Steel tariffs will allow American steelworkers to keep their jobs, help the American domestic economy, reduce United States’ dependency on China as a trading partner and foster the growth of the middle class.

This was the logic that motivated Donald Trump to impose a 25 percent tariff on steel and 10 percent tariff on aluminum on all countries except Mexico and Canada on March 23, 2018. This decision, while politically popular among his supporters who advocate for the steel industry, is incorrect in its assumptions and harmful to America as a whole. History and economic theory demonstrates that these tariffs will be bad for the economy in the short and long term.

Historically, tariffs have adversely affected the United States economy. The Smoot-Hawley Tariff, enacted in 1930, was arguably the largest in American history. This piece of legislation levied taxes on over 20,000 goods. According to Robert Whaples of the Economic History Association, there is a consensus among economists that the Smoot-Hawley Tariff exacerbated the effects of the Great Depression.

Other tariffs have had similar effects on the economy. More recently, President George W. Bush implemented steel tariffs on March 5th, 2002. These ranged from 8 percent to 30 percent and were implemented in response to the collapse of many steel-producing companies. The United States’ International Trade Commission estimates that these tariffs created a loss of around 41 million dollars to the U.S. economy. In addition, thousands of steelworkers lost their jobs. The tariffs reduced the amount of steel into the United States economy, inevitably creating a 9.2 percent steel price increase. As a result, around 200,000 jobs in all steel-consuming industries were lost in 2002 according to a Lancaster University study by Robert Read. Since steel-producing industries only account for 190,000 jobs, the net result on employment of this policy was incredibly negative. Because of the negative effects of this action, the Bush administration decided to revoke these tariffs on December 4th, 2003. Simply reducing the imports does not improve domestic conditions. Successful domestic firms are not competing against international firms; therefore, they will not be efficient enough to export their goods to other countries. Furthermore, American citizens will be less likely to purchase these goods for higher prices. This creates market conditions that aren’t conducive for success in the long term. Even if tariffs are imposed on just one product like steel, the negative effects will extend to a variety of industries.

Still, roughly 70 percent of Republicans and 25 percent of Democrats support President Trump’s decision to implement steel tariffs. These numbers are a result of the belief that tariffs can help expand the ever-decreasing American middle class. However, the fact that technology is advancing at such a rapid pace and automation is becoming more popular leads to a lower demand for labor in manufacturing jobs. As capital becomes more efficient, fewer workers will be necessary. In 1950, the number of steelworkers in the United States was around 650,000. Today, this number has fallen to 140,000. This number will continue to decrease as technology improves. Tariffs will not stop the inevitable jobs loss in the steel and aluminum industries. Instead, they will decrease jobs in other industries. A strong, concentrated political interest in favor of the steel tariffs currently outweighs the weak, diffuse interest in opposition to the steel tariffs. Because steelworkers benefit greatly from these tariffs, they will have a large incentive to passionately support President Trump’s policy. On the other hand, the greater number of people who would be harmed by the implementation of steel tariffs do not believe their jobs are in jeopardy. Therefore, there will be significant passion and political support behind the steel tariffs, even though they harm America as a whole.

The recent steel tariffs had immediate negative effects on the U.S. economy. The day the steel tariffs were put in place, the S&P 500 dropped from around 2,750 points to around 2,590 points. While there is limited data on the effect on employment and GDP, we can use history and economic theory to predict the full effect of these tariffs.

Steel and aluminum are present in everything from cables to cars. Accordingly, steel tariffs raise prices on items that hard-working Americans need in their daily lives. Joseph Amaturo from the Buckingham Research Group estimates that these tariffs will raise the price of cars by 300 dollars per vehicle. The actual effect of this is to lower the income of the rest of America at the expense of just steelworkers. This will reduce the amount of money that people have to spend and invest to grow other segments of the economy.

Additionally, raising tariffs could cause harmful economic effects if other countries choose to retaliate. In fact, the United States has already suspended the tariff on the European Union, Australia, South Korea, Brazil, and Argentina, some of the biggest exporters of steel into the American economy. The result of putting this tariff into effect only in certain countries will only benefit the countries which have been exempted from this tariff.

Furthermore, the fact that some of the biggest exporters of steel are exempted shows that this tariff does not even serve its intended purpose. The exempt countries will still export enough steel into the American economy to drive American steelworkers out of their jobs at a similar rate. This tariff only strains relations with countries who aren’t exempted, while effectively maintaining the quantity of steel imported.

Just like President Bush did in 2003, President Trump should recognize that his decision to put in place steel and aluminum tariffs is damaging to the United States as a whole. However, that does not seem to be the case right now. While some steelworkers may lose their jobs consistent with global demand and technology changes, more Americans will be able to keep jobs in related industries and the average American will be more able to afford everyday goods without the tariff. Because people are able to save more money, they will choose to invest more of that money. This will have the effect of creating jobs in other industries that are competitive in the global economy, like technology, rather than attempting to sustain unsustainable jobs. The American economy would be more prosperous, vibrant, and efficient without these tariffs.

 

On March 1st, 2018 President Donald Trump signed two proclamations imposing a 25 percent tariff on steel and a 10 percent tariff on aluminum that have become subject to much public debate. “I’m defending America’s national security by placing tariffs on foreign imports of steel and aluminum,” he said, finally fulfilling one of his campaign promises to aid the American steel industry.

            This is not the first time that the domestic steel industry has received protection through tariffs and trade regulations. In 2002, President George W. Bush imposed similar tariffs on imported steel, a controversial decision met by public outcry from those who advocated for free trade. The economic impact of these trade policies does not bode well for the future of the Trump economy. Despite their intentions, studies show that Bush’s trade policies were largely detrimental to the national economy, suggesting a similar path for Trump’s tariffs.

            Despite the administration’s support for free trade, the Bush administration justified the steel tariffs in 2002 as a necessary measure to protect against dumping practices. After the International Trade Commission, a U.S. agency, concluded that the European Union (EU) had been flooding and endangering the American steel industry, Bush swiftly authorized plans to impose tariffs on EU and East Asian steel. Bush hiked the tariff on foreign steel up to 30 percent, which had previously ranged from zero to one percent.

Politics also influenced Bush’s decision to impose tariffs. According to a study on the consequences of the 2002 tariffs, one of Bush’s primary campaign promises was to protect the steel industry, gaining him much support from steel-producing swing states like Pennsylvania, Ohio, and West Virginia. Fulfilling these promises became paramount for the Bush administration who sought reelection in just a few years. The culmination of economic and political factors resulted in tariffs that were swiftly announced and imposed in March.

            The economic retaliation by the EU was detrimental to the American manufacturing industry and economy as a whole. Within months of the tariff, the World Trade Organization had deemed Bush’s tariffs to be illegal, permitting the EU to set $1 to $4 billion worth of its own tariffs and sanctions in response. This sparked an international trade war leading to major steel shortages within America, which according to Trade Partnership Worldwide, increased steel prices up to 38 percent within eight months. These volatile price hikes had collateral effects on the manufacturing industry: automobile and appliance companies now faced rising production costs along with shortages on steel. Companies across most American industries now needed to cut down on costs and did so largely at the expense of their workers. By March of 2002, every state within America had experienced job loss from higher steel prices, leading to a roughly $4 billion decrease in wages. “We found there were 10 times as many people in steel-using industries as there were in steel-producing industries,” said Tennessee Senator Lamar Alexander. “They lost more jobs than exist in the steel industry.”

            The culmination of economic and political pressures eventually pushed Bush to reverse the sanctions just over a year after they were imposed. Having targeted various American exports, the EU began targeting specific industries that would directly hurt Bush’s hopes for his 2004 reelection. For example, the EU threatened to place high tariffs on oranges from Florida and cars produced in Michigan, an attempt to inflict significant damage on Bush’s campaign for reelection. By late 2003, Bush finally lifted the tariffs.

            The motivations behind the economic sanctions that Trump has signed are eerily similar to those of Bush. Both presidents have justified their tariffs by declaring a clear opposition, the EU for Bush and China for Trump. Similar political key words such as “safeguard” or “protection” have been used to support these tariffs. A significant portion of Trump’s supporters come from these steel-heavy states like Pennsylvania, one of the major swing states that Trump won. Very similar political and economic factors appear to have pushed both presidents to support tariffs on the steel industry.

            There are also several parallels between the economic details and circumstances of Trump and Bush’s overall plans. Trump has signed off on imposing a 25 percent tariff on all steel imports, a number just shy of the 30 percent tariff that Bush had implemented. The steel industry has remained a declining sector in the American economy since 2002. A recent study by the Organization for Economic Co-operation and Development, or OECD, described the global steel industry as “weaker than it has been in years” and that most governmental policies have failed to promote short to medium-term sustainability. Though China has now emerged as the key player for steel exports rather than the EU, the overall macroeconomic conditions of the industry itself have not changed significantly.

            Advocates of Trump’s sanctions have argued that several differences between the two plans make the Trump’s tariffs more likely to succeed. Both sides of the political spectrum have noted the vagueness of Trump’s executive order, particularly to which countries the tariffs will apply. The current executive order exempts “friendly nations” from the sanctions without much clarification which countries would fall under such category. Supporters of these sanctions view this vagueness as a way of insuring greater flexibility and leniency. By having these loopholes and potential exemptions, Trump can pick and choose which countries fall under the “friendly” category. It should also be noted that Bush’s tariffs, though stringent in the beginning, ultimately succumbed to pressures for exemptions once the EU retaliated. Today, China has openly stated that they still expect these sanctions to apply to their steel industries. China has also been vocal about potential retaliation.

            The Bush administration’s steel tariffs have been largely condemned by both Democrats and Republicans since their end in 2003. The economic retaliation and subsequent effects on the manufacturing industry have all pointed towards the necessity and benefits of free trade. Trump’s tariff plan appears to have many economic and political similarities to the Bush tariffs, suggesting a similar fate will befall the American economy within the coming years.

The Tax Cuts and Jobs Act, passed along party lines by Congress and signed into law by President Donald Trump in December 2017, marks the most expansive overhaul to the tax code since the Reagan era. Economic conservatives could not have asked for a better Christmas gift, as they celebrated the tax bill’s inclusion of slashes to the corporate tax rate, widespread lower income taxes and a variety of deregulatory and financial perks for small and large businesses across most industries. However, people yearning for the delivery of a central promise of the bill are left wanting; while elements of the byzantine tax code were simplified by the new bill’s passage, the system remains essentially as complex as ever.

The reality is Americans in 2018 will not be able to do their taxes “on a postcard,” a colloquialism used by Senate Majority Leader Mitch McConnell and Trump, which referred to the optimistic idea that tax-payers would no longer need to fill out – or pay someone to fill out – hundreds of sheets and documents for the IRS each year before Tax Day. The failure to streamline the tax system begs the question of whether Americans will ever see simpler procedures, or if they should accept that today’s economy is too complex and the influence of special interest groups too strong for itemized deductions to ever fully disappear.

The history of the federal tax system is one of sustained growth, both in regards to the number of citizens targeted and the size of the bureaucratic skeleton. Throughout the 20th century, tax rates and the number of deductions ballooned. Before World War II, only a small percentage of the wealthiest Americans paid taxes; that number, about seven percent, expanded to include nearly 70 percent of the population while the war was being funded, according to economic website Marketplace. Due to the introduction of the Earned-Income Tax Credit (EITC), a refundable tax credit for low income people (especially those with children), this number has declined to 53 percent of the population that pay taxes today. As a result, changes to the federal tax code mostly affect non-retired earners who do not qualify for credit breaks.

The new bill also doubles the standard deduction for these non-retired earners, which admittedly promotes more simplicity as an increased amount of people will be incentivized to deduct a flat rate rather than itemizing deductions line by line. Most people who have the opportunity would evidently rather pay a clear flat rate than suffer through an endless sea of forms and painstakingly account for their receipts. Internal Revenue Service (IRS) data from 2013 (the most recent year with available data published) shows that 68.5 percent of households took the standard deduction in lieu of line by line deductions, leaving only 30.1 percent of households that choose to itemize. This latter number will shrink as a result of the tax bill, but for those that continue to itemize, the system will likely continue to be as convoluted as it was last year.

One of the tax system’s central controversies has repeatedly been individuals exploiting technicalities in tax breaks for certain behaviors, in an effort to avoid paying taxes. One example of this involves businesses shifting their official classifications from an industry such as “Consulting” to a less-taxed industry, in order to keep more of their revenue. Since certain new rules implemented by the Tax Cuts and Jobs Act are intended to simplify parts of the code, there will inevitably be situations where people will attempt to cheat the IRS by taking advantage of loopholes that reward certain types of behavior.

For example, an important provision in the new bill increases the deduction for pass-through entities, which are business vehicles exempt from corporate income tax such as landlords’ real-estate, legal partnerships and S-corporations. According to the Brookings Institute, however, 95 percent of all U.S. businesses can be defined as pass-throughs. While this particular change will be a boon for many small businesses and may spur economic growth, the reality remains that the majority of this pass-through income flows to the top one percent of earners, who might try and position themselves as businesses rather than as individual taxpayers in order to pay a lower rate. For example, a hedge fund might absorb hundreds of millions of dollars a year and still classify as a pass-through based on the status of its ownership, which may seem unfair to earners making less but proportionally paying more. In turn, more rules would have to be put in place to prevent this disingenuous behavior from occurring, leading to more provisions, more paperwork and more bureaucracy.

Similarly, while the bill lowers most individual rates, it also keeps the previous seven income brackets in place. As was the case in the previous tax code, the amount of income paid scales up gradually. For example, a family with an income requiring a 28 percent income tax rate will not pay a full 28 percent of its income to the IRS. Instead, for its income that falls within the first income bracket, the family would be taxed at the 10 percent rate stipulated by the new bill. This taxing procedure would continue for its income falling within the subsequent income brackets (rates of 15 percent, then 25 percent), and finally the remainder of its untaxed income will be taxed at 28 percent. This is just one more cause of confusion and frustration that the bill did little to eliminate.

Several solutions to tackle the complexity of the current taxing system have long been brought up by experts. One solution is that of investor Steven Forbes, who has always advocated for a flat tax system with no deductions or loopholes. This radical solution would eliminate the interest group question entirely and make tax filing truly doable on a postcard, although inevitably resulting in a loss of benefits for the poor and elderly. However, the idea never gained much real traction during the process of amending the bill. Instead, the debates over what changes to make to the existing code centered around haggling over individual bracket rates, debates over which deductions to add or eliminate and a variety of other minutia that was decided by different Congressmen and committees. A different path towards simplification, and the one that was most used in practice, is the elimination of as many itemizations as possible. However, most discussions of removing specific line items faced pushback from one interest group or another.

Approaching the tax system by attacking line-by-line details parallels the myth of Hercules and the Hydra: cutting off one head of the beast leads to two more popping up in its place. For a meaningful simplification of the tax code to take place, politicians will likely have to start working on a bill from the top down with the philosophy that all itemizations must go and that flat taxes will be the new standard for each income group. If they can accomplish this while maintaining a safety net for low-income and elderly people, all families and earners will benefit. Until then, per the Taxpayer Advocate Service, Americans will continue spending a combined six billion hours a year filing taxes while paying compliance costs roughly totaling 195 billion dollars. There’s a reason tax magnate H & R Block’s stock actually increased after the bill passed, despite early fears the company would be forced to close its doors. The Tax Cuts and Jobs Act made some meaningful strides by doubling the standard deduction, but the code still has a long way to go before filing taxes on a postcard becomes possible.

In today’s global economy, every million counts. American corporations spend, or “lose”, hundreds of millions of dollars due to taxation– in the United States, 35 percent of corporate income is taxed. The quick fix for U.S. companies seems to be tax inversions. A tax inversion involves a U.S. company buying a foreign company and using its newly acquired tax nationality to reduce tax costs globally. While such a procedure is legal, it has been deemed as unpatriotic by many in the American political sphere.

Burger King

Burger King may be one of the most famous American companies to seek corporate tax haven. Fast food chain Burger King is in the process of completing its buyout of Canadian coffee chain, Tim Hortons. Burger King’s headquarters would be relocated from Florida to Canada and the company would pay far less taxes to Uncle Sam.

According to a critical report by the non-profit “Americans for Tax Fairness”, Burger King’s estimated savings are $117 million from the merger. Both Burger King and Tim Hortons will continue their operations separately; both will continue to use their respective brand names and serve the same products. The inversion changes the nationality of Burger King for tax purposes, and nothing else. The merged company would also have a shared official name, but that is a mere symbolic change.

Caveats

Tax inversion only works for companies that have significant revenues overseas. There are three main caveats to tax inversion as a quick fix. First, the United States has a policy of taxing foreign income, not just stateside profit. This is referred to as a “worldwide” system of taxation according to The Economist, and is a unique taxation system among the developed economies of the world. This worldwide tax essentially makes it so that U.S.-based companies pay 35 percent tax on money made anywhere in the world. Therefore, whatever Burger King makes from restaurants in Mexico, France, Lebanon or Bermuda would be under the same 35 percent tax rate. However, once Burger King finalizes the tax inversion process, it will be subject to the 35 percent rate for profit made within the US, 15 percent for the profit made in Canada, 0 percent for profit from Bermuda, and so on for any other country. For companies that make significant profit domestically, the tax inversion might not save much money.

Secondly, the Treasury Department has plans to make inversions less attractive going forward. Treasury Secretary, Jacob Lew, has added regulations to ensure that inversions are more difficult to accomplish. One example is preventing inverted companies from transferring cash or property from a controlled foreign corporation (CFC) to the new parent directly, in order to completely avoid U.S. tax. Another example is reinforcing the 80 percent rule, which requires that a U.S. company be worth less than 80 percent of the new company that will be merged abroad. The merger must happen between the U.S. company and a foreign company that owns at least 20 percent of the new total value. While the rule was in effect before the new regulations are set, companies with a different distribution of shares were usually able to change the proportions to meet the rule. This will become more difficult now. Of course, many on Capitol Hill have argued that the onerous tax code, and not the lack of regulations, is the source of the inversion phenomenon. While lawmakers are divided on how to improve the tax code, most have proposed to cut the highest corporate rate. Republicans have proposed changing the worldwide tax to a stateside tax, also known as territorial tax, which would mean that corporates have to pay the U.S. rate of 35 percent for domestic profit only.

Thirdly, and perhaps most importantly, is the public perception of tax inversion. Are U.S. companies unpatriotic for reducing some of the millions in taxes that go into the treasury? For some, the answer is clear. In 2014, Walgreens had plans to merge with a Swiss company; which would have saved Walgreens an estimated $783 million per year. However, this move was called off because of the controversy and backlash it created. Still, companies need to compete in the global market, and U.S. companies are at a disadvantage relative to overseas companies with significantly lower tax rates. But some companies may decide that the negative publicity that comes with the tax inversion may be more costly than the potential tax savings.

Source: http://www.flickr.com/photos/jumpyjodes/115391579/

The Oregon state legislature recently held a special session to discuss methods to appease Nike Inc., a powerful corporate citizen that is expanding its operations in the U.S. but has threatened to move out of Oregon. Nike would like to continue its expansion at its current Beaverton headquarters in Oregon, but first wants assurance that its state tax burden will not increase. Oregon’s existing corporate tax structure provides incentives to companies that commit to investing $150 million in the state over five years and create 500 jobs. Nike plans to surpass this threshold, raising the possibility that due to its size, its corporate tax structure could be altered to its disadvantage. If this happens, Nike will entertain offers from other states that are courting the company with more attractive incentives. As Chuck Shetetoff of the Oregon Center of Public Policy explains, Nike has put an “economic gun” to the Oregon governor’s head and said “you either guarantee the law won’t change or we’ll go elsewhere.”

Source: http://www.flickr.com/photos/jumpyjodes/115391579/
Nike headquarters in Oregon. Source: http://www.flickr.com/photos/jumpyjodes/115391579/

This scenario has become all too familiar in the American corporate world. Granting corporate incentives has evolved into a standard operating procedure for state and local governments across the country, with governments collectively giving incentives worth more than $80 billion annually. The beneficiaries come from a myriad of different industries, from technology and entertainment companies to banks and big-box retail chains.

A recent examination conducted by the New York Times found the state of Texas to be at the forefront of massive spending by states on incentive programs to attract businesses to operate within its borders. Incentive spending was minimal in Texas until 2000, when Governor Rick Perry took office and instituted a different approach towards economic development efforts. The numbers have become staggering in the decade or so since. Today, Texas gives out $19 billion in incentives every year, which is more than any other state (Michigan comes in a distant second with $6.65 billion spent annually). The Texas incentive program translates to roughly $759 per capita, and 51 cents per dollar of the Texas state budget. The top grants to companies, to name only a few, include big names such as Amazon ($277 million), Samsung ($232 million), and Anadarko Petroleum ($175 million). The incentive programs come in many different forms, including cash grants, sales tax refunds, exemptions or other sales tax discounts, and property tax abatements. In support of the program, Texas argues that it leads the nation in job creation, with half of all U.S. private sector jobs created over the last decade being located within its borders.

Who benefits more from these incentives: the businesses or the people of Texas? The situation gets blurry behind the scenes, as a fundamental trade-off is at stake. States can continue to provide incentives to businesses with the hope of deriving benefits like job creation in the long run, but this can be done only at the expense of spending flexibility on basic services such as education in the short run. Big business activity has indeed created prosperity in some forms; however, some troubling statistics exist. A New York Times examination revealed that Texas has the third-highest proportion of hourly jobs paying at or below minimum wage. Furthermore, thousands of Texans surprisingly remain unemployed, with Texas having the 11th-highest poverty rate among states. With these hard truths now on the public’s radar, it will be interesting to monitor future state spending. Texas recently cut billions of dollars in public education, an area where Texas already ranked 39th before spending cuts took place, in an effort to balance its budget. A commission was created by the Texas Legislature to take a close examination of the state’s economic development efforts, and will be issuing a report with findings and recommendations in January 2013.

The tax structure, regulatory climate, and legal environment in Texas are all very positive for businesses. However, while companies have gained, some school systems have lost. While simultaneously distributing billions of dollars in incentives to businesses, Texas was forced to cut public education spending by $5.4 billion in 2011. In the Manor school district, located in the outskirts of Austin, spending shrank by $540 per student this year. These cuts came even as student enrollment has tripled at the school since 2000, and 80 percent of Manor students are classified as low-income. Businesses depend on an educated workforce for their success – so shouldn’t education spending be prioritized over any incentive spending?

Numerous stories exemplify the lack of transparency in measuring the effectiveness of state economic development programs. Pennsylvania has offered Shell a tax credit worth $1.6 billion over 25 years for an energy production facility, predicting that the plant that they intend to contract will create thousands of long-term jobs. However, the state did not require a formal agreement to create the jobs in exchange for the tax credit. Caterpillar opened a new plant in Georgia earlier in 2012 after being offered $44 million in incentives. The company has been experiencing soaring profits, but recently froze workers’ pay for six years at several locations, arguing that it needed to remain competitive within the industry. As New York Times reporter Louise Story found in her extensive research, local officials typically have scant information about the track record of corporations, and are not in a strong position to question their deal terms.

Many indirect effects of economic development programs counteract the motivation for giving incentives in the first place. As shown the Pennsylvania Shell case, some states do not hold businesses legally accountable for why they are being granted incentives in the first place – to improve economic stability for American families and contribute to bolstering the economy as a whole. Furthermore, in the Caterpillar case, unpredictable events may follow after committing to expensive economic development plans. This could mean frozen payments, or in even worse scenarios, could involve an entire corporation going bankrupt, like what happened to GM in 2009. GM’s bankruptcy caused enormous sums of money to simply go to waste that had initially been spent to lure the company to places like Moraine, Ohio and Janesville, Wisconsin. And perhaps most importantly, as shown in Texas, states may be forced to dramatically cut spending on basic services such as education as budgets suffer – undoubtedly an indirect result of expensive commitments to economic development programs.

As companies seek tax concessions and other incentives, state and local governments must ensure that they are paying businesses an appropriate price for the benefits they expect to derive. The presence of big businesses in states can certainly be a big plus, but states must closely examine the tradeoffs and ensure that the businesses are held accountable after the deal is struck. When closely monitored and carefully organized, economic development plans certainly may be beneficial in the long run.

Year after year, the U.S. spends the most money on education in the world, but comes up short in results. In 2008, U.S. spent $809.6 billion, more than 5 times the runner-up, Japan, at $160.5 billion. In spite of such ginormous spending, we are falling behind in student achievement in the world. The most recent Program for International Student Assessment (PISA) results show that U.S. students barely achieved the average score in reading literacy, and scored below the average in mathematical literacy. This problem may in part be attributed to the way we spend the mammoth budget, and it’s a conflict between equality and achievement.

In 1971, John Serrano agreed for ideological reasons to be the lead plaintiff—essentially a stage dummy— for reform-minded lawyers who, in their minds, were furthering the equalizing-education legacy of Brown vs. Board of Education 1954 (Arthur Wise 1967; Peter Enrich 1995). The mastermind lawyers believed that the then-current system of funding public school districts with local property tax was unfair to students who lived in areas with low property values because their school districts received much less funding than students who lived in property-rich areas.

The California Supreme Court found in Serrano vs. Priest that reliance on local property taxes leads to significant disparities in educational opportunities, and thus violated the Equal Protection Clause of the U.S. Constitution. Though Serrano was college-educated and his son went to a well-off public school in the area, his Hispanic name mislead some reporters and even scholars to assume that he was a poor Chicano in a property-poor area, struggling for educational equality for his children. It is important to note that this case was not the result of dissatisfaction with the status quo; rather, it was a staged lawsuit for agenda-minded activists.

Using spending-per-pupil to quantitatively measure educational opportunities, the California Supreme Court tried to attain equality by decreeing that property tax must be collected by the local government and then subsequently transferred to the state government, which would then reapportion the tax revenue to districts based on a “district power equalization formula.” In essence, property taxes were divorced from public school districts and henceforth, funding for districts no longer depended on the wealth of the geographical area in which they were located.

The California Supreme Court’s decision in the Serrano case continues to reverberate in California and the rest of the nation. Although the federal equivalent of Serrano, San Antonio Independent School District v. Rodriguez (1973), decided in a 5-4 ruling that unequal funding for public school systems due to disparities in local property values does not violate the Equal Protection Clause, the dissent strongly encouraged states to consult their own constitutions. In fact, the majority opinion explicitly asked the states to deploy their own equal protection clauses and do whatever they wanted to school financing.

That’s exactly what the states did. Approximately 16 state courts immediately followed California’s precedent. In addition, a handful of states including New Mexico, Michigan, Ohio and Kansas revised their public school financing systems in anticipation for litigation. The redistribution of local property tax to equalize public education is a growing trend in America, and it appeals to one of the fundamental founding principles of our great country: equality. In the name of equality, wars have been fought, lives have been lost, and schools have been desegregated. The next step, naturally, is removing the socioeconomic dividers in our education system.

But reform has its costs, and for the public education system in America, it may be one that we can’t afford. After the Serrano ruling in California, numerous studies have analyzed how the centralization of funding has affected student achievement in the public school systems. The conclusions are ominous: school-finance centralization has hurt average educational quality, and as opponents claim, “dumbed down” education.

Take California, the birthplace of this trend, for example. In 1995, 24 years after the reform took place, California’s spending per pupil fell below the trend-line of growth in America. The study (Silva and Sonstelie 1995) contributed half of the drop to increasing enrollment in the public school system, and the other half to the centralization of school-finance. And, utilizing the terminology of the California Supreme Court, one can say that the reapportionment of local property tax directly lowered the educational opportunities for those students involved.

The reformers had hoped that equalization would raise the tail without bringing down the top, but studies have shown otherwise. For example, centralization appears to have a large, statistically significant, negative impact on average SAT scores (Husted and Kenny 200). The reasons for these achievement reductions are not very clear, but numerous conceivable theories have emerged.
One is that competition has diminished between school districts because of centralization, as there is less incentive for schools to attain high achievement in order to attract wealthy residents who expect to receive superior schooling in exchange for paying high local property tax.

Second, lower-income students do not always live in property-poor areas, and thus the benefits of equalizing school finance have not helped them in any significant way. Third, many wealthy parents, knowing that their tax money will not go toward their children’s public schooling, decided to send their kids to private schools, to get the full bang for the buck spent on education.

While equalizing public education sounds phenomenal in theory and laudable in practice, it is impractical in reality. It’s a difficult conundrum: should equality or high educational achievement prevail? One must sacrifice one to uphold the other, and there is little room for compromise. However, with the U.S. falling behind the world in achievement tests and globalization transforming our world into an increasingly competitive platform, how can America succeed?

Investing in education for our future is a must, and if that investment isn’t fully utilized in the most effective ways, we may fall farther behind, and not only in terms of education. If there comes a day when our education fails, our economy crumbles, and our strength diminishes, who then will be the champion of equality?

 

Zimbabwe 100 Trillion

The International Monetary Fund estimated that by January, Zimbabwe’s inflation rate had escalated to 150,000%. The Zimbabwean government has refused to release inflation figures in an effort to keep prices down since last June. That plan has failed as businesses have used inflation estimates to set prices.

The Zimbabwe Reserve Bank decided to increase the money supply to ease the cash crisis. Yet this will only worsen the problem. The Reserve Bank is considering issuing a new currency of a lower denomination. However, if Zimbabwe is unable to implement monetary reform along with the new currency, inflation will continue to spiral out of control.

Zimbabwe’s raging hyperinflation is a result
of a lack of revenue to cover expenditures.
The Zimbabwean government has been
unable to reduce spending, subsequently
racking up a very large fiscal deficit. A
government can finance its spending in three ways: by taxing the public, selling government bonds, or printing money.

Due to existing economic woes in Zimbabwe, it is not feasible for the government to raise more revenue by increasing taxes. Zimbabwe already has one of the highest tax rates in the world, as the average citizen is subjected to a 35% income tax. However, despite these high taxes, the Zimbabwean government provides very few social benefits for its people. Many people in Zimbabwe barely have enough money to afford basic necessities like transportation, food and rent, let alone fund their government’s fiscal expansionary policies.

Zimbabwe is unable to raise revenue through the sale of government bonds because there is no public demand for them, stemming from a lack of faith in the Zimbabwean government.

Contrarily, every year the U.S. government raises billions of dollars of revenue by selling bonds and securities to the public. The U.S. has established a reputation as a creditworthy institution, and has never defaulted on its debt obligations. Zimbabwe on the other hand, has been plagued with political unrest and financial insecurity. Investors are unwilling to risk their money in a precarious political environment in order to finance a government with questionable credit history. The Zimbabwean government is handicapped by their inability to raise revenue by issuing debt.

Unable to levy taxes or sell bonds, the Reserve Bank has resorted to printing money as a solution to their fiscal woes. The inflation rate has drastically increased from 3,700% in April of 2007 to 66,000% in December of 2007 to 150,000% in January of 2008. Zimbabwe used to be one of Africa’s most prosperous nations, however, poor monetary policy has destroyed the economy and unleashed hyperinflation.

The central bank’s loosening of monetary policy not only finances the fiscal and trade deficits, but also targets Zimbabwe’s past decade of negative GDP growth. In 2000, Zimbabwe’s president, Robert Mugabe, enacted land reform that severely hurt the country’s maize productions. The production of this staple crop, dropped by as much as 75% as a result of the reforms. This had a strong negative impact on rural incomes, exports, and food securities. Unemployment reached 80%, manufacturing fell 51% from 1997 to 2005, and exports declined by a half from 2001 to 2005. As a result, aggregate demand and the economy’s total output decreased significantly. The Reserve Bank’s policy theoretically could shift aggregate demand back to long run output. However, increasing money supply has only resulted in hyperinflation and an exacerbation of the Zimbabwe’s economic recession.

Historically, countries that have suffered from hyperinflation have resolved the problem by restoring faith in their currency and by enacting strict monetary reform. Zimbabwe must end its economic misrule by beginning to deal with its hyperinflation.