the language of economics now

serves other ends. For years economic journal-

ists have promoted a view of entitlement that

overlooks any thing as inconvenient as scarcity.

To wit, they have ignored th e brilliance of the

price system.

Attemp ts to make prices, includ ing

the prices of peoples labor and talents, be

something other than signals to gu ide resources

to their most valued uses, makes those prices

less effective for their ba

sic pu rpose, on which the

prosperity of the whole so

c ie ty d epends , writes

Sowell.

The role of government.

It is t rue, as

Sowell observes, that a

market economy canno

exist in a vacuum. Strong

but limited government is

necessary to enforce rulesand contracts and allow individuals to engag e

freely in econom ic exchange. Moreover, no

political freedom is secure w ithou t a system

of prop erty righ ts. Economically, prop erty

rights are needed because they create incen-

tives for producers and consumers. For ex

ample, while most Americans do not own

farmland, thanks to prop erty rights, they have

more and better food available at lower p rices

than in countries without property rights. And

as Sowell notes, prop erty rights tend to create

a system of self-monitoring. Producers are no

about to let resources deplete without regardEven a libertarian su ch as Sowell ac

know ledges that governm ent, in the case of en

vironm ental protection, can make better deci

sions than the marketp lace. Still a market

economy that generates externalities does

not allow government to ignore the questions

of costs and benefits of its actions.

Basic Economics does have severa

slight shortcomings. In the age of Greenspan

any w ould-be economic enthusiast would mos

definitely need an introdu ction to the n uance

of central banking. But Sowell doesn t delve

mu ch into monetary policy. Neither does hedelve mu ch into tax policy nor describe the hid

den costs of taxation up on the supp ly and d e

mand for capital and labor.

Professional economists as of late

have been asking themselves whether they

should d o well or do good. Basic Economics i

proof of wh at Sowell has been doing his wh ole

career: writing broadly with verve and intel

lect and doing it well.


8/8

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SUFFOLKUNIVERSITY

8ASHBURTONPLACE

BOSTON,MA02108-2770

In Point of Fact

NONPROFITORGANIZATION

U.S.POSTAGE

PAID

BOSTONMA

PERMIT#18443

Tax a moving Jeter!

The tax code for todays pro ath-

letes can be a nightmare. Among

other things, they have to p ay

tate, and in some cases city, income taxes

everyw here they play. Derek Jeter, wh o is

cheduled to p lay nine games in Boston this

year, will pay Massachu setts taxes on abou tone-sixteenth of his $15 million salary. On

op of that, professional athletes must ac-

count for any app earance in w hich they re-

ceive money or goods, and every endorse-

ment nickel that makes its way into their

bank account. Sell an autograp h? Gotta de-

clare it. Take ho me a free television after an

appearance at the latest electronic store to

open? Write it down. Its all taxable income

according to Un cle Sam.

Matthew Futterman,New Jersey Star-Ledger,

April 15, 2001.

Lemon Meringue Risk Management.

Circus clowns were told to take out custard

pie insurance against the risk of being sued by

pectators who fail to see the joke. With an in-

creasingly litigation-crazy public ... the ethics and

egal implications ofsplattingand sloshingare

expected to be hotly debated u nder the Big Top,

Clowns International said in a statement from its an-

nual convention. Although no clown has yet been

sued by the recipient of a face full of custard p ie, the

organization fears it may be just a matter of time.

Reuters by w ay of Yahoo, April 6, 2001.

Snail Mailsnuffed out on Saturday?

The large and still growing popularity of e-mail is

one of the major reasons why the U.S. Postal Service

is considering eliminating the delivery of mail on

Saturday. The Postal Service is facing a loss of be-

tween $2 billion and $3 billion this year. Currently,

Internet users send over ten billion non-spam e-mails

per day, an International Data Corp. (IDC) study

claims. That will increase to 35 billion by 2005, IDC

pred icts, and within five years there will be 1 billion

e-mail accounts. The market research firm Cyber

Dialogue reports that 73 million U.S. adu lts access e-

mail at least once each month. That represents 94%

of all U.S. Internet users. E-mail is also grow ing

quickly in the bu siness sector. For example, the elec-

tronic marketing firm 24/ 7 Media estimates it sent

over six billion e-mails in 2000, a 300% increase from

the year before.

E-Commerce Times, April 4, 2001.

Smells like teen spirit.

A nationw ide survey of 546 students cond ucted

by Junior Achievement reveals that 83% of

young people think taxes are too high. The JA

Interprise Poll on Personal Finance also

asked teenagers if purchases made over the

Internet shou ld always be tax-free. Seventy-

nine percent said yes, while another 13.6% said

purchases should be tax-free for a limited time.

The results indicate that todays young people

might have more of a reason to care about cur-

rent tax rates than many adu lts may think.

Business Wire, April 13, 2001.

No option: Alternative Minimum Tax N ightmare.

Like so many others in the high-tech w orld,

Jeff Chou watched his millionaire dreams

crumble along with the plunging stock mar-

ket last year. But through it all, the 32-year-

old hardware engineer never expected that he

would have to endure a taxpayer nightmare

for the rest of his life. Chou owes the IRS taxes

on $6.5 million in paper profits he never saw

after exercising Cisco Systems stock options

last year. By tax deadline, Chou would have

to come up with around $2.5 million to pay

his state and federal income taxes. Even if he

were to liquidate all his assets and hand them

over to the IRS, he figures hed still fall $700,000

short. Theres no chance I can pay the gov-

ernment back in my lifetime, moaned Chou

who now faces bankrup tcy.

May Wong, Associated Press, April 12, 2001.

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