On July 9 I launched, unceremoniously, my very own little campaign for an economic freedom amendment to the United States Constitution. Noting that the Supreme Court had upheld the individual mandate in the Affordable Care Act as a tax, I explained that there appears to be no constitutional protection of our economic freedom against an expansion of government by means of taxation. I also pointed out that government expansion in the form of, e.g., the welfare state is a very serious problem:
What makes the welfare state so dangerous to economic freedom is that it is built on the premise of redistributing income and wealth between private citizens. This creates an ever growing cadre of government dependents who falsely believe that without getting a handout from government they would not be able to survive. This drives the continuation – and expansion – of government programs such as the welfare acronym trio SNAP-WIC-TANF, but also programs that are less often recognized as being redistributive, such as Medicaid and public education.
The fundamental principle that would define an economic freedom amendment would be that government cannot use tax revenues for the purposes of economic redistribution. The key to accomplishing this is, of course, to define redistribution in such a way that it makes economic sense and is easy for everyone to understand – including cynics among my fellow libertarians who would be more than happy to say that “It’s impossible” and “Would never survive in court”. But until they offer their own alternative (and no, I do not consider a “Ron Paul for President” bumper sticker a credible policy alternative) I am going to continue to outline my case for this amendment.
The term “redistribution” may seem straightforward enough, but its application in the context of protecting economic freedom requires an elaborate analysis. There are, fundamentally, two dimensions of redistribution: demographic and consumption. You can redistribute between population groups (the demographic dimension) and you can redistribute the ability to satisfy needs (the consumption dimension). Demographic redistribution is when everyone pays a tax but only a few people get to enjoy the services that the tax pays for; consumption redistribution is when government taxes some people more than others but everyone gets to enjoy the same type of service.
We will exemplify demographic and consumption redistribution later. First, though, let us consider another aspect of redistribution, namely what government actually spends money on.
In its effort to execute economic redistribution, government can use our tax money to provide two types of entitlements:
1. Income entitlements. Government uses general tax revenues to give cash to a defined group of citizens.
2. In-kind entitlements. Government uses general tax revenues to fund spending coupons for a defined group of citizens.
(The use of the term “a defined group of citizens” is deliberate and will be explained in a moment.)
The in-kind spending type is the bigger and bulkier of the two. Most of what government spends is for the purposes of providing goods and services to citizens, i.e., in-kind spending. Police protection and public education are two good examples. A third example, related to the Affordable Care Act decision, is health care. Our challenge is to find out if these three would be unconstitutional under an economic freedom amendment.
To approach this, let us go back to the two dimensions we mentioned earlier: demographic redistribution and consumption redistribution. Public education is paid for with taxes collected from all of us, but benefits only a strictly defined part of our population, namely families with school-age children. This means that public education redistributes: there is a discrepancy between the population that funds the program and the population that benefits the program. As we all know, government pays for public education through general tax revenues; even if every dime that goes in to your school district comes from local property taxes, the tax is still general in the sense that it is paid for by a group of citizens that is different from the group that received the service in question.
The discrepancy between the population paying the tax and the population receiving the in-kind service is a sufficient condition for defining a spending program as being redistributive. However, government can get away with taxing and spending on public education by perfectly matching the taxpayer population with the population entitled to the service. If only parents with school-age children paid the taxes that are designated for public education, no demographic redistribution would take place.
There is still redistribution going on, however, namely redistribution of consumption. Suppose the Romneys and the Paupers have five kids each, and the kids all go to the same school. The cost per student to the school district is $10,000 per year. Suppose the Romneys pay taxes equivalent to $15,000 per student and the Paupers pay the equivalent of $5,000. Since the children in both families get the same education in the same classrooms, government is effectively redistributing consumption from the Romneys to the Paupers.
Government is now redistributing consumption by having the Romney’s pay for half of the education consumption enjoyed by the Paupers. As a result, if we have an economic freedom amendment that bans both demographic redistribution and redistribution of consumption, public education will no longer be constitutional.
There is, however, a possible loophole here. The consumption dimension of redistribution presupposes that there are at least two people in the populations of taxpayers and entitlement beneficiaries. But what if there is only one person in each group?
This is not an unrealistic example, nor is it hypothetical. According to the Supreme Court the individual mandate in the Affordable Care Act is a tax. This tax comes in two parts: an out-of-pocket spending part and a penalty part. The taxpayer and the beneficiary is the same person. As a result, it is possible that the Affordable Care Act could pass for a non-redistribution program and therefore be forced to buy something he may or may not want to buy.
As a direct consequence, we could redesign public education along the lines of an individual mandate: government could force everyone with a school-age child to purchase education for that child through, e.g., education exchanges from government-approved schools.
Eventually, the individual mandate as designed in the Affordable Care Act would not be constitutional under an economic freedom amendment. However, in order to explain why we need more space than we have left here.
Stay tuned for a third article on how to constitutionally guarantee economic freedom in America.