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A Round Table held on July 12, 1978 and sponsored by the Program forTax Policy Studies of the American Enterprise Institute for Public Policy Research, Washington, D.C. This pamphlet contains the edited transcript of one of a series of AEI forums. These forumsoffer a medium for informalexchanges of ideas on current policy problems of national and international import. As part of AEI's program of providing opportunities for the presentation of competing views, they serve to enhance the prospect that decisions within our democracy will be based on a more informed public opinion. AEI forumsare also available on audio and color video cassettes.

AEI Forum 20

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ISBN 0-8447-2137-9 Library of Congress Catalog Card No. 78-72285

Printed in United States ofAmerica OHN CHARLES DALY, formerABC News executive, J and forum moderator: This Public Policy Forum, part of a series presented by the American Enterprise Institute, is concerned with government spending and the broad array of campaigns that have been designed to limit that spending. The subject of our discussion is the tax­ payers' revolt: Are constitutional limits desirable? This is the year of a new rising by Americans against their government. The shot heard around the world this time is Proposition 13, the Jarvis-Gann amendment to the California constitution, by which some 65 percent of the voters of Californiaslashed property taxes by some 60 per­ cent. The phrasemakers are calling it "the great tax revolt of 1978." It started with what seemed like a series of isolated local actions. New Jersey and Tennessee voted to limit annual increases in state spending; voters in the cities and towns of Ohio rejected well over half of the school financing meas­ ures on the ballots; and in nineteen states, including Massa­ chusetts, Michigan, Idaho, Utah, and Oregon, campaigns were launched to cut specific taxes, limit annual increases, or just limit government expenditures. These actions, taken together with the overwhelming success of Proposition 13, clearly warned of a nationwide tax revolt on the part of the citizenry.

1 In Washington, Senator Robert Dole of Kansas intro­ duced a proposed constitutional amendment to mandate a balanced federalbudget each year, twenty-three state legis­ latures have called fora constitutional convention, and only eleven more states need take action to achieve it. Moreover, Congressman Jack Kemp of New York and Senator William Roth of Delaware introduced a bill that would cut federal income taxes. by 30 percent over three years, regardless of the impact on the budget. An Associated Press-NBC poll taken at midyear sampled public opinion on a constitutional amendment to cut federal, state, and local tax collections and to limit futuretaxes. Of those polled, 67 percent favored an amendment; only 20 percent were op­ posed. In recent days, Walter Heller, the chairman of the Coun­ cil of Economic Advisers from 1961 to 1964, warned the National Conference of State Legislatures not to bury its head in the sand because, he said, something is about to happen. Mr. Headlee, you have led a largely successfulcampaign in Michigan to put limitations on state spending. What is your program, and why is it a good one?

RICHARD HEADLEE, Chairman, Taxpayers United for Tax Limitation: In the last ten years, Mr. Daly, spending in the state of Michigan has gone up 235 percent, while the gross personal income in the state has gone up only 140 percent. The number of state employees has gone up 50.3 percent, while the population has grown only 6.7 percent. Govern­ ment spending is out of control, and we feel that we must have a comprehensive approach to tax limitations. We have proposed a constitutional amendment that would control all forms of taxation and spending in the state of Michigan, limiting state spending to its current share of the economic pie.

2 We also want to stabilize property taxes at their current level and index them to the consumer price index of the U.S. Department of Labor. In addition, we insist that all state­ mandated costs be paid for by the legislature. That should stop a lot of state meddling in local government. I hope we can do the same thing at the federal level some day.

MR. DALY: Mr. Holman, as president of the National Urban Coalition, you are concerned about the survival and the success of the American city. Do you see the present activism as an angry warning to governments to shape up, or do you see it as a long-term movement that bodes ill for public services in cities, particularly services to the disadvantaged?

M. CARL HOLMAN, president, National Urban Coalition: It certainly is a warning, and it is being seen as such by all of the politicians who are scuttling forcover. There is a real possi­ bility that the present tax protest will have some long-term ramifications,if only because it got many others to join what is essentially a class interest effort by homeowners, rightly concerned because California had enormously high taxes and an effectivesystem of collecting them. The Proposition 13 forces had very zealous and effective leadership. In other states, though, there may not be quite the tidal wave that some people anticipate. There will be a lot of litigation, and some people will find that they cannot do some of the things they have been considering. In the course of this tax reformmove, we saw in Californiaa new class of police recruits, made up largely of women, blacks, and Chicanos, who were sworn in and then told that they had no jobs. So I expect to see this movement spread across the coun­ try, but I am not sure that it will move with quite the ease that it did in California, which had a surplus of $5 billion.

3 MR. DALY: ProfessorBork, you were formerly solicitor gen­ eral of the United States, the federalgovernment's advocate beforethe United States Supreme Court. Are limitations on spending and taxation constitutional? I believe five chal­ lenges against Proposition 13 have already been lodged in the CaliforniaSupreme Court.

ROBERT BORK, Chancellor Kent Professorof Law and Legal History, Yale University: There may be reason to question the constitutionality of some provisions of Proposition 13. There would be less reason to question the constitutionality of a well-drafted constitutional amendment at the federal level. From a constitutional lawyer's point of view, the interest­ ing aspect of the movement to limit taxes by constitutional amendment is that it necessarily rests on the idea that the processes of representative democracy do not work ade­ quately in the most basic areas of government-namely, taxing and spending. That is quite a statement about the democratic process in this country. The fundamentalgoal of a constitutional amendment is to cure those areas where democracy does not work well. That is why this movement has begun at this time.

MR. DALY: Mayor Alexander, you are a past president of the U.S. Conference of Mayors and as the mayor of Syracuse, New York, you may become involved in the current maelstrom. Do you agree with Walter Heller that something is about to happen? And, if so, what?

LEE ALEXANDER, Mayor, Syracuse, New York: Yes, some­ thing will happen, but I am not sure anyone will really know what until the dust settles in California.As Mr. Holman said,

4 there were unique circumstances in California-asurplus of $5-6 billion and a tremendous escalation in the property tax. The legislature had the outrageous nerve to continue col­ lecting taxes in spite of the enormous surplus. That was the public's perception of the situation. But I must disagree politely with Mr. Bork when he says this means that the public is dissatisfiedwith representative democracy. The public was limited in that instance to local government. If people could file a Proposition 13 against the income tax, which they do not have the right to do, they probably would do it. Proposition 13 was the only vehicle for protest that they had. But it means even more than that. Proposition 13 is a clarion call fortax refoon. In about eight hours of voting in Californiaa new ice age descended on us, and those of us who do not heed the public's message will probably wind up in the swamp with the dinosaurs. Until this country stops expecting cities to act like na­ tions, though, tax problems will continue. In all the indus­ trial nations of the world, the United States ranks at the top of the list of those that expect local government to deliver health, education, and welfare services. In most of the in­ dustrial nations, those functionsare handled by the federal government. What the California taxpayers seem to be saying-and this is backed up by a recent Harris poll-is that the taxes in this country should be collected from those who have the ability to pay. That means we should rely on the income tax, not the property tax which afflictseveryone regardless of his ability to pay.

MR. DALY: Harvard's Samuel Beer believes that the gov­ ernment is now so big and so oriented toward self­ preservation that it is the government itself, not citizen need or citizen demand, that stimulates and promotes most of the·

5 big new programs. Would you comment on that, Mr. Head­ lee?

MR. HEADLEE: I would like to go back for a moment and comment on Mayor Alexander's statement that people who have the ability to pay should pay. First of all, 93 percent of the taxes are paid by 50 percent of the people. The other 50 percent of the people only pay 7 percent of the taxes. So that theory does not really explain why people are upset. People are upset with all formsof taxation, not just the income tax. A deluge of taxes has been imposed on people, and now there is a 7 percent inflation tax, the result of twenty or thirty years of excessive spending at the federal level. There are income taxes, property taxes, gas taxes, liquor taxes, cigarette taxes, local taxes, state taxes, federal taxes, and the 7 percent inflation tax. Reform is not the issue; restraint in government is. Most people want the govern­ ment out of their lives. Relatively few are demanding new services from government. People would like to have a well-managed, progressive government, not one that is out of control. Forty-two per­ cent of our income now goes to the government. We work from January through part of May of each year for the government. People do not understand that. What we need is not just another reform (which the people recognize as another tax increase), such as shifting the burden to business. As we know, businesses do not pay any taxes; they merely collect taxes for the government. People pay all the taxes. When the government raises Ford Motor Company's taxes, Henry Ford doesn't pay an extra dime. The cost is passed along to the guy who buys the next Ford or Lincoln. So instead of talking about tax reform,let's talk about tax restraint and getting government under con­ trol.

6 The Jarvis-Gann amendment is not the way to get gov­ ernment under control; it is a way to dislocate services. It is a radical, irrational approach to a very serious problem. We do not need to shift the taxes from property to income to something else; we need to control all forms of taxation.

MAYOR ALEXANDER: Youare right when you say that people are annoyed with taxation, but in California they used a meat axe when they should have used a scalpel.

MR. HEADLEE: No question about it.

MAYOR ALEXANDER: You commented on how heavily this country is being taxed; let me give you some statistics. Of all the industrial nations, the United States has one of the lowest levels of taxation in relation to the size of the gross national product. The United States pays 28 percent of the GNP with the taxes it collects. In Austria, taxes comprise 37 percent of GNP; in Bel­ gium, 37 percent; in Denmark, 44 percent; and in France, 3 7 percent. All of these countries impose heavier taxes than does America. The problem in the United States is that the tax structure is inequitable. We have developed very sophisticated taxing formulasat the federal level-in the community development area, for example. Wetake account of poverty, of population, and of growth in housing. We have sophisticated formulas for taxing some things, but not for taxing property. There we have one simple measure-we take a percentage of the market value of a house, without regard to whether or not the people living in that house may be able to pay the tax. The people in Califor­ nia targeted the property tax because it is the most regres­ sive and inequitable.

7 We in New York state have had a cap on property taxes since the nineteenth century, and I live with it. My cap is 2 percent of the average five-yearvaluation of property at its full market value. I have lived with that for three terms because, in spite of my tactics, they keep reelecting me. [Laughter.]

MR. DAL v: Do you not consider that 2 percent cap revolting?

MAYOR ALEXANDER: No, I think a cap is in order, and I per­ cent is much too low. Consider the sales tax, for example. Since a person can consume only so much, someone earning $100,000 a year might pay no more tax than someone else who earns $25,000. Like the sales tax, the property tax is regressive, and the California voters have struck it down. Now, the Harris Poll indicates that the public is calling for tax reform,and I think it is just that. Other states have put caps on expenditures or on levies rather than on rate of tax, as New York has done. They are trying to control the expenditure side. But look at my city, which has a population of only 200,000. Fifteen percent of my budget goes to the police department. If I were to take a referendum, the people would vote against cutting even one dime out of the police department budget. Another 15 percent goes for the fire department. Not one dime would be cut from the fire de­ partment. Ten percent goes forpicking up the garbage and taking care of the roads, and 20 percent goes to employee benefits.So 60 percent of my budget is covered right there. I turn over 80 percent of my property tax, which is about $35 million a year, to the Board of Education, and I keep a few million dollars for the operation of the city. Thus, I do not think the property tax should be expected to deliver education, or health-as it presently is-or wel-

8 fare. If those burdens were taken from us, we would not have to tax as much. We could cut our taxes.

MR. HEADLEE: What I am saying, though, is that reform does not come first; overall limitation comes first. Only a certain percentage of people's gross personal income should go to taxations of all forms. Once that idea is established, then the legislatures and public officials can argue about how to levy it for equity purposes.

MAYOR ALEXANDER: We are penalizing the wrong person when we tax the property owner. A fellowmay have worked for thirty years in industry and retired on a very small pension, yet he is expected to pay property taxes that go toward educating another man's familyor paying welfareto poor people.

MR. HEADLEE: Well, who educated his family? You imply that he educated his all by himself.

MAYOR ALEXANDER: During his time, he paid.

PROFESSOR BORK: I think we are at the wrong end of this subject because I do not think that anybody at this table defends the Jarvis amendment or thinks that the problem really begins or ends with the property tax. What we are concerned about is the overall amount of wealth consumed by government, oftenwithout any indica­ tion that it is consumed wisely or to our benefit. That is why this movement has to go on to the concept of an amendment to the Constitution to limit federal spending. I do not think the problem is tax reform. I take it that Mayor Alexander thinks the answer is to impose the bulk of the tax burden on the rich. It turns out that if we taxed the really rich, we could probably buy three martinis for every

9 man, woman, and child in this country. That would dissipate all of the wealth; there just isn't that much there.

MAYOR ALEXANDER: I disagree.

PROFESSOR BORK: Unless by "the rich/' you mean people making more than $25,000 a year.

MAYOR ALEXANDER: We are taxing the poor to pay for the rich when we impose a property tax on people.

PROFESSOR BORK: We are not talking about the property tax.

MR. DALY: We have a lot of ground to cover. Let's move on to other areas. Mr. Headlee, your petition, which has successfully gained a place on the ballot, calls for freezing all taxes at present levels.

MR. HEADLEE: That is correct.

MR. DALY: And freezing taxes at 9.7 percent of the total personal income in the state of Michigan?

MR. HEADLEE: Actually, it works out to about 9.2 percent. What has been happening in terms of the federaland local government shares, the state government share, and the individual share of the economic pie is a lateral encroach­ ment by state government. It is not a case of one man, one vote in a state legislature. A strongly organized group can exact programs fromthe legislature that are not required or demanded by the majority of the people. So, the govern­ ment encroaches on the individual's share. Who does that hurt? Not lifeinsurance company presi­ dents, or solicitor generals, or mayors. It hurts the person

10 who has no discretionary income; he is the one who gets clobbered. Our program aims at limiting all state taxation and spending to its current share of the economic pie. Give the state a stake in economic growth; put it on a commission. As the economy grows within the state, the state will have more dollars to work with, but it will not be able to encroach on the individual's share without a vote of the people. If it wants to increase its share of the economic pie, it can, but only with the vote of the people. In a year when there is an emergency, the legislature, with a two-thirds majority, can exceed its share for that specific emergency for that specific year.

MR. HOLMAN: It is interesting that you talk about a vote of the people. Unfortunately,your program isn't in existence, andJarvis-Gann is, so it is difficultnot to referto it. In a way, it is the parent of all this. One of the interesting things about all this is the limita­ tions that are imposed in many cases. In California, for example, it will take a larger percentage of the population to vote fortaxes again than even Mr.Jarvis and Mr. Gann were able to collect for Proposition 13. I am sure Mr. Bork is absolutely right when he says that people are unhappy about government. It does bother me, though, when we say we are so dissatisfiedwith representa­ tive government and its limitations that we are ready to start talking about constitutional amendments. I don't mind constitutional amendments. All of us have our favorites. We in the National Urban Coalition are for ERA; we probably would be against the one we have been discussing here. But the whole notion of a constitutional convention scares me to death. All of the surveys suggest that if a constitutional convention were called tomorrow, the Bill of Rights would be one of the first things to go.

11 I am very worried that groups who share a natural con­ cern about tax problems will band together in righteous indignation and move to a constitutional convention that could come up with some things that we are not prepared for.

PROFESSOR BoRK: Mr. Holman, in order to move to a federal constitutional amendment, there need not be a constitu­ tional convention.

MR. HOLMAN: Yes, but some of the states are asking forit.

PROFESSOR BoRK: Then the clever thing to do would be to head the states offby having two-thirds of each house of the Congress present a constitutional amendment to the states. Thus, there would be no need for a convention.

MR. DALY: Is it not also true, Professor Bork, that there never has been a successful amendment put into the Con­ stitution by the constitutional convention procedure?

PROFESSOR BORK: I don't recall one.

MR. DALY: It is a very lengthy, difficult, and tricky proce­ dure.

MR. HOLMAN: I hope it continues that way, and I hope our representative government continues for a little longer.

PROFESSOR BORK: Well, I think representative government ought to continue, but it ought to do those things it does well; and let me say that there are structural defects. Look what has happened to expenditures at the city

12 level, forexample. One of the problems in some cities is the enormous strength of government employee unions that control essential services. They are very hard to bargain with because police, fire protection, and garbage collection are services we badly need. In a sense, they have much more power than private unions. And mayors have little incentive to fightthem very hard. For instance, in a city rather larger than Syracuse and in the same state, the mayor took the attitude that he would not be around in ten years. He thought he would be either in the White House or doing something else, so he decided to pay people offwith promises of pensions that would come due when he was no longer mayor. And in San Francisco, I believe, street sweepers earn $18,000 a year. At this point, we must know that representative govern­ ment is not working terribly well. At the national and state levels, we have the problem of intense interest groups coupled with segments of the bureaucracy who have inter­ ests in particular programs and press for one program at a time. Each interest group has its interest. The rest of us are generally unhappy about the growth of spending, but we can't focus on any one particular program, so we keep losing. The overall result is one that nobody wants. Thus, there are structural defectsin representative de­ mocracy. A constitutional amendment that says the pie for the government is only this big-so sit down, representa­ tives, and divide it to fit your priorities-such an amend­ ment is a cure forthe structural defects and public dissatis­ faction that exist now.

MR. DALY: Mr. Headlee, you consider Howard Jarvis's Proposition 13 to be too drastic. And in your own state of Michigan, there is a proposal you also consider a little too stringent.

13 MR. HEADLEE: It's as if you wanted to lose weight and so cut off your right leg. It's better to go on a diet to lose thirty pounds and show restraint.

MR. DALY: Mr. Jarvis has given a thumbnail description of why he launched Proposition 13, which he himself admits is an imperfect vehicle. He says the only way to cut govern­ ment spending is not to give the government money in the first place. In that way, it is like your proposal, which restricts the amount government can spend.

MR. HEADLEE: That's right. There has been a lot of dialogue about sunset laws and zero-base budgeting, but nobody can show us an example where it has worked in the public sector. Why? Because its share of the economic pie is never defined. Once we define government's share, then sunset laws and zero-base budgeting-which the President would like dearly to have-will work, but they will not work as long as there is an unlimited supply of money.

MAYOR ALEXANDER: There is not an unlimited supply of money at the local level of government. And the property­ tax meat-axe approach of the Jarvis amendment is the wrong way to go about it.

MR. HEADLEE: I agree with that, Mayor.

MAYOR ALEXANDER: We need police and fire protection. The federal government only pays about 8 percent of the cost of educating our young people in this country. That's outrageous. We in New York pay 50 percent of the cost of welfare- 25 percent fromthe state, and 25 percent fromlocal units of

14 government. A bill introduced by Congressman Rangel that has just passed the House Ways and Means Committee would provide $400 million in fiscal relief to local units of government. That will mean some $55 million of fiscal relief to the 1,300 units of government in New York state. This business of caps on spending is not new. In 197 4 the Advisory Commission on Intergovernmental Relations made a study of various states and found thatall but twelve states in the union have restraints in one form or another; probably most of them are on the rate or the levy, as op­ posed to the expenditure. I need a certain amount to run my city. There is a set cost. Syracuse is the only city in New York state that has been running in the black each and every year, but I have accom­ plished that by being a fierce advocate of federal and state spending. Let me remind you what happens when federal and state sources of revenue are cut. Of every dollar of revenue received fromoutside the local unit of government, 80 cents come from the state, and only 20 cents come from the national government. We collect four times as much from the state as we do from the federal government. Let me tell you about my total revenue. I give 45 percent to the board of education; I am the chief fiscalofficer for the board. In other words, 80 percent of all the property taxes I collect go to the board of education. Now, there is not one person in Syracuse who would say he wants fewer services. Does Proposition 13 mean that the . California residents are saying they want fewer services? Not necessarily. Remember that there is a $5-6 billion surplus in California, and the public was angered by the soaring property tax increases. Property taxes in California increased from $6 billion to $12 billion between 1973 and 1976. That is an outrageous, astronomical amount of money when there is that kind of surplus.

15 I am not beating up the Californialegislators; the public in Californiaalready did that. But it is not fairto say that the public support forProposition 13 means simply that people want restraint in spending. Are they prepared to restrain their demands forpolice and fireprotection or education?

MR. HEADLEE: I want you to understand our proposal, Mayor. We want to stabilize property taxes at their present levels and allow them to grow as the consumer price index of the U.S. Department of Labor grows, which means salary increases can be paid to schoolteachers, firemen, and policemen. We do not believe that local services are what people really want to cut. That is noLtheir real gripe, even though the lightning rod may be property taxes because they come twice a year in big bites. Understand that our proposal has nothing to do with this Jarvis-Gann approach; it stabilizes property taxes at their present level and allows them to grow with the con­ sumer price index. Furthermore, we are not cutting state spending. We are defining the state's share of the economic pie. Within that share, we can determine our priorities, and through zero­ base budgeting and sunset laws, we can fundnew programs or expand current ones. The problem that people have in our country is understanding why one level of government is always pointing the finger at another while the tax bill keeps getting bigger and bigger. I am the fatherof nine children; that's one reason why I'm involved in this movement. Our country is $800 billion in debt, and fast on its way to being $1 trillion in debt. The deficit interesteach year is $50 billion. That was all caused by a generation of people, including me and people who preceded me, who would not live within their income and who wanted to buy their year-to-year expenditures on credit-buy now, pay later.

16 This is a moral question. Year after year, we have been electing people to public office who spend beyond our in­ come and now our children are saddled with almost $1 trillion in debt. In Vietnam, we were unwilling to declare war and pay for the bills. The men we sent there to fight have come back, and they cannot buy a house. Interest rates are 10 percent; inflationis 7 percent, and we sit back like it's business as usual. Controlling the size of government has some deep moral implications. Over the past thirty years, people have fooled us into thinking that we could spend, spend, spend, and it wouldn't hurt anybody.

PROFESSOR BORK: Let's try to stop talking about Jarvis and discuss the concept. The vitality and strength of our econ­ omy are at stake here. What would you think, Mr. Holman, about putting caps on expenditures at all levels of government--caps which would freezespending at its current level, with adjustment upward for population growth and inflation, but without adjustment upward forreal economic growth? As real eco­ nomic growth occurred, we would still have the same level of government service per person, but the government's share of the total economic pie would shrink. What about that concept? Are you for or against it?

MR. HOLMAN: I have a pretty good notion of how the caps are likely to work, because in our society things happen in the small as they happen in the large. If legislators have only so much money to spend, I think I know where they will spend it. The President advised against spending money fornaval vessels that we do not really need. Yet,the same people who argue forcaps on government spending make it pretty clear that it is all right formoney to go fordefense. Many people

17 who agree to the caps will find, as the decisions are made, that the cities will not do very well under the kinds of change that occur. And the change is coming. There should be restrictions on spending, of course. For example, I do not believe in voting to give pensions for which there is no money now and probably will not be later. But I want to ask you this, Mr. Headlee. We are trying to bring business back into the cities. In order to do that, many cities have been providing certain kinds of tax incentives. How could the city of Detroit do that under your proposed amendment or law?

MR. HEADLEE: We have a statutory provision in Michigan, Provision 198, which allows fortax abatement. Its purpose is to encourage business to refurbish, build new plants, and generate jobs.

MR. HOLMAN: Would that have to be voted on?

MR. HEADLEE: No, it is not a new provision; it's an old one.

MR. DALY: Mayor, would you respond to Mr. Bork's ques­ tion about caps?

MAYOR ALEXANDER: Yes. I do not object to caps; I live with one. As I said, my operating expenses are limited to 2 percent of my full market value.

PROFESSOR BoRK: How about caps at the federal level?

MAYOR ALEXANDER: We've done the same thing at the fed­ eral level through tax cuts. The federal revenues grow natu­ rally during periods of inflation. But looking at Mr. Head­ lee's chart, I see that at the local level, 81 percent of the tax

18 receipts come from the property tax-some $50 billion, at the national level, less than 3 percent. So property tax hits local government, and that is unfor­ tunate. Sure, the public is angry, and I sympathize with them about the heavy taxes they are paying. But it is unfor­ tunate that they took it out on local government in Califor­ nia.

MAYOR ALEXANDER: I just wanted to emphasize that point. If there is to be restraint, the restraint should not be on local government, which is sorely pressed to meet the demands that are made upon it. After all, it would be very nice if we could walk into a hotel, order a nice dinner, and sign a petition that the dinner should only cost $2. But the hotel could not deliver it. It's fineto demand services fromlocal levels of government and tell them to practice restraint. We all admire efforts to tighten the belt and so forth. Still, thepublic demands cer­ tain services.

MR. HEADLEE: But you agree that there should be some restraint?

MAYOR ALEXANDER: Let me say this: there is not a service I deliver that I can make a profiton because if I could make a profit,you guys in the private sector would take it away from me. I know that forsure. It's true at the federallevel, too. We cannot make a profit offering police and fire protection. If that could be done by private enterprise, they would de­ mand that we got out of it. So there has to be a loss, and there is a loss.

MR. HEADLEE: Do you think there should be any restraints on local government at all?

19 MAYOR ALEXANDER: Of course, there are restraints-

MR. HEADLEE: All we're saying is that there should be restraints on all levels of government.

MAYOR ALEXANDER: There are, but it is unfairto impose the heavy restraint that the Jarvis amendment imposed in Cali­ fornia.

MR. HEADLEE: I could not agree. more; it is the improper approach.

PROFESSOR BoRK: Mayor, may we sign you up now as part of a movement to freezefederal, state, and local spendingat its current levels, with adjustment upward only forpopulation growth and inflation?

MAYOR ALEXANDER: I cannot answer yes or no until I know fully what you intend to accomplish.

PROFESSOR BORK: I intend to stop any increase in spending.

MAYOR ALEXANDER: Well, some increases are necessary at the federal level, but with a comparable reduction at the local level. For example, I would like to see the welfare load picked up at the federal level. That's where I respectfully disagree with the President, who wants to limit spending to 21 percent of GNP. The President is in the forefrontof the fight forfederal takeover of welfareand fornational health; he has said that these are ve:ry important goals. But he cannot achieve these goals if he insists that federal spending should be limited to 21 percent of GNP, because when the federal government eventually takes over those programs,

20 the cost will be billions of dollars. That will increase federal spending.

MR. DALY: Let's go to a differentaspect of that, though. So far, in terms of action, the tax revolt is strongest at the state and local levels. Do you hope, Mayor, that spending respon­ sibilities will simply be pushed up to the federallevel, along with providing services to the disadvantaged and the ill? The decision-making process would then become even more centralized, which defeats one of your principal philosophies.

MAYOR ALEXANDER: That is a contradiction. We say that officials elected at the local level are the most efficient be­ cause they are closest to the people they serve. The city halls of this nation have in factbecome early �arning stations for America. We hear the public sentiment much more quickly than do our representatives at the state and national levels, because people walk in to city hall; they see me on the street, and their complaint is loud and clear. But a mayor can give very little relief. Naturally, I want to deliver services at the smallest possible price, but I can't · rely upon my revenue base until I am relieved of the bur­ dens that should be national responsibilities. For example, someone made an indirect remark about New York City. There is no question that New York City could be in the black and could be strong, but I think it has been a victim of its own munificence. The implications of a New York City default go farbeyond New York; they affect the entire nation and perhaps the entire financial world. Yet, New York City is compelled to provide welfare to people who come into the port. Take, for example, the Puerto Rican immigration into New York City; why should New York state and New York City be responsible for 50

21 percent of that cost? Why doesn't the federal government spread that cost around the country or pump more aid into the island of Puerto Rico so the poeple will not migrate around this country seeking greater opportunities? That is how the tax system becomes distorted. New York City is liberal; it feels its social responsibility and spends billions of dollars. No other city could have accomplished what it has. That is why I say New York City is sometimes a victim of its own munificence.

MR. HOLMAN: Wedo have a cap in effectat the federallevel. We have two budget committees that have been successfulin limiting one kind of spending, and not another. If they had a pie of a certain size, I can tell you where they would spend that money and where they would not spend it. They would not spend it on the cities, and if any mayor believes otherwise, he has only to look at what has happened to urban legislation and legislation aimed at help­ ing the poor. Look at the number of people advocating caps on spending who say that one of the things they want to do is get rid of welfare. In many cases, these caps will just move people fromone side of the ledger to the other, because hidden behind everything else that Mr. Headlee, Professor Bork, and others are saying is the notion that our fettered, shackled private enterprise system is just waiting to bound into action and take care of all our problems. I talked with three major businessmen in California who told me they had no notion how the kind of growth suggested by some proponents of Proposition 13 was likely to occur. Some businessmen have told me they think welfare problems are the government's concern. As everybody knows, the private sector can only hire people who have certain kinds of backgrounds and certain kinds of abilities. Structural unemployment will continue to exist-and in

22 larger measure---oncewe start capping all of these govern­ ments.

MR. DALY: Mr. Heller, who was mentioned earlier, thinks that statutory limits on spending, rather than a constitu­ tional limit, would be preferableand more efficient. Would you comment on that, Professor Bork?

PROFESSOR BORK: Well, if the movement to limit total spend­ ing is much weaker than the individual interest groups who want their own programs, then a statutory limit will be breached. Indeed, the new budget procedure that Congress has set up has been breached more often than it has been honored. I am not one who likes to amend the Constitution, and I have opposed a number of amendments even though I agreed with the objective. But it does seem to me that the tax burden upon the American people and upon the economy has become so serious that perhaps it is time to consider a constitutional amendment to restrain spending.

MR. HOLMAN: So you say we should avoid giving power to make spending decisions to the representatives of the people because they cannot be trusted to deal with it. Next, you say that come war, come recession, come inflation, we have set an inflexible lock that could leave us almost in-

PROFESSOR BoRK: We haven't discussed the drafting of these proposals. Most of them say that, upon a declaration of emergency by two-thirds of the legislature, the govern­ ment's share may be increased. But that is quite a step, and it requires a super majority, which is very hard to get. We oftenrequire a super majority when we want to do something as serious as amending the Constitution.

23 So we would not have to be locked in forever. If we declared war, forinstance, we would have no problem arm­ ing the nation-

MR. HOLMAN: We just came through one that was unde­ clared.

MR. HEADLEE: They tried statutory controls fora hundred years. Every time they got close to the budget deficit ceiling, they added billions of dollars to it. The basic nature of man is to exercise unrighteous dominion when he gains a little control over his fell ow man, and we have a Constitution to restrain this basic nature. I am not promising that things will get better for freeenterprise and forjob creation and capital formation; I only hope they won't get any worse.

PROFESSOR BoRK: And it's not that we can't trust representa­ tives. I would behave the same way if I were a representative and people came in and said they cared about one issue, and they would vote against me unless I supported their posi­ tion. If I wanted to be reelected, I would probably decide to go along with a number of them.

R. DALY: I think we have put down a very broad M base, gentlemen, and it is time to open the question-and-answer session. May I have the first question, please?

EUGENE AUSTIN, House Budget Committee: Professor Bork, I believe you indicated that the Congressional Budget

24 Resolution had been violated or breached more oftenthan honored. Is that correct?

PROFESSOR BoRK: I read an article recently that said the Congress had rejected the recommendations of its budget committee eleven times out of thirteen or something of that sort.

MR. AUSTIN: In terms of breaching the budget resolution by enacting laws that would exceed the ceiling?

PROFESSOR BORK: Yes, I understand that since the budget committee was formed, the budget has increased 15 per­ cent, which was not thought to be the object.

MR. AUSTIN: But there is a two-step process, a first budget resolution that sets targets and a second budget resolution that sets the ceiling. The ceiling has not been broken to date by the three budget resolutions that have been enacted since the new congressional budget process began. I wanted to correct that. Also, most of the resolutions calling for a constitutional amendment to require a balanced federal budget have in­ cluded a provision which would permit a two-thirds vote by each of the houses of Congress to waive that constitutional provision. How does that relate to the existing congressional budget process with respect to changing the budget in an emergency situation?

PROFESSOR BORK: The new proposals say that the budget can be changed by a two-thirds vote of Congress when an emergency is declared.

25 MR. AUSTIN: Are you aware that that is precisely what we have in place now? The Congressional Budget and Im­ poundment Control Act of 1974 provides for a third or fourthconcurrent resolution on the budget in the event that economic conditions require that the budget be changed. So a constitutional amendment that has that provision would give the same result.

PROFESSOR BoRK: Well, it might be differentif there must be a declaration of an emergency in order to change the · budget. In addition to that, the information I gave here came froma recent issue of Fortune which suggests that Congress has rejected the recommendations of the budget committee more often than not.

MR. DALY: I believe there actually have been actions by the Congress exceeding the line item elements of the budget resolutions as put up.

MR. AusTIN: That happened with respect to only the first budget resolution, not the second.

MR. HEADLEE: Is he talking about a balanced budget?

MR. DALY: No, it was with respect to the budget committees of the Congress, which were established three or fouryears ago.

MR. HEADLEE: But I understand the proposal is for a bal­ anced budget, which is far different.

MAYOR ALEXANDER: There is an intention to have a balanced budget.

26 MR. DALY: May we have the next question, please?

NEAL KOTLER, office of Congressman John Conyers, Jr. (D-Mich.): My question has to do with tax revolt and the economy. I see the tax revolt as a reasonable collective response to an economy that has gone sour and possibly reached a dead end in growth. It's gone sour in terms of chronic unem­ ployment, in terms of the earnings remaining constant or diminishing over time, in terms of technological displace­ ment, in terms of inflation. I see the problem, therefore, as a movement from the questions of growth to the questions of redistribution. Now, ifwe have a balanced-budget amendment or a tax-reduction amendment, we are probably going to add tremendous pressure to this whole question of redistribution, which I predict will be a very harsh political arena. Why hasn't the panel commented about this economic context?

MAYOR ALEXANDER: In California,of course, the reverse was true. There was rapid economic growth. California went through a period of great economic activity which resulted in increased values for houses and produced remarkable revenues for local governments. When they didn't know what to do with the money, it piled up as surpluses. But during the same period, New York state did not experience that remarkable growth, so our values stayed pretty much the same. Again, I think that we have to be carefulof the label "tax revolt." It is popular to call it a tax revolt, but I think it is taxpayers' anger. I have faith that the American people will pay for what they want. What they do not want is a high property tax, and in that sense it is a revolt.

27 PROFESSOR BORK: I don't see why a constitutional amend­ ment would be a straitjacket on redistribution. If we put a cap on the amount of money the federalgovernment could take in all forms, the progressivity of the various tax rates within that total amount would not be frozen. I wish it were frozen or reduced. What we are talking about now is freezing the total, not freezing redistribution within the total.

MR. HEADLEE: I think the people are getting smarter, too. For years we have been told that we didn't have to pay our bills, that we only owed it to ourselves. And now, because of inflation, real income isn't going up. There is an expression that hell hath no furylike a vested interest parading as a moral principle. The government accused the coal miners, the steel workers, the postal work­ ers, the Arabs, and the farmers of being the culprits of inflation. Finally, it had accused everybody, and people started to say, hey, it is not us, so it must be them. I think this is the general feeling of the people, who see a bigger and bigger chunk taken out of their paychecks, along with con­ tinuous inflation. They finallycame to the conclusion that they have been conned forthe past thirty years into thinking that they could put their groceries on BankAmericard and get by with it, and it would never catch up with them. They have decided that the problem is not the Arabs, or the farmers,or the coal miners, or the average citizen who is trying to keep up with the inflation generated by excessive federal spending. People have now focusedon the real problem: government at every level needs to be restrained. And as I said, hell hath no fury like a vested interest parading as a moral principle. If you are in government, be careful. The people are fed up, and they are a lot smarter

28 than they were twenty years ago. Econ. IO I has been taught to them by inflation. [Laughter.]

MR. HOLMAN: I was interested in this question of distribu­ tion and of a flagging economy. What seems to be true of California is not necessarily true of this country as a whole. Some California busi­ nessmen told me that Californiawas a very bad place to do business. I took that to mean they didn't like the environ­ mental laws being passed there. I am not so certain that this happy little revolt of some of the people will not be met, perhaps outside the legislative arena, by a counter-revolt by some other people. We have an electorate that diminishes year after year. This has allowed the minoritarian groups that lead these movements to assume a great deal of influence and a great deal of power. No economist has convinced me that the reason forall of the inflationary and stagflationaryforces is the size of gov­ ernment. Are you saying that the grain sales had nothing at all to do with our current state of affairs?

MR. HEADLEE: They did have a temporary impact on a price here or there, but I am talking about the root cause of inflation. It isn't by chance that we are $800 billion in debt and we have an expansionary credit policy.

MAYOR ALEXANDER: But inflationis not limited to America. Inflationis worldwide, so it cannot be blamed on the Ameri­ can system.

PROFESSOR BORK: It can be blamed on American monetary policy and on those nations which have similar monetary policies. Not every nation has that monetary policy, and not every nation has that level of inflation.

29 MR. HOLMAN: Some of them are doing very well. I heard William Simon, the formertreasury secretary, on this topic. He is one of my favorite people in that he not only made a great deal of money in the bond market and in persuading New York to do some of the things it did, but also was later able to criticize and to say that New York ought to declare bankruptcy. I heard him say that the Germans have done marvelous things and that we should emulate them. Well, surely he remembers the Marshall Plan; he could not have forgotten that. He must remember that the German economy does not have one great drag upon it which we have, a defense establishment, which is unscathed and which will remain unscathed under whatever cap may be set. Once we put a cap on state spending, we will find that, in reality, state government more than any other level of government is controlled by suburban and rural interests. Only in the last ten to twenty years has government begun dealing with the problems of the cities and of the poor. The people outside the system will say we have changed the rules of the game. In California,the things that are being cut are the services that help poor people and others who are trying to get into the system. When that occurs, there will be not just litigation, but some very rancorous times in this country.

MR. HEADLEE: In Michigan that is not the case; the UAW runs the legislature.

PROFESSOR BORK: Not only that, but at the federal level our defense expenditures have been declining as a proportion of GNP even as our social welfare expenditures have been expanding. Since 1965 social security has gone up from20 million to 34 million beneficiaries; welfare rolls have gone from 4

30 million to 11 million people; foodstamps have quadrupled to 16.7 million. All this time the defense expenditures have been going down as a percentage of GNP.

MR. DALY: If I may interrupt, we should move to other topics. May I have the next question, please?

MALCOLM PEABODY, Peabody Company: I would agree with ProfessorBork that we have structural deficiencies, and the best example of this is that Congress, whose role until the 1960s was to restrain the executive from spending too much, now votes even more money than he asks forand sues in court if he doesn't spend it. Yet, the same structural deficiency that allows special interest groups to increase spending may have offset an­ other structural deficiencyof democracy, which allows the majority to tyrannize the minority. Have you considered the possible side effectsof your medicine in that light?

PROFESSOR BoRK: Many parts of the Constitution deal with possible structural defects in representative democracy; they are called the Bill of Rights, and they are intended to prevent the majority from tyrannizing the minority in any particular way. I'm not sure how limiting federalspending would increase the possibility of majority tyranny.

MR. DALY: Would another member of the panel like to comment?

MR. HOLMAN: I can only restate what I have said before. Perhaps what we have to do is watch this thing play itself out and see the reaction of those outside the system, in the minority. For example, social security and unemployment compensation will have, among their strongest champions, the very people who will be pushed into unemployment

31 compensation and onto social security, either by age or by the very caps we are talking about. There has to be some reasonable restraint upon a certain kind of spending, but there also has to be the recognition that government, in this country and others, takes on certain kinds of problems that nobody else is likely to handle. With­ out the activism of this government, the private sector could not be what it is.

MR. HEADLEE: I'd like to quote a fellow by the name of Dr. Alexander Tytler, an English historian who in 1839 ex­ pressed the view that a democracy cannot exist as a perma­ nent form of government; it can exist only until the voters discover they can vote themselves largess in the public treas­ ury. From that moment on, he said, they will always vote for the candidate who promises the most in the public treasury, always ultimately ending up in fiscal chaos,always followed by a dictatorship. He said that the threat of tyranny does not come from small restrained government, but from large unbridled government. It cannot be said that we haven't done things forpeople in the past. In the 1930s the people of this country really needed help, and Franklin Roosevelt gave them help. Through the WPA, PWA, and ccc, people continued to be productive members of society. We had "workfare" rather than welfare. They were painting park benches, cleaning public transportation vehicles, and doing all sorts of things which helped our society. The problem today is that we want to give everyone a free ride and not ask them to be a part of society. I don't think we have discipline in government, and I hope that through restraint, we will be able to regain a measure of discipline. I do not mind contributing to the quality of life of people

32 who have less than I do. On the other hand, why shouldn't they contribute to the quality of my lifeas well? I should not have to drive home along freewaysthat are littered with beer cans and garbage or walk along streets of Washington, the nation's capitol, and see paper and garbage all over, know­ ing that I'm paying a lot of people to do nothing all day long. Wedo not have a well-managed public sector; that is why we need restraint in government.

MR. DALY: May we have the next question, please?

KEN BARNES, Attorney, Washington, D.C.: Mr. Bork, you made the point that if we do not limit the size of govern­ ment, we will have a bunch of vested interests who will push their various programs through without any consideration of total cost. I think when you recommend putting a cap on spending as a remedy, however, you fail to deal with two points made by Mr. Holman and Mr. Alexander. First, Mr. Holman said that putting a cap on spending would not do away with the problem of the vested interest, because interest groups will still try to get their programs through. Yousimply haven't dealt with the question of who will get shares of the pie. As Mr. Holman said, the most powerfulgroups will still get their share of the pie; and the poor and the disadvantaged will not. How do you deal with that point? Second, Mr. Alexander said that the services provided by the government are those which are not traditionally provided by the private sector, because they are not profit­ able. Nevertheless, these services are desirable; people want them. How can we provide desirable services which are unprofitable if we limit the size of government?

PROFESSOR BORK: We are talking about limiting the size of government expenditure to what it is now. Right now, one-

33 third of the people in this nation are dependent upon gov­ ernment fortheir income, which means that two-thirds of us are supporting one-third. That one-third consists of gov­ ernment employees, people on welfare, people on social security, and so forth. So it seems to me that an adequate proportion of the population is being taken care of. You can call them weak and powerless; however, they seem to do much better in the budget than does the Defense Department, forexample. If we set a limit to the total government expenditure, it is true that priorities will have to be set, but that is the ordinary process of democracy. If we freezegovernment spending where it is now, with adjustment for inflation and so forth, the services govern­ ment now provides will not go away. We are not talking about cutting 60 percent of expenditures; we are talking about freezingit where it is now, with adjustment forinfla­ tion and forpopulation growth. Services will be there; they will not disappear.

MAYOR ALEXANDER: With that simple statement, you elimi­ nate the goals that the majority of our representatives in Congress and the Senate have said are laudable goals forthis country, such as the assumption that health and welfarewill be taken care of by the federal government. The cost of that cannot be met with your proposal. I am concerned by this talk about freezes. If I walked into your company, Richard, and told you to run your company with a certain number of dollars, regardless of how much it costs to run, you would think it absurd. You would say, let me show you how much it costs to run the company.

MR. HEADLEE: That's exactly how it is; I have to run it within a budget.

34 MAYOR ALEXANDER: But when people advocate a freeze or arbitrary limits and then speak about zero-base budgeting in the same breath, they are contradicting themselves. The concept of zero-base budgeting means starting at zero and computing the cost of the operation. It is not a matter of tacking more figures on last year's budget. So what I would like you to do is come to my city, or any other city and ask how much is being spent on each service rather than say to me, here's your limit, spend it any way you want, but don't go over it. In that way, we can reach a reasonable conclusion and an equitable judgment, not an arbitrary, capricious one. As I said, I have faiththat the American people will pay forwhat they want.

MR. HEADLEE: History doesn't bear that out. We're going on a trillion dollars in debt.

MAYOR ALEXANDER: What they are saying is that they will not pay forcertain services through the property taxes.

MR. HEADLEE: Just a couple of comments. First of all, one of your friends here in town made the statement a few weeks ago that there is a $7 billion slop rate in HEW. That is the whole budget fora whole year for all of the services forthe state of Michigan. There are plenty of places we can pare down if we manage it properly. It is just that when there is an unlimited supply of money, things are not managed very well. To assume that just because we restrain government the people who need help will not get help is a faulty assumption, I think. To say that we will spend it on B-1 bombers rather than on helping people who need help is a faulty assump­ tion.

35 The American people are better than that, sounder than that, and they are finerpeople than that. Some people in our society ought to be helped in a different way, through dif­ ferent types of programs. Instead of saying we need more money, we ought to question the leadership, the creativity, the approach, the intent, and the results. More money is not the answer, although that's always the answer given by the public sector, which is never questioned. And I do run my company on the basis just mentioned. If we don't sell some more product and generate more profit, we don't have more money to work with. We don't have an unlimited supply of money .

. MR. HOLMAN: Some people have to be laid offthen, right?

MR. HEADLEE: That's precisely right.

MR. HOLMAN: And then what happens to them?

MR. HEADLEE: They are paid unemployment compensation.

MR. HOLMAN: Precisely. And where does that money come from? [Laughter.]

MR. HEADLEE: What I'm saying is, I'd like them to do some­ thing productive when they are on unemployment. There is no reason why they cannot.

MR. HOLMAN: I was glad to hear one thing you said; I had always thought that some people considered Franklin Roosevelt a villain because he was the original creator of big government. I am very glad to hear you say something positive about him.

36 MR. HEADLEE: You made the statement, Carl, that only in the last ten or twenty years have we helped people. Only in the last ten or twenty years have we helped people in an improper way. Franklin Roosevelt knew how to help people by keeping them productive and involved in society. He did not make them feel as if they were on the dole; he made them feellike constructive members of society. We have lost that.

MR. HOLMAN: Which is why he was accused of establishing leaf-raking kinds of enterprises.

MR. HEADLEE: Not by me. Let me make one other point. There is an economist at UCLA who did a recent study on all of the programs we have had to lift people out of poverty. I think he estimated that $240-odd billion went to help these people each year-in foodstamps and the other programs. He also constructed an economic model at UCLA, which showed that with something like $89 billion in cash to all of the people below the poverty level, they could be brought above the poverty level. So, we're doing something wrong.

MR. HOLMAN: I would like to see that voted upon. Do you have any idea how impossible it would be? Let's see if we can agree on some things here. You talked about the $7 billion wasted by HEW. First of all, I don't think anybody believes that it is healthful to have a situation in which people are being wasteful of anybody's money, in­ cluding the money that they get publicly. I saw that $7 billion figure,and I'd like to see whether or not your proposal would cure it. All of the headlines around the country said "$7 Billion in Fraud," and everyone got the mental picture of some welfare mother who was receiving 19,000 different checks.

37 It turns out that only $1 billion of it had anything to do with fraud,though that is still a large amount of money. The other $6 billion would not be taken care of unless some quite differentproblems are addressed. So we have to look at what the various proposals will accomplish, but I think we have had enough about liberals overpromising. Conservatives should not overpromise, either. People have a very simplistic notion that by setting a cap they will be rid of some of their former problems. Many people who voted for Proposition 13 in California, for example, were renters, who had the illusion that they would receive an automatic passthrough of whatever the landlord saved. The mayor of Los Angeles, Tom Bradley, told me that two days after that vote, some people received, instead, warnings from their landlords that they would be paying even more. That is why I am afraidof rigid limits placed on the current system. One of the things that these alternatives seem to be pointing toward is that more and more of these decisions will be made, not at the local level, but at the state level and, ultimately at the federal level. In California the state made the decisions as to what would happen in those localities, and it is the furthest awayfrom the taxpayers.

PROFESSOR Bou:: That is precisely why it would be better if the constitutional control started at the largest level, the federal level, and moved downward, so that we do not just federalize all of these problems.

DR. PEGGY BROWN, Office of Councilman Jerry Moore, Washington, D.C.: Dr. Bork, do you have any alternative to the freezeon all levels of spending in view of the problems of welfare, which might benefit more people-and certainly

38 state and local governments-if it were nationalized? I'm wondering, is there any alternative to your proposal to freezespending at the federal level, where the public has no impact on whether to give more to military defense or to other sectors when the pie is divided? What are the alterna­ tives to a freeze on spending in view of our problem?

PROFESSOR BORK: If expenditures may not grow except for inflation, the public and the various interest groups would fight out how much each one got within that framework. I see no reason to think that welfarewould be a big loser, since welfarehas been growing rapidly under the current system.

DR. BROWN: I don't really mean to take money away from welfare, but to shift the responsibility for welfare from the local level, as Mayor Alexander mentioned. I'm really con­ cerned with what seems to be an airtight proposal to freeze spending on all levels, federal, state, and local. It does not seem to deal with the problems that the local levels are having. It seems to omit the problem.

PROFESSOR BORK: Well, if I can't deal with it, I'd just as soon omit it. [Laughter.] But I'm not quite sure what I've omitted. I don't see why freezing the total level of expenditure necessarily moves control fromthe city to the state to the federal government.

DR. BROWN: I'm not talking about control; I'm talking about responsibility.

MAYOR ALEXANDER: I think there is a misconception as to how it would work practically. One of the major polls taken in California shows the cuts that people prefer. The first response is, cut welfare; the second is, cut the parks and

39 softwaresectors of the economy. People do have some idea about where they want these cuts to take place. The Washington Post printed an imaginary letter to a constituent in which a congressman said: I agree that taxes should be cut. Let's talk about where we should cut. Adher­ ing to your admonition of some weeks ago, I will not touch the defense budget because we must stand up to the Rus­ sians. And, as a World War II veteran, you would be the first to say to me that you do not want veterans benefits cut; they're not enough. And he went on with a laundry list of all of the things people do not want touched. But the one area in which people insist on cuts is the welfare area. But it concerns me, Richard, that you seem to think there are many able-bodied men on the welfarerolls who should be out working. That is just not true. Most of the funds distributed under the welfare pro­ visions in this country go to Aid to Dependent Children-a staggering proportion. A very small amount of federal, state, and local fundinggoes to able-bodied men on welfare roles. That isn't the problem. The problem is unemployment. And when you say the solution is to cut people off the payroll, remember that for every point we go beyond 6 percent unemployment, the government loses $16 billion in revenues. That's a combination of unemployment payments and a loss of taxes from that man's wages.

MR. HEADLEE: I don't want to get off on the subject of welfare. I want to talk about tax limitation and how it will work from level to level. Dr. Milton Friedman, Dr. Paul McCracken, and some other fairlybright guys drafted this proposal. A provision in this particular constitutional amendment relates to your question which is a sound one. It states that if responsibility for funding a program is transferred from

40 one level of government to another as a result of constitu­ tional amendment, the state revenue and spending limits may be adjusted to accommodate the change, provided that the total revenue collected by both state and local govern­ ments does not exceed the amount that would have been authorized without such change. This was drafted for the state of Michigan. I see no reason why similar language could not apply to the federal government. If the authority goes fromthe local level, then the tax base fromthe local level should be part of the federal limit; the local level should not continue to be taxed at the same rate when the money is being spent at the federal level. So, Mayor, we believe that your concerns, which are valid, can be handled by the constitutional process as we attempt to place restraints on all levels of government.

MR. HOLMAN: Are you saying that if a particular level of government mandates a program, then that level has to pay forthe total cost thereof?

MR. HEADLEE: Absolutely.

MR. HOLMAN: I don't think many cities would complain about that aspect.

MR. HEADLEE: Right, there are many mayors on my commit­ tee. I was trying to get Lee Alexander.

MAYOR ALEXANDER: I support that idea.

MR. HOLMAN: Because that is what has happened to the property tax in many cases. Things have been mandated by the states but have to be paid by local levels.

41 MR. HEADLEE: The biggest enemy of local government in Michigan is the state government.

MR. DALY: Next question, please.

ELGIN GROSECLOSE, Institute forMonetary Research: There is a German legend about a salt merchant who possessed a magic mill that turned out salt. He set it to work while at sea. The salt began to fillthe vessel, and the vessel sank. The mill sits at the bottom of the sea, and that is why the sea is salt. We have been put in a sea of inflationby a marble mill on Constitution Avenue that Mr. Roosevelt set up in 1932. He did so by getting Congress to pass a law authorizing the Treasury to sell to the Federal Reserve its debt obligations and receive in return irredeemable paper money which passes as legal tender. Today about $100 billion of that worthless paper circu­ lates in this country. My question is, who needs a restriction on taxes when we have a magic mill that grinds out paper money to our heart's content? It is easy forNew York City to turn its problems over to the federal government as long as that mill is there. How can we keep the government from grinding out more paper money and floodingour country with inflation?

PROFESSOR BORK: We simply write the amendment in terms of a limit on spending, not upon taxes. When there is a limit upon spending, the federal government has much less in­ centive to inflate, because it cannot spend.

MR. DALY: Next question, please?

MICHAEL BALZANO, resident fellow, American Enterprise

42 Institute: Mayor Alexander, most of us who have been around Washington for some time have been able to docu­ ment cases of fiscal waste in the federal government. We hear about it and see it at state level as well. As a mayor, where would you put a cap on it? You are against freezingat present levels of spending. Where can the taxpayer go for relief?

MAYOR ALEXANDER: Well, as I pointed out earlier, my city is probably the only major city in the state of New York that runs in the black, and I am very proud of that fact.But there is a limit to efficiencyin government at the local level. The fact remains that the large share of my operating budget goes to the police and fire departments, to the department of public works, and to employee payments. I can do very little about that except to reduce those departments. There is a notion that all we have to do is take this rusty machinery that sits in our cities and gold plate it, and it will functiona lot better. That's nonsense. There are structural tax deformities that we have to correct, but if any level of government is efficient, it is the local level, because the people put the pressure on us there. We are always under the microscope, and that is as it should be. I think we are the most responsive group of elected officials in the country because of our accessibility. I am not about to advise where the federal government could be more efficient, but I know the government has developed some sophisticated tools in delivering aid to the cities, which should save billions of dollars in the long run. We call it a targeting mechanism. When money was distrib­ uted in the past, it was distributed to those who needed it and to those who did not. As a result of intensive lobbying by mayors and a cooperative administration under President Carter, we have developed some formulasthat will save the

43 federal taxpayers billions of dollars because we will target the money where it is needed. The government is moving in the right direction in that way. It will take fewer dollars, if we can find out where our dollars are best spent and most needed. We in the Northeast suffer particularly because we made the greatest contribution to this country. Our cities started first in this country. Our plants are now obsolete, and now the sunbelt, which has all new plants and equipment, is benefiting fromthat. During the early years of this country, the older cities pumped the money into underdeveloped areas. When ag­ riculture was in trouble, the cities of the Northeast lent their mighty industrial power and wealth to save the agricultural section. Now it is time for things to change. The cities have to be reborn and rebuilt. We need some of the resources of this country to help us do that. All we want to do is restore the conditions that once existed in this country's major cities, so that we can once again be contributing partners in the de­ velopment of the great industrial might of this nation. We have the factors that can enable us to accomplish that. We just need some help at this particular juncture in America's history.

ROBERT LEVINE, Congressional Budget Office: Mr. Bork said that his proposal would limit government to its current share, which is one-third. But his proposal also takes ac­ count of inflationand would increase government spending for that; it takes account of population change and would increase government spending for that. It would explicitly not increase government spending for economic growth. Thus, it condemns government to an ever decreasing share. That may be good or that may be bad, but it shouldn't be represented as a constant share.

44 PROFESSOR BoRK: No, I didn't say a constant share; I said a constant amount. I am not at all taken aback at the thought that government's share of the total economic pie might decline. I can bear up under that thought. [Laughter.]

MR. LEVINE: Forever, under a constitutional amendment?

PROFESSOR BORK: It's beginning to sound attractive, yes. [Laughter.]

MR. DALY: All right. We only have time for one or two questions.

JONI SARLES, social worker, Alexandria, Virginia: I'd like to ask the panelists what they think an equitable tax system would be. Who should pay, and about how much?

MR. DALY: That is a big question. [Laughter.] Who would like to start?

MR. HEADLEE: I will start. Over the last 200 years, we have worked very hard with the results of thirty or fortydifferent kinds of taxes in Michigan, taxing everything that moves, and walks, and earns, and has property. And our tax system really isn't all that inequitable. As I mentioned earlier, 93 percent of the income tax is paid by 50 percent of the people, which indicates the system is based on ability to pay. Certain things we've done in the overall taxing structure have inhibited capital formation and job creation and have taken the funout of the freeenterprise system. For instance, no one can start a business, or hire a few people and expand a little without having four or five OSHA people come by every week. If we put a limitation on government and give it a stake in economic growth, then the revenues will improve

45 and increase, and it will encourage government to restrain these regulatory agencies. I'm not here to say I think taxes are great. But we have taxes coming froma lot of differentsources, and I think we probably have equity. Taxes got out of balance in California because of an aberration in the supply and demand of houses and property. All in all, people are concerned about the total bite, wherever it comes from, and that's what we should be con­ cerned about, the total bite. Let the legislative process con­ tinue to seek equity by fine-tuning and adjusting the proc­ ess, but firstlet's definewhat part of our economic pie we're going to devote to the public sector, and then work within that definition.

MR. DALY: With that comprehensive answer, our time has run out. This concludes another Public Policy Forum pre­ sented by the American Enterprise Institute for Public Pol­ icy Research. On behalf of AEI, our heartfelt thanks to the distin­ guished and expert panelists, Mr. Richard Headlee, Profes­ sor Robert Bork, Mayor Lee Alexander, and Mr. Carl Hol­ man, and our thanks also to our guests and experts in the audience fortheir participation. [Applause.]

46 AEI ASSOCIATES PROGRAM

The American Enterprise Institute invites your participa­ tion in the competition of ideas through its AEI Associates Program. This program has two objectives: The first is to broaden the distribution of AEI studies, conferences, forums, and reviews, and thereby to extend public familiarity with· the issues. AEI Associates receive regular information on AEI research and programs, and they can order publications and cassettes at a savings. The second objective is to increase the research activity of the American Enterprise Institute and the dissemination of its published materials to policy makers, the academic community, journalists, and others who help shape public attitudes. Your contribution, which in most cases is partly tax deductible, will help ensure that decision makers have the benefit of scholarly research on the practical options to be considered before programs are formulated. The issues studied by AEI include: • Defense Policy • Economic Policy • Energy Policy • Foreign Policy • Government Regulation • Health Policy • Legal Policy • Political and Social Processes • Social Security and Retirement Policy • Ta x Policy For more information, write to: American Enterprise Institute 1150 Seventeenth Street, N. W. Washington, D.C. 20036 Taxpayers' Revolt: Are Constitutional Limits Desirable?, the edited transcript of a televised AEI Public Policy Forum, examines the issues surrounding the widespread demands forchanges in taxes at all levels of government. Among the questions discussed by the panel and audience are the fol­ lowing: Does the passage of Proposition 13 reflect the at­ titude of taxpayers throughout the nation or only those in California?Should there be a constitutional limit on the total amount of government spending? Would needed welfare services be the victim of cuts in government revenues? And would shifts of revenues between federal, state, and local governments resolve many of the problems? John Charles Daly, former ABC News chief, serves as moderator for the panel: • Lee Alexander, mayor of Syracuse, N .Y., and past pres­ ident of the U.S. Conference of Mayors • Robert Bork, Chancellor Kent professor of law and legal history at Yale University and former solicitor general of the United States • Richard Headlee, chairman of Taxpayers United for Tax Limitation in the state of Michigan, and chief exec­ utive officer of the Alexander Hamilton Life Insurance Company of America and the Maryland Life Insurance Company of Baltimore • M. Carl Holman, president of the National Urban Co­ alition and former deputy staff director of the U.S. Commission on Civil Rights. S2.DD

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