Thursday, October 08, 1992

Compulsory student unions:  Australia's forgotten closed shop

  1. Everyone has the right to freedom of peaceful assembly and association.
  2. No-one may be compelled to belong to an association.

(Article 20, The Universal Declaration of Human Rights.)


Workers and employers, without distinction whatsoever, shall have the right to establish and, subject only to the rules of the organisation concerned, to join organisations of their own choosing without previous authorisation.

(Article 2, International Labour Organisation Convention Concerning
Freedom of Association and Protection of the Right to Organise.)


Everyone shall have the right to freedom of association with others ...

(Article 22, The International Covenant on Civil and Political Rights.)


Australia is a signatory to all of the above.



FOREWORD

Readers of this valuable publication will promptly conclude that something is rotten in the citadel of freedom.  Although universities jealously guard their independence, their rights to free enquiry, and their rights to free speech, it seems that they are all too willing to compromise their students' rights to freedom of association.

The authors of these papers expose the double standards of university administrators, who insist on, or at least acquiesce in, the conscription of students into university unions, guilds and student associations.  A strong economic and political case is made out against continuing to require students to pay compulsory levies to these organisations in order to obtain tertiary education.

Some myth-makers have canonised the students of the Vietnam era for their "idealistic" opposition to military conscription and war.  With the benefits of hindsight the results of that idealism seem very equivocal.  Nevertheless, one of the spoils of victory is to win a sympathetic place in history.

Students of a more recent generation are no less idealistic because they oppose another kind of conscription, a less graphic conscription admittedly, but closer to home.  Whether these students win the plaudits of history for their opposition to vested interests, privileges and the denial of freedom will depend to a large degree on the success of their efforts.  This publication will have a bearing on that outcome.

The task of these authors is a difficult one.  It is an axiom of modern democracy that political favour is best obtained through patronage.  As Richard Wood notes, by taking small sums from many, one can deliver large amounts to a few.  Those who benefit from patronage in this way make powerful allies.  Those who pay for it make weak and disorganised foes.

Compulsory student unionism is a stark example of this process.  Students who are forced to pay comparatively small levies do not match the student leaders who receive and spend them, in either organisation or aggression.  The few have a much greater interest in preserving their privileges than the many have in ending them.

It is interesting that these student leaders have no qualms about the compulsory collection of levies which they spend, but are strongly opposed to government attempts to recoup some of the funds taxpayers spend on providing "free" tertiary education.  The campaign against the Higher Education Administration Charge illustrates again how the voice of the select group which stands to gain is much louder than the diffuse group at whose expense the gain is made.

One of the more striking aspects of this campaign is that the public is told that some students may be denied tertiary education if they are required to pay a very small fraction of the cost ($250) required to provide their tuition.  It is apparently of no concern to student leaders that some students may have been denied education because they could not afford the union fee used to pay for student newspapers, tennis courts, student politicians' salaries and expenses and other optional luxuries of student life.

But it is not just the student leaders who have a vested interest in the compulsory collection of student fees.  University administrators (including vice-chancellors) have been all too happy to play bag-men in this enterprise.  Many of them would not be particularly happy about performing this function.  They do it because they do not want to incur the wrath of the vociferous and organised benefactors of patronage.  In the end, all they want is a quiet life.

No-one should begrudge another wanting a quiet life.  But it is objectionable that it should be purchased at someone else's expense.

Peter Costello
Melbourne.



CHAPTER 1
STUDENT UNIONISM:  ECONOMIC NECESSITY?

INTRODUCTION

Proponents of compulsory student unionism argue that it is an economic necessity.  Student unions, they say, perform valuable functions.  Were compulsion to be abolished, the temptation to "bludge on your mates" would mean that very few students would pay their union fees.  Either the services currently provided by the unions would disappear, or they would have to be paid for in some other, less satisfactory, way.

This is an argument which is used in attempts to justify all sorts of economic injustices which involve the expropriation of money from the individuals in a community to pay concentrated benefits to a minority.  And it is wrong.

This chapter deals with the economic consequences of compulsory student unionism, and analyses the economic arguments routinely advanced in its favour.  It compares and contrasts the economic implications of compulsory student unionism (CSU) and voluntary student unionism (VSU), and identifies the traditional supporters of CSU and the potential winners from VSU to explain why CSU has so resisted reform.

Underlying the economic arguments defending compulsory student unionism is the social and political assumption that it is the norm, the benchmark.  By implication, any move away from the tried and true compulsory arrangements involves a leap in the dark.  But in fact the compulsory economic arrangements of student unions are the exception, not the rule.  And evidence suggests voluntary unionism would be economically better than compulsion.

Student union subscriptions subsidise a range of campus activities.  These include cafeterias, newsagents and general stores, sporting facilities, newspapers, radio stations, and campus clubs and societies.  There are unsubsidised, off-campus alternatives to virtually all these.

A walk from the Union building of any Australian campus to the nearest ordinary shops will reveal this.  There you can find cafes and snack bars which often provide better and cheaper service than is available at the Union cafeteria.  The Union cafeteria can be doubly expensive, because even if students never walk through its door, they pay a hefty subsidy to it through the General Service Fee (GSF).

Off-campus newsagents generally sell magazines, newspapers etc. at recommended retail price, as do their campus equivalents.  However, unlike their campus equivalents, they do not, in addition, receive a subsidy from their customers.

The student newspaper set-up is an obvious example of the impact of captive financing on quality (though of course the same applies to other enterprises).  It does not take great insight to see that the staff of a student newspaper often have little way of knowing whether they are pleasing their readers or not, and little incentive to improve if they are failing.  A give-away publication which is not subject to discipline in the form of loss of circulation or revenue, can very easily become a vehicle for mere self-aggrandisement by its student "journalists" and "editors".  If, as sometimes happens, hundreds of unreadable and unread copies of student newspapers and other publications are stacked around and left to be blown away or made into paper aeroplanes, this type of market-signal, which in the real newspaper world would mean drastic changes, can be more or less ignored.  (Even ordinary suburban give-away newspapers are subject to more market discipline in that they must convince advertisers that they are read.)  The newspaper's student staff will quite likely be going on to other things next year anyway, and those who want the professional credential of having worked on a student newspaper have got some items for their cuttings-books whether anyone read them or not.  This is not to say all campus publications are this bad:  many are not.  The point is that with captive financing they have greatly reduced incentive to supply a product that their conscripted customers want.  They may have able, ethical and hard-working staff who produce good papers, but when the reward for slap-dash, inaccurate or dull writing, ego-tripping and the pushing of political barrows is almost exactly the same as it is for the hard work, attention to detail, accuracy, mental liveliness and so forth that good journalism requires, it is plain that the incentive to quality is not strong.

Off-campus services generally offer students a choice between rival suppliers.  Union activities, however, generally offer no choice.  The Union monopolises whichever activities it pursues on-campus, and allows no competition.  As with all monopolies, this acts directly against the interests of the consumers (the students).  It is not worth travelling off-campus every time one wants a sandwich, so one is stuck with whatever price the campus monopoly charges.

Other aspects of Union operations serve at least some people rather better, however.  The sporting facilities provided by Unions are often of a good standard, and, for the minority of students that use them, may be cheaper than private-sector alternatives.  Some sporting and other recreational clubs do well out of the unions, gaining grants which exceed their members' club subscriptions.

Some clubs have been set up simply in order to obtain these grants, and in the nature of student organisations, with their changing and often relatively immature membership, it can be very difficult to have spending responsibly accounted for.  Even if a club is penalised for abusing a grant by, say, having further grants cut off, it may be quite easy for it to simply reconstitute itself with a new title and join the queue again, particularly as a large part of the student body changes from one year to the next, and last year's activities are often no more than ancient history.

A number of points can be made about the operations of student unions:

  • They are organised along lines that are not even usual, let alone without alternatives:  namely, compulsory payment to a single supplier (through GSF to the union) rather than voluntary payment to a choice of alternative suppliers as in everyday business.  Defenders of compulsory fees often state that these payments are analogous to a tax.  However taxes, at least in theory, are levied to pay for public goods such as defence, law and order, and street lighting, and things such as social welfare, for which there is thought to be no satisfactory private alternative.  Even if one takes a far more cynical (or realistic) view of tax-spending than this, there is still no justification for using the tax analogy to support compulsory payments to what is essentially a club providing luxuries.  Without taxes the state could not function, but without student unions, students' raison d'etre -- gaining a university education -- would be affected hardly at all (except perhaps for the better, as there would be fewer demands on their time and other resources).  Even if the services student unions provide, such as cafeterias, student newspapers and finance to clubs were withdrawn and not replaced, it would make little real difference to students' study and academic accomplishments.  (If for some reason no cafeterias were provided on campus, students could bring packed lunches, but in fact there would be private caterers keen to step in since they would have a large guaranteed market.)  Running a university, and in particular, running a university club, is not analogous to running a country.  Indeed, given that at a university one is meant to be dealing with intelligent young adults with at least enough resources of their own to feed themselves, it is not even analogous to running a school tuck-shop.
  • The services that students are most likely to use, such as the cafeteria or shop, do not have incentives to perform well.  They suffer from the normal faults of monopolies and, like subsidised industries the world over, they are backward, inefficient, arthritic and expensive.
  • Some students, such as writers on campus newspapers, gain access to large assets and expensive items such as printing presses.  Others, such as student politicians, can gain access to offices, stationery, telephones, photocopiers, word-processors, cars etc.  Obviously, for the recipients, such concentrated benefits and privileges can greatly exceed in value what their CSU fee costs:  but they are benefits obtained at the expense of all the other students who are forced to pay for them.  No wonder student politicians have tended to be vocal defenders of CSU!

Most students, however, are net losers from CSU.  If this were not the case, it would be unnecessary for compulsory student unionism to be compulsory.  If all, or even the great majority, benefited, the system would work on a voluntary basis.  None of the services provided by student unions are "public goods" comparable to the public goods of a state or national economy.  Real public goods are supplied to students, who are also citizens, in the same way as they are supplied to the rest of the community.  There are no comparable goods supplied by student unions.

Student unionism is certainly not alone in arguing for compulsory support arrangements on the grounds of economic necessity.  Compulsory support for uncompetitive industries through tariffs and import quotas uses the same argument:  this industry is vital but could not survive without compulsory support, so compulsory support is necessary.  But unless a convincing argument can be mounted to show why an industry or service is "vital", then this justification for compulsion fails.  Nothing provided by student unions is "vital" (as opposed to "convenient") for a student to study at a university.  Again, conscription is sometimes put forward as an analogy.  However, this analogy ignores the fact that conscription may be an aspect of national defence, a classic example of a "public good", and in any case is concerned not with providing funds for clubs but perhaps with the survival of the nation and everyone in it.  It is doubtful whether most Australians would support military conscription on the grounds that it was a cheap way of raising an army.

All the services provided by student unions are provided in the market off-campus.  The argument that student unions must subsidise and monopolise campus services because they could not be adequately provided by the competitive private sector appears to be the opposite of the truth.  If student unions did not preclude competition by monopolising these activities, they would be provided by the private sector.

As for the benefits which student clubs gain from CSU, when the true cost of union services is considered by adding in the union fees, even small clubs rarely get a good deal.  If the members of some clubs decide -- as has happened -- to spend the clubs' grant money on booze and barbecues, this is not necessarily how they would have spent it if it had been left in their pockets as disposable income.

The best sort of economic system, from the point of view of efficiency, is free competition.  This promotes efficiency in two ways.  First, it allows consumers to decide how their money is spent.  This is the best way of ensuring that people's money provides them with maximum welfare because they decide themselves, and they are the best judges of their own wants.  Second, it promotes competition between rival suppliers who compete for the business of customers by trying to provide the best and cheapest service.

Compulsory student unionism, like all other forms of compulsory economic arrangement, interferes with this process in two ways.

First, it takes away the freedom to decide how your money is spent.  Your money is no longer spent to most benefit you, but to suit someone else.  Union presidents and vice-chancellors who favour compulsory fees sometimes liken the compulsory fee to a tax.  The falsity of this identification has already been shown, but it may be worth pointing out here that on taxation principles it is totally regressive:  if you are rich -- and some few students are the children or spouses of millionaires -- this impost will be a mere mosquito bite.  But if, like most students, you are not, then it can really hurt.  Imagine the outcry from the social justice industry if a national tax policy charged all Australians the same tax of, say, $15,000 a year, whatever their income and assets, and punished them if they did not pay up!

Second, it stifles competition.  The union monopoly increases the power of the union over the student by limiting choice.  The university shops can charge more for inferior service.

Any form of compulsion creates unfairness and waste.  It creates unfairness by forcing people to support an undertaking they do not want to.  It may sometimes be necessary -- even if it seems to them unjust -- to conscript soldiers to repel an invader, or to use legal sanctions to make people pay taxes, but it is both unjust and unnecessary to force a student to support the easy life of employees of overstaffed university enterprises, or the sailboats or debating trips of wealthier students.

It creates waste by encouraging the use of resources in areas where they do not pay their way.  If an industry requires compulsory support to survive, this means that it costs more than it is worth, and withholds resources from other, more productive undertakings.

This is not the case with public goods, which are necessary, but which no-one would normally voluntarily pay for out of his or her own pocket because the benefits are too dispersed and the expenses too concentrated.  (For example, when a ship is heading for rocks, it is impractical for the crew to start thinking about buying a lighthouse, and when bombers are heading for a city, it is impractical for its citizens to start thinking about buying interceptors.)  But it must be re-emphasised that the provision of campus cafeterias, newspapers and club subsidies is in no way a "public good".  These things could easily be provided in the market-place and in any case are luxuries rather than necessities.

Compulsory support for services that should be marketised not only allows inefficiency to occur, it may promote and entrench it.  If compulsory support is available, an industry will often have an incentive to remain inefficient in order to justify its continued receipt of support.  There is much anecdotal evidence from the public service of sections and departments taking care to spend all their money in one financial year lest it be cut in the next, and in subsidised industries the same principle applies:  if you do not spend all your subsidy you are showing it is unnecessary and may lose it.  As soon as the free ride of support is no longer available, the industry has an immediate incentive to become efficient or face going out of business.

Students would be the winners from an end to CSU.  Rather than being forced to pay for a bad service, they would be free to use it if they felt it was good enough.

These are the truths about monopoly services.  It makes sense for student unions to pretend that they are false.  Students should realise, however, that student unionism entrenches protectionism in universities.


METHOD IN THE MADNESS

Despite considerable agitation by certain student groups, reform has always been stopped in its tracks.  Two questions must be answered before CSU can be sensibly and successfully reformed:

What to reform?

What alternative to CSU should be implemented?  Completely voluntary student unionism?  Or some hybrid, which retains some degree of compulsion?  In order to answer this, it is necessary to analyse how the features of CSU produce the results described above, and thus how it can be modified to avoid them.

How to reform them?

Previous reform attempts have consistently run into a brick wall.  Superficially, this is a puzzling result.  Given that most students lose from being forced to support monopolies, reform would appear a vote-winner for State and Federal governments.  This has not stopped politicians dropping it like a hot potato.  We therefore need to understand how CSU and arrangements like it interact with the democratic process to produce and defend unjust results.  There is method in the madness.

Student union operations are like nationalised industries.  They are protected from private-sector competition by partial monopoly of their market and from their customers by ensuring that a large proportion of their costs are met by compulsory payments.  (However, "nationalisation" is a term more often associated with steel mills and shipyards than with tuck-shops and tennis courts.  "Cloisterisation", reflecting the protected status of university enterprises as well as their modest scale, may be more appropriate.)

In the marketplace, people control how their money is spent in the most direct and effective manner:  by spending it themselves.  This economic freedom produces good results for consumers.

Compulsory student unionism denies students this freedom.  But it is argued by its defenders that, even so, this does not completely remove student control of their own money.  They still exercise control over their funds indirectly, by electing student politicians, rather than directly through the marketplace.  Student unions are "democratic" -- all of their members are allowed to vote.  Surely democratic control of funds entrusted to student unions will ensure that students' needs will be best served?

The answer is:  "No".  The political process makes decisions differently to the marketplace.  Politicians deal in votes.  In deciding how to spend students' money, student politicians naturally spend it where the votes are.  This is the catch, because in politics a buck is not a buck.  A dollar of GSF spent on the sailing club or the staff of the cafeteria is more likely to win you support than a dollar spent on reducing prices in the cafeteria.  This is because the more thinly students' money is spread across a greater number of students, the less likely it is that it will attract attention and therefore votes.  Successful student politicians seem to understand this well.  They do not seek to appeal to the broad masses of students ("Two cents off a cup of coffee if you vote for me!"), presumably because they assume that such promises will fail to excite.  Rather, they direct funding to a minority of students organised into small groups.

This is one reason why the economic consequence of student unionism is the creation of a privileged minority supported by an underprivileged majority.  Another reason is that some people are better at getting the favours of student unions than others.  As a rule of thumb, the more cohesive and organised your coalition, the greater influence you can expect to have over student politicians.  A strong coalition is more able to deliver or withhold voting support from student politicians, and to apply lobbying and other kinds of pressure to them.

This argument (that student politicians will sensibly focus their favours narrowly so that they become significant, and that the more organised a group, the better its chances of gaining favours) explains many of the political features of compulsory student unionism.  It is consistent with the distribution of benefits, which go not to large, inherently unorganisable, groups such as cafeteria users or newspaper readers, but to small, naturally-cohesive groups such as cafeteria employees and newspaper writers and staff.  It provides an explanation for the fact that it is the norm for fewer than 20 per cent of students to vote in campus elections, and why tightly-organised political extremist groups have benefited disproportionately from student unions while most students are politically moderate or not interested.  Students are divided into two groups -- those organisable enough to make it worth their while to participate in the political process, and those effectively disenfranchised because the information and organisational costs (including, for example, time) necessary to control their money through the political process are too high.  The arguments of the public choice theorists seem to apply here with a special obviousness.

That the majority supports a minority is not wrong in itself.  A moral argument on grounds of equity might justify it.  However, the economics of student unions appears to be driven by self-interest, not altruism.  The benefits (free travel for rugby clubs, new boats for sailing clubs, easier, more secure and more remunerative work for Union staff) fit more easily in a pork-barrel than a collection bowl.

An instructive test for whether these redistributions are "fair" or "equitable" is to ask:  if students were asked to give them freely and openly, would they consider that they should?  The answer is almost certainly no.  Why, then, should they be forced to?  And this raises another interesting issue.  Far from being openly and freely aired, the benefits enjoyed by the minority at the other students' expense generally go unknown to most students.  The fact that the beneficiaries from CSU do not go out of their way to publicise their good fortune does not suggest they have great confidence in their moral claim to them!

Having seen how student unions work, the next question is how should they work?  Is there a case for compulsion in any part of their operations, or should they be completely voluntary?

It is hard to escape the conclusion that they should be completely voluntary.  None of the redistributions they indulge in have any convincing ethical basis.  There is no convincing reason why any of the worthwhile operations that they conduct could not and should not be conducted, as they are elsewhere and more successfully, by the competitive private sector.  And since CSU is a substantive and a regressive pseudo-tax, imposing real costs on all students and the biggest proportionate cost on those least able to afford it, it is hard to think of a set of values which could justify it if all it defends is economic waste and unfair privilege.

It is unreasonable to criticise people for being self-interested.  But it is reasonable to criticise a system which runs on the manipulation of greed to produce unfair results.  Because the free market does not give any student control over another's money without first earning it through free and voluntary exchange, it is much less capable of producing unfair results.  Compulsory student unionism, forcing on students arrangements they would not voluntarily accept, seems incapable of avoiding unfair results.

Moreover, compulsory student unionism reproduces in miniature many of the problems of Australia.  Protectionism has ossified our industries, directing our scarce national resources to the wrong areas and imposing all manner of costs which are becoming increasingly painfully obvious.  Australian society is riddled with interest groups using the political process to obtain privileges for themselves from governments.  The unfairnesses and inefficiencies within student guilds are mirrored and magnified in society at large.  Tertiary institutions are supposed to set an example to society.  It sticks in the craw when they embrace and implicitly condone the principles underlying the network of restrictions and privileges doing so much damage to the nation.

In answer to the question posed above about what reforms should be made, university unions should be reformed to let them serve the needs of students as well as possible.  This should involve:

  • Making membership completely voluntary and allowing the establishment of rival student unions.  This will require unions to earn their members by offering them sufficient services to make membership worthwhile.  Allowing rival unions will promote competition for members which will put further pressure on unions to provide an attractive deal for their members.  It should go without saying that no union should have the administration act as its collection agent;
  • Selling university trading operations to private enterprise and promoting competition between them.

There is a wealth of evidence and a lot of common sense behind the proposition that enterprises run by private businessmen whose future depends on their performance will perform better than those run by bureaucrats whose future does not.  Since choice promotes consumer-benefiting competition, wherever possible two or more rival suppliers should be allowed instead of the monopolistic Union.

Knowing which reforms should be implemented is no good if there is no coherent strategy for their implementation.  As mentioned above, despite very considerable agitation, politicians of all hues have dropped reform like a hot potato.  To abuse the politicians concerned is appealing but provides no guide as to when worthier politicians are likely to emerge in the future.

It may be more helpful to again look to vested interests.  Those same vested interests which operate in university politics to extract benefits from the system can also operate in State or Federal politics to defend the system which benefits them.  While it may be wrong to accuse most politicians of being courageous, it is equally wrong to regard them all as being stupid.  They may think that removing the legislative enforcement of CSU will lose them the votes of those who benefit from it, but may not provide sufficient per capita benefits to ordinary students to win many votes.  They also realise the considerable capacity of the vested interests supporting CSU for lobbying and propaganda.  Little wonder, therefore, that politicians have tended to regard it as a hornet's nest, best left undisturbed.

This does not make it impossible to reform CSU.  There are three approaches that reforming politicians could take:

Damn the torpedoes!

This approach requires courage.  It involves pressing ahead regardless, selling the idea on its merits and hoping to attract sufficient votes in the process.  This approach can work.  Witness Margaret Thatcher's victory over the miners.  But it is risky.  Witness Jacques Chirac's backdown over university reform.

Buy them off

This approach requires cynicism.  It involves accepting that vested interests will oppose any reform which makes them worse off.  It aims to buy off the opposition by giving them enough of the benefits from reform to make it in their interest.  This is the approach employed by Margaret Thatcher when privatising British Telecom.  This was going to generate very considerable wealth by improving the efficiency of BT but upset the cosy arrangements built up by Telecom workers.  Mrs Thatcher gave them sufficient benefits from the sale (discounted shares, big redundancy payments, etc.) to bring them on-side.  This could be applied to CSU by phasing it out over a number of years, giving those who would lose out time to pass out of the system.

Big is beautiful

This requires vision.  It involves taking sweeping reform on such a scale that it carries opposition before it.  Ronald Reagan's tax reform bill, which was so broad in scope that it captured peoples imaginations by demanding equality of sacrifice by all vested interests, is a good example of this approach.  Applying it to CSU would involve making CSU reform part of a much wider package -- drawing in the whole tertiary education system and possibly other levels of education or other areas in need of reform.

Any of these three approaches has the potential to win votes.  Ronald Reagan won support by standing up to the air traffic controllers in the 1981 dispute.  This was a damn the torpedoes approach, tackling a vested interest head-on and appealing to the politics of ideas for public support.  Ronald Reagan also won support with the "big is beautiful" approach to tax reform in 1986.  British PM Margaret Thatcher has used the "buy them off" approach to make her privatisation programme very popular.

Politicians looking for a cause both good and popular should therefore tackle student unions.  They should not stop there, since there are a hundred other examples of the injustice and waste exemplified by student unions in need of reform.  But it is as good a place to start as any.

One proposal politicians might consider is to abolish compulsory student unionism and double the Higher Education Administration Charge to $500.  This would leave the cost of attending university almost unchanged, since the cost of union fees is approximately the same as for the current $250 HEAC and few of the CSU subsidies find their way back to services students are most likely to use.  But politicians would be replacing a fee of approximately $250 which supports wasteful subsidies and entrenches privilege with one which generates new funds for the tertiary education system.  This could kill two birds with one stone.  As well as removing the distortions imposed by CSU, it would also improve the performance of the higher education system by putting it on a more user-pays footing.  The benefits for students would be twofold:  better campus services and a slightly less ossified and slightly more accessible higher education system.  Students, having a more visible incentive to study and get value for their money, would be less likely to take three or four years at University for granted, and demand more both from themselves and their courses.

It is notable that, perhaps because an appreciation of economic realities is gradually spreading in the community, and perhaps because the qualities of independence and self-respect have never really gone out of favour, the re-introduction of the $250 fee has met with surprisingly little opposition from the broad mass of students as a principle -- despite exhortations from some of the education establishment and even some politicians to demonstrate against it -- or from students' families or the community at large (protests have mainly been about it falling unevenly on full-time and part-time students, external students, students with multiple enrolments etc., rather than about the principle).  Politicians should take note.  Apropos the suggestion made above, they should also note that there is no evidence that students in general support government-enforced student unionism, and massive evidence at practically every student election of their indifference to, or rejection of, everything associated with it.

Of course the network of vested interests which support union fees and oppose university fees would still be riled.  However, in the current political climate, they may find themselves getting shorter shrift than that to which they have become accustomed.



CHAPTER 2
POLITICS AND STUDENT UNIONISM

INTRODUCTION

Most tertiary students regard their student union as remote, at most a nuisance at election time.  For those who take an interest in them, however, student unions are the focus of many passions.

Recently, the debate over politics and student unionism has changed.  The debate which characterised the 1960s and 1970s culminated in the demise of the Australian Union of Students in 1984.  At issue then was AUS support for political organisations with policies strongly opposed by many students.  Nowadays, fewer student political organisations openly support the PLO or particular sexual preferences.  The days of student rebellion at taxpayers' expense are largely past.  The new focus of the self-important student advocate, elected, like the South African Government, by a minority of those they claim to represent, is "student services and welfare" and other "education issues".  Support for unpopular or irrelevant political causes has disappeared, but even the most vocal are now inclined to mask their intentions.  Groups seeking power within student unions claim to differ in policies and approach, but all accept the essentials of this new focus and all claim that student unions have the right to exclusively represent these student concerns.

The modern compulsory student representative organisation is seen by its supporters as a lobby group influencing the university administration and various levels of government.  But it is clear that the newly-found restraint has not removed politics from these organisations.  Student politicians attempt to influence the political process and play games which imitate the partisan political operations of government both within their organisations and outside them.  These activities, which are funded by a compulsory student levy, are the central feature of all existing student representative organisations.  All students, in effect, must become members of these organisations, since, although it is often easy to give up your voting rights, it is very much harder to escape the associated payment.

The current debate about politics and student unionism revolves around the issue of whether students have an obligation to support these organisations.  It is objectionable to be forced to aid the funding of a sport you don't like, as it is objectionable to be forced to fund a political or moral position which your conscience rejects.

There are many political arguments against voluntary student unionism.  None of them stand up to serious consideration.  Certainly they go nowhere near justifying what is, at its roots, an infringement of people's liberty to pursue their own goals in their own way.


THE POLITICAL EFFECTIVENESS OF STUDENT REPRESENTATION

Those who wish to represent student views in public and to government and university administration, often claim that students have a unique set of interests which should be represented by organised and officially-recognised bodies on campus, and by associated groups at a State and Commonwealth level.

That not all states have such organisations and that no federal organisation exists at present is related to particular conflicts and circumstances, rather than to the absence of a desire to form such bodies by student activists seeking greater status.  Both the need for such representation and the effectiveness of that which has existed should be examined.

Students are a very diverse group.  The diversity of age, culture, studies and interests is a cherished feature of the university tradition.  In some respects, these differences are greater than those found in the non-student population.  Some minority groups are disproportionately represented in the university population, with beneficial effects for the knowledge and understanding of all concerned.  Far from being a homogeneous whole, we would expect the diversity of opinion and interests among students to be greater than for society at large.

Students have little of the homogeneity of other interest groups.  Their current and future occupations, income levels, ethnic and cultural background, and so on, are all diverse.  In many respects students are no more of a common interest group than a football crowd.  Indeed, unlike a football crowd, they do not even have common loyalties (and compulsion will not create such loyalties).

The attempts made by student unions to promote a common interest of students, backed by a monopoly of representation, is detrimental to the role of higher education in a civil society.  This common interest is supposed to disappear upon completion of their studies.  Education is, however, an area of concern to a very large number of ex-students.  Former tertiary students occupy a large number of positions in all the levels of decision-making which students might seek to influence.  This spread and depth of former students is a most effective ad hoc lobbying group.  The actions of former "student politicians" on entering government have been far more influential than the antics of student unions.  Many of these will, of course, have an incentive to favour a system of compulsion which makes useful funds available for political causes and campaigns they favour, and which, furthermore, may provide them with a steady flow of junior (i.e. largely non-threatening) supporters as successive generations of new student politicians graduate behind them.

Some students favour university fees.  Many students are opposed to compulsory student unionism.  Student unions cannot, and do not, represent these or any other views conflicting with the interests of the student union.  Yet it is claimed that student unions introduce students to the ideals of democracy.  This is a dubious proposition:  democracy has its faults, and can be arbitrary, and at times authoritarian, in enforcing the will of the majority.  However, the authoritarians of the student unions are not even in the position of bad democratic leaders:  they do not represent a majority of students but only a majority of the very small minority of students active in campus politics.

The formal organisations which do exist, namely student unions, appear to be out of touch with the mainstream concerns on education issues.  The growing public criticism of trends in funding, quality and relevance of university education are rarely voiced by student unions.  Student unions devoted much effort to opposing the new $250 Higher Education Administration Charge.  Yet the relatively meagre turnout at the demonstrations they organised suggests that students feel either that the charge is justified or that it is not worth opposing.  Student concern, in line with concern in the general community, is shifting away from issues about the cost of education towards questions about its quality.  The issues in education which are of most concern to students, and to the taxpayers who provide funding for them, concern the capital expenditure to provide proper, modern facilities for tuition and research, the cost pressures of contact hours required to give adequate tuition and the quality of the product.  However, the desire of taxpayers and students to have a good quality of education is limited by the money available to government and by the controversy over whether or not government is the best agency for achieving educational excellence.

When students do have particular interests, they are different from those pursued by traditional economic interest groups.  Members of trade unions provide labour in exchange for their claims, while businessmen offer the investment of capital, and an end-product to consumers.  In contrast to these market-based exchanges, and the political conflict derived from them, students make an ambit claim on taxation revenue paid by other people.

When students seek increased AUSTUDY, they seek a transfer of wealth from the presently productive in society to themselves.  Although of importance to students, the existence and extent of these payments are based on decisions which must be made primarily by those who have provided the resources to allow this support for students.  The traditional mechanism for these decisions is the Parliament.  Students have no a priori claim to the money which can pre-empt those decisions.  Since students provide nothing in return for AUSTUDY, they have no sanctions like strikes, boycotts or lockouts, which most interest groups can use to reinforce legitimate claims in an exchange relationship.

Education is a service provided to its consumer, the student.  But without the freedom to choose which product to pay for, the student is in the classic position of the victim of a monopoly.  This is more the case with tertiary education than with primary and secondary education.  At present, alternative government and private secondary education systems are available in Australia, with the private system generally recognised as being superior.  Tertiary education, however, remains a government monopoly enforced by law, and attempts to break this monopoly by introducing private tertiary education institutions are being furiously opposed.  In the same way, compulsory student guilds force tertiary students to accept a monopoly on representation.  Literature handed out to first-year students often attempts to justify the functions of guild presidents along the lines that "if you have a problem with the faculty or administration, the guild president will hear you and may intercede on your behalf".  This is play-acting the role of an elected representative, perhaps something like a romanticised Member of Parliament or leader of a real trade union.  It ignores the facts that, first, there is no competing organisation to which students can divert their loyalty, support and membership in the event of their "representative's" failure, and second, that even to be a campus politician generally means that the guild president has little or nothing in common with the great majority of students who are not interested in political organisations.

Of course, this is not to say that representation may not be needed.  Some university administrations have displayed arrogance, bureaucratic inflexibility, and callousness towards students, to say nothing of occasional academic corruption of the type set out so well in Malcolm Bradbury's The History Man, with students suffering victimisation, favouritism, intimidation, sexual harassment and plain bad teaching.  But this does not justify representation and "intercession" by a guild politician.  What it does mean is that students do need real and proven means to make their genuine grievances felt (such as more free choice in tertiary institutions).  I know of students who have been treated badly by universities, but of almost no cases where student politicians have effectively taken up students' genuine grievances about getting an education.  Like any other monopoly, the monopoly of student representation encourages feather-bedding and ineffectiveness on the part of those who no longer have to compete.  Like other monopolies, it is maintained by force, and consumers suffer.  In fact, the existence of guilds in their present form may easily hinder students who wish to present genuine grievances -- perhaps one reason for their popularity with some administrations.

Freeing-up the system by permitting competition might lead to guilds withering away.  As with the present low turn-out at guild elections, this would not indicate "apathy" in any derogatory sense, but would indicate that students have a different set of priorities.  Quite apart from study, the reason for being at university, students are individual human beings, with individual interests.  They are not a collective, amorphous mass of fodder for budding politicians to "administer".


POLITICS WITHIN STUDENT UNIONS

As it is, if students are apathetic, it is because they have a great deal to be apathetic about.  Student politics are dominated by factions which run tickets;  make or break deals;  run, at students' expense, newspapers over which students have no control and which they would not voluntarily buy;  publish pamphlets attacking and defaming "enemies";  and plot and counter-plot in the manner of some banana republic.  Such activities make guild politics for many students only an unpleasant mockery of a sensible club doing things in an atmosphere of voluntary good-fellowship.  It is claimed that the levying of money for student activities provides for essential student services.  No-one, however, would suggest that student sporting clubs, newspapers, political societies, rock concerts and other activities by guilds are necessary at all.  Even when not actively pernicious and destructive, they are at best hobbies and luxuries.  If, in order to pass examinations and become productive members of society, it is necessary for students to have refectories and restaurants provided on campus (a highly dubious proposition), then this could be done by a commercial contractor.  (Experience suggests that the food would be better too.)

Many of those seeking election to student representative organisations do so with an eye to an entry on their curriculum vitae and a future in "real" politics.  However, those students in faculties with a high number of academic contact hours are rarely able to match the extra-curricular activities of the political activists from the "soft" faculties.

It is not the particular political preferences of students active in student guilds that is the problem, but the manifestation of these preferences in the operation of the compulsory organisations which they seek to dominate.  There are many other forums in which students can engage in political activity.  Most students have the vote, and membership of ordinary political parties is open to them if they desire it -- in fact they can expect to be courted by the parties as "youth".

The conflicts in guild organisations do not arise solely from differences of political opinion.  Compulsory student organisations have access to very large amounts of money derived from the mandatory levies, surpluses on trading activities (these may enjoy a favourable tax position relative to ordinary traders) and subsidies from universities or governments.  Presidents and other officers of these organisations are often paid handsomely, and other sweets of office are available to them one way or another.  These include access to offices, telephones, stationery, computers and word-processors, hospitality allowances and motor-cars.  The fight for the sweets leads to the formulation of horse-trading coalitions, the setting up of dummy clubs to increase voting strengths and to get grants and so forth.  For years the atmosphere of the goings-on of the Australian Union of Students and some individual campus guilds was one of rancour, cynicism, organised lying, greed, and some physical violence -- an interesting comment on the value of student politics as a form of political education fitting one to take part in the government of the nation.

The importance of the distribution of money can be seen in the attempts made by student guilds to maximise revenues by measures such as a special levy on first-year students who have not yet had a chance to vote or sample the worth of their "representative" organisation.  The limits to higher charges on students are only the practical limits of University Senate, or Council, approval, and the desire for re-election.  (As the student body tends to change rapidly from one year to the next the importance of this last as a discipline is diluted.)  An Arts Degree takes three years to complete, so there is a high turnover of constituency each year.  Certainly some students take longer than three years -- some a great deal longer -- but then again other students drop out or otherwise leave the University prematurely.  By requiring students to pay on enrolling, the university administration acts as a compliant bag-man and enforcer, often conducting little scrutiny of how the money is spent.

The so-called "student-power" demonstrations of the late 1960s showed how incredibly weak and conciliatory university administrations can be towards student politicians.  Their firmness and discipline tends to be directed more towards those who try to buck the system by refusing to pay the student unions' bag-men.

Sporting, debating and drinking clubs are involved in the scramble for money like others.  A move at The University of Western Australia to limit the subsidy of any club to an amount equal to the students' guild fees was attacked in a vocal campaign by some sports clubs to ensure that other students subsidised their recreation.  But these clubs find it increasingly difficult to compete with off-campus clubs for student membership:  most students, outside academic hours, want to get as far away as possible from the atmosphere of guild politics.  In any case, and for a number of reasons, the whole ethos and tradition of Australian university life means that such clubs are not nearly as important as they are, or have been, in Oxbridge or Wilhelmine Germany, or in the American college and Ivy League university traditions.

The institution of the compulsory student union is often praised as a pillar of democracy, an organisation which helps to promote the democratic ideal and which provides undergraduates with experience in its functioning.  This notion has never had much to back it up beyond romantic visions of student life and calculating vested interest masquerading as idealism.  If students saw their student union as an example of democracy, they would be left with contempt for democratic ideals.  Indeed, it seems probable that many who use it as a political model are left with precisely such contempt.  However, the student vote at annual elections represents a fraction of all students:  very rarely as many as 20 per cent.  My own impression is that the longer people are at tertiary institutions the less likely they are to vote.  Considering that universities are small communities where a far larger proportion of people can be expected to know the candidates personally than is the case in elections in the outside world, the minimal nature of student participation is obvious.

It is difficult to tell what opinions most students hold or to determine whether any particular meeting attended by some minority or other is representative.  General meetings (usually held at lunchtime) rarely attract large numbers, and at the end of the official lunch-hour students in serious courses often have to leave to attend classes, leaving the field to the activists.

The recent case at The University of Western Australia, which followed the election (by a large majority) of a Guild President and her associates who were opposed to the ruling clique, shows the hunger to stay in power which motivates some student politicians.  The election was ruled invalid and this was justified by a reading of the Guild Constitution which held that a keg of beer was "audio-visual material".  The Guild tribunal which made this decision consisted of two students from the defeated faction and an academic from the University's Faculty of Law.  The two-to-one decision was made despite advice to the contrary, and a dissenting vote from the academic member of the tribunal.  It was not until the commencement of a Supreme Court appeal that the election tribunal changed its mind.

If people express dissatisfaction with the way their student organisation is operating the usual response from the student activist and administration spokesman is to tell them to "get involved".  This is often little more than an assertion of the possibly true, but somewhat unedifying, sentiment the implications of which are expressed in the rhyme:

The good old rule, the simple plan,
is they should take who have the power,
and they should keep who can.

As it happens, the effort required in "getting involved" is for most people quite disproportionate to the results.  It entails cultivating allies and identifying enemies, organising voting coalitions and numbers, trading favours, attending interminable meetings and otherwise taking part in the whole process of politics.  On some campuses and in AUS it has at times involved receiving unpleasant and intimidating abuse and even physical violence.  For people who only want to rid themselves of the burden of compulsory fees this is a heavy price to pay.  "Getting involved" means having to trade-off priorities, with a sacrifice of such things as academic study, family life, leisure activities and productive employment.

In any event, as the experience of successive generations of active students at The University of Western Australia over the last 15 years has shown, it is also futile.  Despite intensive lobbying on the Guild Fees issue, a series of Coalition and Labor State Governments did nothing about it, beyond the Coalition Government's renaming the Guild Fee a "Services and Amenities Fee".  The fee was still collected by the administration and passed on to the Guild, and the change actually increased the area of the fee's oppressiveness and compulsion:  because it was no longer officially a fee to the Guild of Undergraduates, exemptions for conscientious objectors and postgraduate students were removed.

Voluntary membership of guilds would probably bring them more into line with other voluntary organisations that need to be responsive to their members' wishes and show demonstrable benefits.  It is the fact that you are a student that should entitle you to representation, rather than the fact that you are a member of a faculty, association, or guild.


THE PHILOSOPHICAL JUSTIFICATION OF VOLUNTARISM

In 1977, after membership of the Guild of Undergraduates at The University of Western Australia became theoretically voluntary, enrolling students were presented by the university administration with a form containing two boxes marked "yes" and "no", which they were required to tick to indicate whether they wanted to join the Guild or not.  In 1979, following an unsatisfactory result from this process, the form underwent one little change:  only a "Yes" box was provided!

Enrolling students hardly needed a letter from authority to the effect that it was "very much in their interests" to join the guild.  The ethos of the offer they couldn't refuse had already been made abundantly clear, with all that it implied.

Compulsory membership of student associations is an affront to principles of liberty.  Some might consider it a minor infringement, but it occurs in the very institutions which are supposed to encourage tolerance, mutual respect, and the means whereby an open, democratic society preserves freedom and liberty.

Clauses allowing conscientious objection do not guarantee freedom of association -- at best, they merely allow those dissatisfied with compulsory student unionism to register their dissent.  Student activists and others of the Vietnam period declared that conscientious objection did nothing to limit the evils of conscription.  It is strange indeed that their latter-day descendants are satisfied with such an obvious move to marginalise anyone who disagrees with the present state of affairs.  While users are not required to pay for those services of which they wish to take advantage, the conscientious objector is asked to feel a debt to other students which should not be his to bear -- and besides, he pays the money anyway.

Membership of a student union frequently involves implicit consent to further action on an individual student's behalf.  A student may automatically be made a member of a faculty organisation and state or national organisation with which the union is affiliated, and, of course, be compelled to subsidise its various activities and publications at the same time.

Student unions, it must be emphasised, are neither regional governments nor genuine trade unions, though apologists for compulsion almost invariably seek to justify it by using one, or both, of these comparisons.

In a debate in the "Higher Education Supplement" of The Australian, published on 10 September 1986, a union president claimed that:

Compulsory unionism and the obligations it entails are a necessary and basic part of unionism, student or otherwise.  It is one in all in, there is no other way that union members' interests can be served.

On the same page, a fellow president expressed a belief that:

The whole "union" fee should be considered as a tax similar to council rates rather than compulsory membership of a political organisation.

Similarly, in 1979, the Vice-Chancellor of The University of Western Australia, Professor Street, argued that:

To convert the Amenities and Services Fee to a voluntary fee would be analogous to converting income tax or local government rates to a voluntary payment.

These arguments are little more than loose analogies, neither of which fits the student union.  They are usually used without considering objections to compulsory trade unions and the role of local government.  They are also inconsistent ideas.  A local council covers a region, while a union covers people in particular employment.  Were a council to provide services such as libraries, refuse collection or footpaths for some, but not all of its residents, it would not fulfil its function.  Conversely, a trade union impinging on people outside its industry is involved in demarcation disputes.

The State ultimately justifies its existence, compulsory membership, and those charges levied to support it, on the grounds that a monopoly on coercion is needed to ensure the liberty of the citizens which it serves.  In claiming that it is like a local government, the student union seeks a slice of this monopoly to force on students membership and payment of fees.  At this level the arguments in favour of compulsory membership appear unsavoury.  The student union has none of the basic elements of the state.  It defends no territory, apprehends no criminals, guarantees no contracts and oversees no lands titles.  All it does is provide some services which can be delivered by alternative means and provide some limited representation to higher authorities.

By appealing to the analogy of local government, proponents of the compulsory union are on dangerous ground.  It provides, if anything, ammunition for the advocate of voluntary student unionism.  There is a growing trend in local government towards the universal franchise.  This allows all residents of an area to vote, as well as the rate-payer.  This is promoted as being highly democratic.  What it does is remove the link between direct monetary contributions to the council and a right to votes, services or representation.  To carry the analogy over to student unions, the payment of membership fees would become irrelevant to access to representation on university decision-making bodies.  For example, representation of students on University Senate and Faculty boards might rely not on membership of the Guild but, as should be the case, only on the fact that one is a student of the University or Faculty.  Such a change would also remove one of the more common objections to voluntary student unionism, namely, that it would result in poor or inadequate representation of student views to the University.

Is the student union like a trade union?  On examination the similarity stops at the name and the pretensions of some student union office-bearers.  The trade union is designed to negotiate with employers.  It has the sanction of the withdrawal of labour, the go-slow and other such devices.  But the relationship of a student to the university is much closer to that of a consumer, the only difference being that the product (education) is paid for by others.

Since places are at a premium, students are buyers of education in a sellers' market.  Even if it were conceded that the arguments in favour of compulsory trade unionism were valid, they are irrelevant in the case of compulsory student unionism.  Compulsory trade unionism is usually argued for on the grounds that everybody should pay for the benefits that a few people work for.  The benefits that students might receive from membership of student unions are not those of salary, working conditions or health and safety.  They are not derived from total productivity.  They are not the reciprocal obligations involved in the payment of a salary for work done.  Indeed, most benefits are fairly easily made subject to a user-pays principle.

In his 1979 defence of compulsory student amenities and service fees, even Professor Street admitted:

It is true that without the income from a compulsory Amenities and Services Fee, some of the guild's enterprises could be converted in their operations to become independent, self-financing entities (or) could be converted to leasing arrangements by tender.

Further, unlike a professional organisation, the guild does not maintain professional standards, conduct examinations, or police ethical codes of conduct.  Thus, these analogies do not justify compulsion.  What remains?

The proponents of compulsion are left with the tortuous and comic argument that any attempt by the government to remove the present statutory compulsion will impinge on the "autonomy" of the student union, or will be "statutory encroachment on the guild's autonomy".  That is, on the freedom of the student body to compel people!

The "autonomy" argument -- a piece of pure Corporatism -- suggests that voluntary student unionism will impinge on the freedom of the student body to make its own decisions.  However, governments, which claim that they do not have the power to ensure freedom of association on campus, already enforce compulsory membership through legislation.  They often influence the operations of universities through the provision of discretionary grants and finance for selected research projects.  Surely if government has a basic function in our democratic society, it is to preserve the greatest possible amount of freedom for individuals and to protect the rights of individuals.  Some people may not be aware of the implications of what they are saying, but to demand special rights for collectives is to point the way to Corporatism and perhaps ultimately fascism in the classic, Mussolini sense, and we should not be afraid to expose it for what it is.

Advocates of special rights to protect the autonomy of student unions over their members are waving a red herring.  The opposition to voluntary student unionism is not a matter of logic, reason, or ethics, and the arguments raised in favour of compulsion break down as soon as they are examined.


SUMMARY

Compulsory student unionism provides the vast majority of students with few, if any, benefits.  It works upon a political model to which many students are opposed, and helps unrepresentative extremists.  It cannot be justified in theory or practice, and does nothing but harm.  It is unethical.  It damages the whole concept of democratic society, especially because the group it affects, that is, university students, tends to pass into influential positions in the community.  Like all such arrangements, its destructive effects spread beyond its immediate sphere, doing their bit to damage and corrupt society.  Every indication is that individual students are better off left to utilise their own resources and to look after their own interests voluntarily.



CHAPTER 3
THE BRITISH EXPERIENCE

Student unions in the United Kingdom grew out of the Oxbridge tradition of Junior Common Rooms (JCRs) which provided amenities and a social forum for residents of university colleges.  Most JCRs are still non-political bodies where organised abuses are minimal.  As non-collegiate universities were established in the 1960s, student unions were formed to serve functions similar to the JCRs.  Since membership of the JCRs had been an automatic occurrence on joining the university college, membership of student unions was also made compulsory.  Today, in tertiary institutions, compulsory membership of student unions is entrenched in the Statutes or Orders of Privy Council that establish each institution.


FINANCING

Student unions in Britain are paid for directly by the taxpayer.  Before 1980, student unions were financed by each student paying approximately £90 per annum from his education grant.  Local authorities were then directed to pay a "Capitation Fee" to the tertiary institution which paid the money to the student union.  This fee was negotiated between university authorities and student union representatives without the local authority having any say in the amount it paid.  Consequently, there was no incentive to restrain the level of the fee as the institution was not paying.  It was merely keen to appease the student union and the student union wanted more money.  Growth in the Capitation Fee was accelerated by the inefficiency of the student unions which were not accountable to the authority paying the fee.

Student union financing changed on 5 February 1980, when it was announced that funding for student unions would come out of the institution's recurrent grants, and thus the money would come from the University Grants Committee rather than local authorities.  Theoretically, at least, student unions became more accountable as they had to negotiate for funding with university authorities in direct competition with academic departments.  This change did nothing, however, to solve the problem of compulsory membership of student unions.


OPERATIONS

Student unions in Britain combine the functions of students' associations, student representative councils, student unions and sports unions on many Australian campuses.  The British student union allocates funds for social, political and sporting clubs and runs bars and shops as well as providing catering services.  It may also produce publications and give advice on welfare and accommodation.  The latter role may, however, merely duplicate services offered elsewhere in the university.  The executive officers of student unions are full-time student politicians receiving student grants (sabbaticals) projected for 12 months.  There are generally four such sabbaticals at each institution, supported by an administrative staff.  These student politicians are generally inexperienced in the field of welfare and spend much of their time politicking.

Most unions have an ineffective system of participatory democracy where Union General Meetings are the sovereign policy-making bodies.  Quorum levels are often less than 5 per cent of students attending the institution.  These poorly-attended meetings are drawn out and dominated by politicos.  A 30 per cent turnout at student union elections also attests to the general lack of interest in the compulsory union.

Abuses of student union money mirror those occurring on Australian campuses.  Attempts to make payments to outside political organisations are commonplace.  These payments are ultra vires since student unions in Britain are strictly charitable bodies.  This is due to the fact that they are financed out of the charitable funds of their institutions so their funds are subject to the charitable trusts of the parent institution.  The charitable status of student unions was established in London Hospital Medical College v. Inland Revenue Commissioners. (1)  This case also found that the use of student union funds for recreational and sporting purposes for the benefit of students was a permissible charitable use.  The court held that such payments furthered the educational purposes of the institution.  On the other hand, expenditure on extraneous political campaigns is unlawful. (2)  There has not yet, however, been judicial interpretation of expenditure by student unions on political campaigns directly related to student issues.  Courts would probably prohibit such expenditure because there is a general rule that political objects cannot be charitable.  Grants to company-based political clubs is another area which has yet to be challenged in the courts.

Since 1978 furtive and devious methods of making covert ultra vires payments have developed.  By affiliating the student union to another organisation, expenditure on outside groups has occurred.  Unions claim that these payments are not unlawful as the student union is receiving a direct service from the organisation in return.  The "service" is information or posters on the subject for which the organisation campaigns.  More common than affiliation is the setting up of political societies and -- as in Australia -- the proliferation of fraudulent societies set up to merely sap union funds.  Other examples of financial irregularities are large union campaign budgets and travelling expenses for union officers to attend conferences.  Most campuses are also affiliated to the National Union of Students (NUS).  Once an institution affiliates, membership to the NUS is compulsory for individual students.  Several thousand pounds a year are paid to the NUS by each member student union.

In total, the British tax-payer is forced to pay £25 million to fund student unions around the country and over £1 million to finance the NUS.

In October 1983, the Attorney-General's Office issued guidelines for expenditure by student unions.  It was stressed that financial support for political campaigns was not justifiable unless the issue directly affected students as students.  Financial abuse has continued despite the guidelines, although in 1984 injunctions restrained the Glasgow University student union from funding coaches to a Campaign for Nuclear Disarmament rally at a nuclear base.  To achieve voluntary membership, legislation is needed to amend the statutes of tertiary institutions which currently require membership of the student union as a condition of entrance.  Thus, the situation is similar to that in Australia and, like that in Australia, has been allowed to continue, despite the affront to ordinary freedom involved, under both Labour and non-Labour governments.  As in Australia, too, it has depended on the sometimes tacit and sometimes active support of university administrations.



CHAPTER 4
THE AUSTRALIAN UNION OF STUDENTS:
LESSONS FROM THE PAST

From the early 1970s to its final collapse in 1984, the Australian Union of Students (AUS) was one of the most extreme and irresponsible "representative" organisations in Australia.  That it was able to continue for such a long period without responding to the views and desires of its membership was due almost wholly to the way it was funded.

AUS was organised on a system of campus affiliations whereby the student guild, representative council or association on each campus was affiliated to AUS, paying a set fee per student.  All the guilds, councils and associations were (and still are), funded by fees collected from all students by the university or college authorities.  Payment of these fees was a condition of attending the institution.  All members of the campus bodies were automatically regarded as members of AUS.

On many campuses, membership of the guild, association or council (and thus of AUS) was compulsory;  the activities of AUS could not therefore be protested by resignation.  Even on those campuses where membership of the campus body was voluntary, refusing to join was largely pointless because the fees which supported this body and AUS remained compulsory.

The history of AUS is thus very much the product of the implicit support of the governing councils and senates of the Australian universities and colleges.  This support was for the most part authorised and approved by State and Federal governments.  In denying students freedom of association, the universities and colleges created and maintained a body which attacked the values held by most students and by society in general.  Presumably they thought it was for the students' own good.


THE HEYDAY OF A.U.S.

In 1971 the National Union of Australian University Students opened its membership to students at the new Colleges of Advanced Education and changed its name to the Australian Union of Students.  AUS then purchased a travel company, AUS Student Travel, which offered students discounts and cheap package tours.  The AUS Friendly Society offered cheap health insurance.  As these benefits were only available to students at member campuses, AUS was able to increase its membership until almost all student bodies had affiliated.  The large increase in funding this produced allowed a dramatic expansion of AUS's bureaucracy and in the scope of its activities.

Part of the problem was that AUS was controlled by a coalition of Trotskyites, Maoists and Communist Party of Australia (CPA) members who had gained power in the student ferment of the late Vietnam War period.  They converted AUS from an organisation dealing with the interests of students to a revolutionary propaganda machine with a sideline in supporting Third World terrorist organisations.

The Maoist-controlled AUS Media Department pushed the official line through Axis (the "national student newspaper"), an "Alternative News Service", an "Alternative Graphics Service" and education news and radio services.  The other departments of AUS also ran various campaigns and distributed large amounts of printed material.  All these publications and services had an extreme political bias and supported a number of overseas terrorist groups including the PLO.  They also attacked pro-Western governments such as those of Israel and Singapore and supported Hanoi and, at times, the Pol Pot regime.  The students who were forced to fund these publications were not consulted about any of this, and their wishes were not taken into account.  AUS publications and those on the individual campuses could also be relied upon to turn, under the apparently benevolent eye of administrations, a torrent of abuse on students who publicly differed from them.  There was no evidence that the majority of students wanted any of this, and considerable evidence that they did not.

In addition to its propaganda campaigns, AUS money was sent to many radical or even revolutionary groups, a number of which were overseas.  For example, among the numerous direct grants made by AUS in 1977 were grants of $2,000 to the Emergency Travel Fund for Thai Activists, $1,000 to the Pacific Peoples' Action Front, $1,500 to the Campaign for Political Asylum for Hishammuddin Rais, $3,000 to the campaign against the Five Power Defence Arrangement, and $1,500 to a campaign to highlight the plight of squatters in the third world.

In 1978 Sandy Thomas, the Victorian Regional Organiser, alleged in his Report to the Annual Council that Maoist activists in the Overseas Students Service had been siphoning off money to the Communist Party of Malaya.

A number of pro-PLO and anti-Israel resolutions were passed at AUS's 1974 and 1975 Annual Councils.  This led to comments that AUS was the only proprietor of a travel business that supported hijacking.  In each of these years opponents of these resolutions took the issues directly to students through the "constituent ratification" procedures.  On both occasions the resolutions were overwhelmingly defeated.  Despite this, AUS continued to support the PLO in various ways.  For example, it continued to distribute the local PLO newspaper Free Palestine and in 1979 gave $1,800 towards a tour of Australia by a PLO delegate.

The financial resources of AUS peaked in 1976 when it had a budget of $667,669 (equivalent to over $2 million today).  Among expenditures in that year were $74,550 on "social action" campaigns on environmental issues, "women", overseas students, international affairs and culture, approximately $80,000 on media, $7,500 on national affairs which included campaigns on defence and Medibank and a grant of $27,520, with no strings attached, to the Black Resources Centre in Queensland.  The total spent on salaries and administration (including printing, stationery, telephones and travel) was $376,459 or 56 per cent of the budget.  Education received only $68,387 which included the $1000 for AUS's "top priority" for that year, TEAS (Tertiary Education Assistance Scheme).


DECLINE AND FALL

Everything started to change in the following year, 1977, when, first, the Maoists went on a "Smash the Bureaucrats" campaign, inspired perhaps by the Gang of Four.  Second, a good deal of press coverage was given to the bashing of several non-left students fighting for the reform of AUS.  These bashings did not occur as a result of the heat of debate, but were plainly premeditated and well-planned;  the students, including at least one woman, were followed after meetings and set upon.  Third, AUS Student Travel collapsed owing $3.5 million and stranding about 5,000 students around the world with useless airline tickets.  With the loss of AUS Student Travel, AUS's attraction for students was greatly diminished.

In 1978, Mr Justice Kaye of the Victorian Supreme Court delivered judgement in Clarke v University of Melbourne and Others. (3)  The court ruled that grants of a political nature by the Melbourne University Students' Representative Council and AUS were ultra vires and in violation of their constitutions.  (Mr Justice Kaye also declared the University of Melbourne's compulsory "General Services Fee" from which the SRC and AUS were funded, to be ultra vires the University.)

These developments and the PLO debates of 1974 and 1975 led to a reform movement within AUS.  The reform movement was based on a loose coalition of Liberal, NCC, right-wing Labor, and Jewish students.  It made considerable progress but was ultimately frustrated by a gerrymandered voting system.  In 1977 the reform coalition took a proposal for the direct election of AUS office-bearers to students on campus via the "Extraordinary Resolution" procedure.  The direct election of office-bearers would have made AUS more responsive to students and would have lessened the power of factional organisers operating behind the scenes.  One of the few attempts at an argued defence of the existing system of indirect elections was given by Michael Munday, then President of the Tasmanian University Students' Representative Council.  He stated that he was opposed to direct elections because they would lead to "the AUS leadership being chosen by the decision of an ill-informed mass". (4)

More than 15,000 students across Australia voted for direct elections and only 5,000 voted against.  The proposal was, however, defeated owing to the "collegiate" system of voting.

This system meant that voting was by campuses, with the votes of each campus being exercised according to a decision taken at a general meeting of students at that campus.  Thus it was possible for a meeting of fifty students at one campus to out-vote a meeting of five hundred students at another, depending upon the set voting strengths of the campuses.

Furthermore, the number of votes exercisable by a campus was not directly proportional to the number of students;  there was in fact a bias in favour of the numerous small campuses.  Campuses with five hundred students had two votes, whereas the University of Melbourne, with approximately fifteen thousand students, had twelve votes.  The University of Melbourne had thirty times as many students, but only six times as many votes.

Another notable feature of the gerrymander was that campuses which did not vote on a reform proposal were deemed to have voted against it.

The high tide for the reform coalition was the Special Council in 1978, when the coalition had about 40 per cent of the collegiate votes.  If the voting strength of each campus had been directly proportional to the number of students at that campus, the reform coalition would have won control at that time.  But as the formula used to determine the voting strength of a campus delegation at Council was the same as that for Extraordinary Resolutions, there was a marked bias in favour of small campuses.  This greatly favoured the extremists, as the reform coalition drew most of its support from big campuses with large bodies of politically alert students.

The Left's strength in small campus delegations was often due to the fact that it had a number of effectively full-time organisers (frequently paid by AUS to be Regional Organisers, Vice-Presidents, research officers, or even "cleaners" and "mail men"), who could recruit, train and support Left activists at these campuses.

Because of the gerrymander, the far-Left alliance retained control of AUS in 1978.  This alliance, however, no longer included the Maoists.  The judgement in the Clarke case declared a number of grants sponsored by the Maoists to be illegal and the Communists and Trotskyites seized on the opportunity created by this to attack their former allies.  They sacked the Maoists employed in the Media Department and abolished the Maoist controlled Overseas Student service.

When the moderate proposals for reform of the departments and the systems for choosing delegates and officers, for limiting the activities of AUS to educational and student issues and for a change to voluntary individual membership were all rejected, a campaign to disaffiliate campuses was launched by the moderate groups.  It took two Special Councils in 1978 and 1979 and the disaffiliation of campuses with approximately half the total former membership of AUS before any reforms were accepted.  Even then the changes were made only reluctantly.  Voluntary individual membership was never accepted because the political extremists realised that it would produce executives and Councils responsive to the needs and desires of students rather than active in revolutionary causes.

As the strength of, first the Trotskyite, and then the CPA groups waned and that of the Labor Caucus (which had strong links with the Victorian ALP Socialist Left) grew, attempts were made to present a new image.  The change was only on the surface, however, as AUS's policy remained very radical and little of practical value was done for students.

Among scores of extremist resolutions passed at the 1983 annual council was a demand for the "establishment of human relationship courses in schools which take into account the real experiences of women and which actively counter myths and inaccuracies concerning female sexuality, including lesbianism, and which explore alternatives to exclusively genital-centred sexuality".  AUS declared 1983 to be the International Year of the Lesbian.  There was an announcement that "all men exercise the threat of rape, intentionally or not".  The Australian socio-economic system was condemned as denying "the most basic of rights to both the individual and the majority".  The Council supported the use in universities and colleges "of assessment methods determined by staff and students such as self-evaluation and group assessment, rather than competitive assessment methods".  There was a call for the abolition of entrance quotas at law schools so that anyone would be admitted, subject only to a requirement that they have a "commitment to study and learning".

1983 even saw a re-enactment of the PLO debates of the mid-1970s with a pro-PLO, anti-Israel, resolution being passed at the Council only to be overturned by students through the "constituent ratification" procedure.  However, in October of that year, Melbourne University Council specifically approved the payment to AUS of the whole of the AUS component in the compulsory "amenities and services fee" paid by students.

In 1984 AUS Council declared marriage was a form of prostitution:  "Prostitution takes many forms and is not only the exchange of money for sex.  For example, prostitution in marriage is the transaction of sex in return for love, security and housekeeping".  These, and many other resolutions, demonstrated the gulf between the values of the extremists who controlled AUS, and the great majority of the students who were compelled to fund it.

The end of AUS came later in 1984 when three of the largest remaining campuses, The University of Adelaide, The University of Western Australia and the Western Australian Institute of Technology all pulled out.  This meant that only a few of the 19 universities and none of the institutes of technology were affiliated, and that the bulk of the membership was at small colleges of advanced education.  Michael O'Connor, the then President of AUS, called for a "Student Summit" to discuss the future of student unionism at a national level.  Representatives from all campuses, whether affiliated to AUS or not, were invited.  Just before the Summit he stated to the press that AUS should be wound up and replaced by a new organisation.

Although AUS was indeed wound up at a meeting later in that year, the Student Summit and the National Student Convention which followed failed to produce a new national student organisation.  They did, however, bring acknowledgement of the correctness of many of the criticisms directed at AUS over the years, as did the "Cross-Campus Ballots" which were held on a number of issues following the Student Summit.  On the question of the type of membership system, 47 per cent of those participating in the Ballots voted in favour of voluntary individual membership, without an organised campaign by the supporters of voluntary membership.


SUMMARY AND CONCLUSIONS

But for the system of compulsory funding, there would never have been a national student organisation as unresponsive to its membership as was AUS for so long.  In the end, AUS's failure to respond led to its collapse, but this was only after many years and after an extraordinary amount of work in an attempt to reform it had been done.  If a large number of responsible students had not contributed an extraordinary amount of effort over many years, the AUS of the mid-1970s might still be with us, consuming massive amounts of student money in attempting to destroy our society.

It should be remembered that the students who fought for the reform of AUS often did so at the expense of their academic work and their personal lives, and sometimes suffered physical violence, or were threatened with it.  They received little help from groups in the general community and were positively hampered by a number of vice-chancellors and university councils.  Year after year state governments and university councils watched with apparent equanimity, while students were compelled to fund apologists for terrorism and even supporters of terrorism.

Students should not have to fight to prevent their names and their money being misused in this way.  The membership and funding of student organisations at both campus and national level should be voluntary.



CHAPTER 5
EXTREMISTS AND VICE-CHANCELLORS

"Bubble-gum politics" or the "hothouse" of student political life have been derisively dismissed by hardbitten parliamentary, Party, and trade union politicians.  Episodes of student-sponsored chaos in Italy, France and some other European countries seem to such observers to be too remote to be taken seriously.  The Baader-Meinhof Gang's campus origins and its winning of some ideological hegemony in some European universities do not even merit consideration.

Such luxurious ignorance was at least temporarily dispelled in Australia by a campaign carried out during the 1970s by a small group of centre, left and right students.  Effective resistance by what was at first a small number of Jewish and other students to AUS and other extremist groups acted as a catalyst to activate many more.

Jewish students emerged as a serious force in Australian student life during 1974 and 1975.  They played a leading part in mobilising opposition to the extremist Australian Union of Students which had advanced a series of hard-line pro-PLO resolutions for student approval (opposition to the extremists of AUS was not, of course, confined to this issue).

The PLO resolutions called for the elimination of Israel as well as having practical indications such as a barring of cheap student flights to Israel.  In 1975, using the funds compulsorily extracted from all students, the AUS organized a speaking tour of PLO students (GUPS).  Some of the biggest campus meetings since the Vietnam War saw these resolutions overwhelmingly defeated -- at, say, The University of Western Australia, Monash University or UNSW.  An indication of how committed the extreme left leadership of AUS was to the PLO was that in 1977, Tasma Ockenden, the 1976 AUS President, went to work for the PLO in Lebanon.

Time and again in the last few years of AUS's life, the extremists in AUS were defeated by a coalition of moderate Labor, Liberal, Christian and Jewish students.  Its members favoured reform from within (that is, from within the universities, although many came to feel that AUS itself was beyond reform) and, furthermore, reform by free consent, by mustering arguments and allies through democratic methods of persuasion.  In the end they demonstrated their ability to mobilise many of Australia's tertiary students for such reforms.

It was perhaps an illustration of the law of unintended consequences that the campaign which moderate students were forced to mount against the abuses of AUS gave rise to a new spirit of co-operation between a number of moderate and democratic groups of different parties, forming associations that have outlasted AUS itself, and giving rise to something of a beneficial sharing of ideas.

Victory, however, did not come easily.  Apart from anything else, successes on many individual campuses were marred by the absence of any law comparable either to industrial law, which ought to ensure fair union elections, or to ordinary electoral law.  Thus, votes by 15,000 to 5,000 students on various large campuses, such as the University of Melbourne and the University of Sydney, to directly elect the paid officers of AUS (such as the President, the Women's Officer and the National U Editor) were avoided and ignored by the AUS.  Campuses where no vote took place were considered to affirm the existing collegiate electoral system.  At other, extreme-left "rotten boroughs", where no debate for the general student body was permitted, some student unions recorded votes in the AUS's favour.  After this frustration with the democratic process in 1978, the collection by the University of Melbourne of the payments of $2.50 per student on behalf of AUS was successfully ruled beyond the powers of the University by Justice Kaye, after an individual student, Robert Clarke, took the matter to the Victorian Supreme Court.

The situation of Alan Weiden, former secretary of the Swinburne Student Union, was typical of the time.  Weiden said:

As a Jewish student, I feel the situation is tense.  I have previously been intimidated by threats of violence.  I find continued anti-semitism in the Swinburne papers and news-sheets appalling, designed to eliminate my effective opposition to the extremist activities of the Swinburne Student Union with its annual budget of $200,000 [in 1978].

I am not afraid or unwilling to combat my political opponents, but ... I have earnestly attempted to pursue all other options.  But when the rule of law does not seem to apply to our student union, where payments of a flagrantly illegal nature are made, when vicious smears and libels are presented as news, and when college authorities hand over hundreds of thousands of dollars of compulsorily-acquired student money, one becomes desperate for some semblance of sanity to be restored. ...

Peter Costello, now a leading Melbourne barrister, argued that:

AUS is not a union, but merely an interest group.  It does not affect the livelihood of the vast bulk of students.  Returned soldiers do not have to belong to the RSL, nor do unmarried mothers have to belong to the unmarried mothers' union.  The whole compulsory unionism debate about AUS is designed to hoodwink students and university administrators into supporting the extremist AUS leadership.

But prior to the Supreme Court ruling, it would seem that the university administrators needed no encouragement to support AUS.  Again and again, vice-chancellors bent over backwards to support the extremists.  The actions of the University of Melbourne clearly showed this.  It insisted on the collection of the AUS fee because of the potential precedent that non-payment would constitute for the much larger Union fee.  It was far more concerned with the financial and bureaucratic problems that would fall to it if student unionism became non-compulsory than it was about what the compulsory AUS fee was to be used for.  In the face of the moderate students' opposition to the AUS fee, the University gave students four days in which to pay their fee and threatened not to enrol students in their academic courses if they did not pay.  Regardless of whether one wanted to join AUS or not, the University demanded the full fee and then, in a letter from the Registrar to this writer, explained that "the University's interpretation of amendments to the Melbourne University Act was resolved after advice by a committee comprising expert legal opinion".

The ANU and The University of Western Australia directed staff not to admit to lectures those students who did not pay student union fees -- fees of which a portion went, through affiliation, to help pay for AUS and its campaigns.  The student extremists at Melbourne even decided to pay over to AUS the money for approximately 3,000 students who explicitly refused to join AUS.

Students were amazed at the way in which staid vice-chancellors continued to make them support a political machine taken over by extremists who made no attempt to hide the fact of their control, and who were, in many ways, linked to extremist organisations in the world off-campus.  This was only a few years after "student power" displays and demonstrations, organised by people in much the same sort of political culture and ideology, had brought many universities in Europe and America to a standstill (in some cases with disorders involving loss of life as well as the disruption of studies and careers) and seriously disrupted some universities even in Australia.

As documented elsewhere, moderate students opposed to AUS were assaulted on several occasions, not as horseplay or in the heat of the moment, but in planned and premeditated acts of intimidation and thuggery. (5)  The power of AUS, for all its bash-merchants, could have been dissolved virtually overnight if governments and university administrations had acted to make the decision of any student to become a part of it voluntary.  This would have ensured its organisation would be responsive to what the members, if any, wanted.  What was required was not any suppression or any fresh coercion, but simply a removal of coercive power from a body which had no entitlement to it.  The great effort which moderate students had to make, often at the sacrifice of their own personal interests, should never have been necessary.

It is interesting to consider whether or not the establishment -- the governments and university administrations who continued to force students to support AUS -- ever wondered, or cared, what students thought of them and what kind of an image of their own values they were projecting to students at large.  Why the establishment seemed so unwilling to permit freedom of association for students, either on individual campuses or nationally (and the one necessarily implied the other), remains a mystery to many, although other papers published here suggest what some of the causes of this behaviour were.


THE SCENE TODAY

The unlamented demise of AUS on 19 December 1984 was the culmination of ten years' effort by the coalition of moderate students I described above when I wrote the first version of this article for the Australia/Israel Review.

Jack Mundey argued that AUS's taking up of the PLO issue was the greatest tactical mistake made by the left (by which he meant Marxists to the left of the Labor Party) in the 1970s.  This is probably true.  During the Vietnam War the campuses provided the most important recruiting ground for the various communist and other extreme left factions and their entryists into the ALP socialist left.  The successful battle against the PLO resolutions in AUS not only led to the destruction of the AUS, but had more important, longer-term implications.  The great reduction in the influence of the far left in Australian politics and its impact on the Labor Party and Australian public policy is directly traceable to the struggle within AUS over the PLO.  Simply put, the absence of a sheltered workshop for the extreme left deprived them of a cadre-generating institution.

A remaining mystery about AUS is the fate of its capital and records.  The organisation was to have been legally dissolved two years after its political demise and any remaining assets or records distributed back to its former member campuses.  As far as I know this has not yet happened.



CHAPTER 6
THE ANU STUDENTS' ASSOCIATION AND OTHERS

THE ASSOCIATION

The Australian National University is a relatively small campus with only 5800 students in 1985.  Each undergraduate is required by the University Council under its powers in s.27(1)(0) of the Australian National University Act 1946 to pay a "General Services Fee" which is distributed to the Students' Association, Sports Union, Union, and Research Students' Association.  Students are given the option to join these bodies although they may not withhold their fees if they choose not to join.  Not even the officers of the Students' Association claim that this is a realistic form of voluntary unionism.  In 1987, $118,000 of the GSF money is allocated to the Students' Association which amounts to approximately $24 for first-year students and $21 for re-enrolling students.

In theory, the ANU Students' Association (ANUSA) exists to represent students in matters affecting their common interests, to promote the social life of members and to support and co-ordinate the activities of clubs and societies other than sporting clubs.  Any knowledge of the affairs of the ANUSA will show that, in practice, it is concerned with promoting political ideals.  What is outlined here is typical of many other students' associations and student representative councils on Australian campuses.


THE STUDENT POLITICIAN AND HIS PEERS

The executive officer of the ANUSA is an elected president.  There is also a paid editor or team of editors of the student newspapers.  In addition there are unpaid members of the Student Representatives' Council and its associated committees.  These student politicians have free access to telephones, stationery, postage, photocopying and printing facilities.  Politicos from both sides of the political fence are guilty of plundering these resources and will continue to do so until they are made accountable to the students who fund these perks.  This waste is never brought to the attention of students because it is not in the interests of the student politician to do so.

The sovereign policy-making body of the ANUSA is the Students' Association General Meeting.  Attendance is usually poor with a quorum set around 1 per cent of the student population.  This is hardly a working example of participatory democracy.  Stacking by either left or conservative students is common and those without a grasp of the standing orders rarely get to put their views.  The meetings are drawn out and dominated by student politicians and frequently deal with issues which have no relevance to students as students.  Disarmament, South Africa and feminism are at times discussed more than educational issues.  Procedural wrangles are common.

Student elections are also farcical.  No more than one in four students takes the time to vote, even though thousands of dollars are spent on election campaigns by some groups.  Student "apathy" shows that most have no interest in their compulsorily-funded students' associations.

The political bias of the ANUSA can be seen through its publications which include the Counter Course Handbook, the Orientation Week Handbook and the student newspaper Woroni.  The Orientation Week Handbook has an air of respectability as it contains official welcomes from the Vice-Chancellor and Dean of Students.  In 1986 the editor called this journal a "manual of survival at the ANU".  Page after page was devoted to feminist views on such topics as abortion and sexual harassment.  Eight pages were devoted to contraception.  A guide to illegal drugs was also presented, prefaced by the statement that drugs should be considered "a form of recreation".

The student newspaper, Woroni, is another case in point.  The final edition for 1986 devoted 10 of its 48 pages to feminism, while other articles featured the Builders Labourers' Federation, Animal Liberation, nuclear test moratoriums, homosexual book reviews and several pages of Marxian economics.  Again, there is very little reflection here of things in which most students are actually interested.  Since funding is compulsory, there is little need to cater to the interests or wishes of the "consumers" of the product.


AN OVERVIEW OF OTHER STATES

Though ANU is one of the smaller campuses, the situation of compulsory student unionism there is reflected in other states.  Conservative, as well as Labor, State governments have been reluctant to reform compulsory student unionism.  In Queensland, for example, the government has made no attempt to institute voluntary student unionism.  In fact, the Education Minister has said he believes he does not have the jurisdiction to make payments to student unions voluntary.

In Victoria, following a series of legal challenges and other manoeuvrings, the Liberal Party's State Council in 1980 passed, almost unanimously, a resolution supporting legislation to make non-academic fees entirely voluntary.  This was ignored by the then Minister for Education in the Hamer Liberal Government, who opposed voluntarism on the grounds that it infringed the autonomy of the university.

Similar political weakness was shown by the coalition government in Western Australia, as detailed in the next chapter.  In these cases and elsewhere, for example in South Australia and the ACT, ambiguous drafting has given the opponents of freedom of association opportunities to expand coercive practices.

The abuses show the consequences of compulsorily-funded student organisations.  They make it clear that current arrangements do not provide appropriate incentives for the ANUSA and unions like it to represent the interests of the students they purport to serve.



CHAPTER 7
THE POLITICS OF COMPULSION

In addressing this issue I had to review ten years of history.  It was a sentimental journey of a kind, and like a good tale it contained heroes and villains, strong and weak, the good, the bad and the ugly.  Among the good -- the centurions holding the line in the long fight -- I might mention Michael Yabsley, Michael Kroger, Michael Danby, Simon Withers, Hal Colebatch, Jeff Babb, Richard Camm, Peter Costello, David Bloom, Chris Lawford, Chris Ellison, Tony Nutt, John Rice and Joe Poprzeczny.  They -- and there were many others -- were students who had a lot to lose, but who refused to be intimidated by authority, and gave willingly of their time for years to further a cause not for personal gain but for the principle of freedom.  My conclusion at the end of the journey was that after ten years we have not advanced (though the landscape has been improved considerably by the removal from it of AUS).

The inability or refusal of Liberal governments to implement full voluntary student unionism must rate as a major failure for the philosophical integrity of Liberalism.  Over the last decade, Liberal governments and politicians made only the weakest attempts to implement a policy -- genuine voluntary student unions -- which would have been simple to execute and in fundamental harmony with their own professed beliefs.

I will look primarily at the history of the issue in WA, where I was personally involved, and from which there are national parallels to be drawn.

The University of Western Australia's Liberal Club was one of the first bodies to become involved in the cause:  on 28 September 1976, it passed a resolution advocating voluntary student unionism.  Seven months later the Australian Liberal Students' Federation endorsed that policy.

At the WA State Elections in February 1977, the Liberal Premier, Sir Charles Court, stated:

We will make membership of student guilds at tertiary institutions voluntary, and remove compulsion. ... Members should be won and not drafted.

Following the election, which the Liberal-NCP coalition won, the new Minister for Education, Peter Jones, introduced legislation, the Acts Amendment (Student Guilds and Associations) Bill, which passed through the Legislative Council on 9 November 1977.  It made membership voluntary, but the compulsory fee was retained.  Further, whereas previously the fee to the Guild of Undergraduates had not been paid by post-graduate students and conscientious objectors, the new fee was made compulsory for these as well.  The administrations of the various tertiary institutions were given power to collect the fee.

The new legislation gave the shadow but not the substance of freedom of association, although Peter Jones and his successor, Bill Grayden, continually claimed they had made membership voluntary.

One potentially useful thing in this exercise was a theoretical restriction in the use of the fee.  The legislation said the fee had to be applied:

Solely for the purpose of the provision of amenities and services for students, or the development of cultural, social, sporting, or recreational activities directly related to the university.

In addition, no gifts could be made by the union or its affiliated clubs out of these monies.

These "safeguards" against "improper" use of the fees turned out to be almost as illusory as the freedom of association the legislation was meant to have conferred.  At the University of Western Australia, enforcement depended on a Vice-Chancellor, Professor Robert Street, who made no secret of his opposition to voluntary fees, and Ministers of Education who either did not understand what was going on or didn't want to get involved.

In 1982 the Arts Union failed to audit its accounts.  The UWA Labor Club gave money to the Christmas Island Workers' Union and paid party membership dues to the State ALP.  Despite protests, no action was taken.

In 1978 the guild transferred affiliation fees to the Australian Union of Student (AUS), then under the leadership of political extremists.  Jones finally intervened with a directive that all student funds were to be used on campus, but by that time the fees had already been paid and no attempt was made to recover them.

In 1978 a "blacklist" of 42 students who had refused to pay fees was circulated to UWA academic staff.  Signed by the Assistant Registrar, it stated:

Their applications for enrollment have been cancelled ... consequently, the students have no rights and privileges and may not attend lectures, seminars, tutorials and other classes, sit examinations or use the library.

Student politicians of the type who had frequently demanded compulsory funding along with TEAS, the abolition of tertiary fees, etc. had frequently insisted that "Education is a right, not a privilege!".  The blacklist showed how much this particular "right" was worth for those who did not toe their line (even ordinary members of the public, incidentally, can "use" the University library in that they can borrow books through the inter-library loan service and, in practice, can usually enter the library and read books there if they wish).  After the discovery of the blacklist and an outcry, the University altered its system so that, unless the dues had been paid, it could refuse to issue degrees and, for enrolling students, it could refuse to process enrolments.

Over the next four years a constant verbal and sometimes, on campus, physical, battle was fought between supporters and opponents of compulsory fees.

When Mr Bill Grayden took over the education portfolio in 1981 many students believed and hoped that he would make changes.  However, it soon became apparent that he intended to do nothing.

In 1981, the Eraser Government passed legislation clarifying its intention to stop the use of student fees for political purposes at ANU, and Sir Charles Court asked Mr Grayden to again examine the whole issue.

In May of the same year, the MLA for East Melville, Tony Trethowan, an accountant by training, reported to Mr Grayden that the Guild's financial records showed that over the preceding three years it had made a non-taxable net profit of more than half a million dollars.  Trethowan concluded:

I do not believe that a financial case can be made, particularly in relation to the Guild of the University of Western Australia, for the continuation of compulsion in regard either to services and amenities fees or membership of the guild.

This advice was ignored.

At the State Liberal Party conference in July that year, the vote was (as it had been for the previous three years) overwhelmingly for the abolition of compulsory student unionism and compulsory fees.  Only one delegate joined with Bill Grayden in voting against the motion, while it was supported by more than 350 delegates.  At a Liberal State Council meeting later that month Grayden was shouted down when he attempted to defend compulsion.  However, this appeared to strengthen his resolve.

In October 1981 a Liberal back-bench committee of both Houses held meetings on the issue.  Mr Grayden produced reports from the State's vice-chancellors and directors of CAEs favouring compulsion.  He also arranged for the committee to listen to evidence from four student union officials also favouring compulsion, and three others were subsequently taken to meet State Cabinet.  This courtesy was not afforded to advocates of the voluntary principle.

It was, perhaps, by the way, that the propaganda being turned out with students' money by the various guild machines and by AUS (which by virtue of their compulsory guild membership students were also compelled to support), was virulently anti-Liberal, not merely on this but on many other issues.  It included unsavoury attacks on Vietnamese refugees (one article published with students' money at UWA was titled "Refugees or Rats?") and sometimes championed the PLO and the IRA.  (AUS distributed the pro-PLO Free Palestine, gave money to various pro-PLO and other extremist groups, and condemned Amnesty International for not supporting the IRA.)

While granting privileged interviews to people connected with organisations the thrust of whose activities was to support their ideological enemies, and while evidently shaping policies in accord with those organisations' needs, some senior Liberals apparently took it for granted that Liberal students and other young Liberals and libertarians would continue to give them unquestioned loyalty, assistance with election campaigns and so forth.  Either they were unaware of the bitterness and disillusionment their attitude was causing among their own party's younger members at the University, or they did not care about it.  Notwithstanding all this, the Committee found in favour of voluntary fees.  The matter was deferred indefinitely.

Jim Clarko was appointed Minister of Education in 1982.  He had been chairman of the Committee and a strong advocate of voluntary fees.  With Mr Clarko's support, the legislation was reconsidered by Cabinet in September 1982.  By then a State election was six months off, and it was decided to wait until after this.

The Labor opposition was delighted.  Labor Education spokesman Bob Pearce, who had long been associated with the campaign in favour of compulsion, wrote to the President of the UWA Student Guild in December 1981, stating that by "forcibly" resisting voluntarism it could be defeated.  Pearce said quite correctly:

I doubt that the Government would be willing to risk yet another education controversy with an election looming.

The Government, of course, lost the election.  Shortly after being elected the new Labor Government reintroduced compulsory guild fees with the Acts Amendment (Student Guilds and Associations) Act 1983, and abolished the "services and amenities fee", bringing the wheel round full cycle (the original political usage of the term "revolution", incidentally).  In the Legislative Council, Liberal member Norman Moore put forward his own amendments to outlaw compulsion entirely.  Regrettably, he failed.  The only concession was the introduction of a conscientious objection clause allowing the students to direct the fee to a charity of their choice instead of to the Guild.  Even this small concession to the principles of liberty was more than had been achieved under the Liberals.  (The University does not exactly go out of its way to inform enrolling students that they have this privilege, and it is doubtful if many know about it.  A colleague of the present writer, who enrolled for a post-graduate course at the beginning of 1986, was unable to find any reference to in the voluminous enrolment material.)

The wider historical and political reasons for all this are interesting.


THE FEDERAL-STATE AGREEMENT OF 1973

In 1973, the Whitlam Government, which took ideas and ideology seriously, made the States an offer they couldn't refuse.  In exchange for the Commonwealth assuming responsibility for the funding of tertiary education, student union fees would have to be compulsory.  The Prime Minister himself wrote to the Premiers:

Student representative council, union and sports fees will continue as the responsibility of the students on the understanding that the institutions will make the payment of these fees compulsory for all students.

That the Whitlam Government should have discussed the matter on this level shows how important it took the issue to be, in contrast to the State Liberal Governments' attitude.

Following the change of Federal Government, Prime Minister Fraser asked the Premiers to outlaw compulsory membership, and the expenditure of student fees on certain purposes.  Despite this, even as late as 1978 Education Ministers in WA and Queensland spoke of "an understanding" with the Federal government as a reason for inaction.  Thus Mr Jones stated in November 1978:

Any attempt by the states to waive a contribution from a student as a condition of enrolment would, in the view of the Federal Government, be contrary to the agreement entered into which resulted in the present funding arrangements for tertiary education.

This was maintained even though Federal Education Minister Senator Carrick denied the agreement was binding on State governments.  Senator Carrick was quite unequivocal about this, saying:

[W]ithin a State, it is for the institutions and State authorities to determine whether non-academic amenities and facilities should be supported from compulsory contributions or in some other way.

It was remarkable that governments so fond of invoking "States' rights" should deny that they had an area of power which seemed clearly theirs under the Constitution and which the Federal Minister said was theirs.

It was clear by 1981-82 that a Federal Labor Government would use legislative power to protect student unions from the spectre of voluntarism.  Just how far it would go was indicated by the Shadow Minister for Education, John Dawkins, in a speech to the Annual Council of the Australian Union of Students in January 1982.  In this Mr Dawkins said:

The vendetta by conservative governments against student organisations continues in contravention of educational autonomy.  [In Government,] Labor would consider attaching conditions to States' grants legislation providing funding to tertiary institutions in order to prevent and redress the restriction of legitimate democratic activity. ... [C]onditions could be imposed that related the funds to the absence of control by the State over the conduct of student unions or organisations;  and this sort of condition could be linked to the provision of funds for the institution generally. ... Section 96 would enable conditions about the autonomy of student unions as part of the general provision of funds.

Literal "absence of control by the State over the conduct of student unions", would, of course, have meant voluntary guilds, since it was only State power that underwrote the guilds' power to compel students to join them as the price of getting an education.  Mr Dawkins meant that State power should continue to enforce compulsion in a climate where tertiary institutions were scrambling for funds to sustain their operations.  Thus any institutions that might have been in favour of freedom on the issue were dragooned onto the side of compulsion.


THE ESTABLISHMENT

Compulsory student unionism was overwhelmingly rejected by the Liberal Party, during a period of Liberal Government in WA, at five successive state conferences.  It was opposed by a majority of Liberal back-benchers, and, some say, by a majority in the cabinet.  The Premier also expressed support for the voluntary principle.  On the face of things, this should have been sufficient to change the Government's policy.

It has long been suspected, and much circumstantial evidence supports the suspicion, that an "old boy network" was actively lobbying against voluntary student unions within the establishment.  As Professor Street said in one argument in favour of "the Guild's autonomy":

The Guild has been a training-ground for many notable people in Australia's political, administrative and commercial life.

Looking at Australia's political, administrative and commercial performance in recent years, one might not think this a matter for unequivocal exultation, but nonetheless, ex-student politicians did and do appear to have considerable influence, as of course do some people still directly involved with the University.  One senior public servant, at a meeting of UWA's Convocation, was heard to describe proposals for voluntary student guild fees as "McCarthyism".  He was later given a high education post.


CONCLUSION:  TEN YEARS ON

One must accept the proposition that if State Governments had wanted to act to end compulsion, they could have done so.  As it was, the freedom of association of several generations of students was sacrificed to political expediency.

Norman Podhoretz once said:  "Politics is about ideas and in the end it's ideas that count".  The idea of freedom of association lost the battle not on the campuses, but in Cabinet rooms.

For ten years of effort, we have gained a certain form of political education and the privilege of having known good companions who refused to give up the fight against a bad principle.



CHAPTER 8
IMPLEMENTING VOLUNTARY STUDENT UNIONISM

LEGISLATION FOR VOLUNTARY STUDENT UNIONISM

Compulsory student unionism at any given tertiary institution is the result of the legislation that establishes and governs the operations of that institution.  Compulsory student unionism thus depends on acts of Federal and State parliaments, and provision for voluntary membership of student unions will require the parliaments to amend those acts.  The following points should be kept in mind:

As a minimum, voluntary student unionism legislation must lead to clauses in the various University Acts specifying that the payment of fees to student unions shall be voluntary.  Half-measures, such as being able to decline membership but still having to pay a fee, fees split into a compulsory payment to service unions and a non-compulsory payment to political bodies, or donations to charity in lieu of fees, do not qualify as voluntary payments.

It is important that the legislation ensure that "voluntary" means just that.  Membership of student organisations should be on an "opt-in" basis.  Students should not be automatically conscripted to student organisations by the university administration each year, and then left to extract themselves from that association through statutory declarations of conscientious object-





general are not without a degree of idealism and many students may well understand and appreciate the arguments for freedom of association as well as for political action which gives that ideal substance.

Given the debate about the Labor Government's Higher Education and Administration Charge, proponents of compulsory student unionism will be forced to argue from double-standards.  The HEAC is described by many student politicians as a "barrier to entry" into higher education.  If that is the case, then student union fees, which are in the vicinity of $250, should also constitute a barrier to entry and should be similarly opposed (or at least made voluntary) in order to increase access to higher education.

University councils can be expected to oppose VSU legislation.  University councils are extremely conservative, if not reactionary, bodies.  Like public monopolies, they seek "modest profits and a quiet and comfortable life" and aim to foster peace and stability in the affairs of the university -- even at the expense of human rights.  This means not upsetting vested interests like student unions which will create such an uproar should their compulsorily-extracted income be replaced by an income dependent on their actual appeal to students.  In the past, university councils have actively lobbied governments on behalf of student unions to prevent the passing of legislation that might upset existing compulsory arrangements, and, where such legislation has been passed, they have sometimes actively colluded with student unions to circumvent its provisions.

Unfortunately, university councils carry some authority outside universities, and are presumed to have the best interests of the university (if not the students) at heart.  Governments tend to believe them when they predict dire consequences should voluntary membership be introduced.  It is the governing bodies of universities that constitute the single greatest obstacle to the introduction of voluntary student unionism.  It will take well-informed legislators to see the lack of credibility in their arguments and to dismiss them accordingly.


WHAT IS TO BE DONE

The Federal Government can legislate for voluntary student unionism at both the Australian National University and the Canberra College of Advanced Education.  The rest of Australia's universities come under Acts of the various State Parliaments and would have to be amended individually by State Governments.  A Federal Government could, however, easily introduce voluntary student unionism nationally, through an amendment to the States Grants (Tertiary Assistance) Act, such that the Federal Government's recurrent grants to the states for the funding of higher education would become conditional on the existence of voluntary payments to student organisations at all tertiary institutions, which would force the States to pass the necessary legislation.  This is provided for under Section 96 of the Constitution.  It has been claimed that such legislation would be an infringement of the autonomy of the universities and of States' rights, but that is to put the autonomy of the institutions and Federalism before the rights of the individual.

While the ALP has always supported compulsory student unionism, the Liberal Party has done very little to introduce voluntary student unionism.  The faults of the Liberals' legislation have been examined elsewhere in this publication.  However, it is worth looking at two arguments that the Fraser government and its Education Minister, Sir John Carrick, employed to justify its failure to legislate effectively.

First, it was claimed that compulsory membership relieved the government from having to fund student unions.  This was simply untrue, as those receiving benefits under the Tertiary Education Assistance Scheme were paid an "incidentals allowance" of $100 to help meet the costs of joining student organisations.  In any case, it is not the intention of advocates of VSU to have compulsory payments replaced by a subsidy courtesy of the Australian taxpayer.  Student unions should be able to stand on their own feet.

Second, it was argued that the 1973 memorandum of understanding between the Federal and State Education Ministers left decisions on the matter of compulsory or non-compulsory membership of student organisations to State Governments.  Although it is true that the 1973 agreement transferred control over tertiary institutions to the States, it was not made explicit that the States would be given exclusive licence to decide on the matter.  The main provisions of the agreement are not incompatible with voluntary student unionism.  In any case, there is no reason why the memorandum of 1973 should determine policy for all time.

The Federal Parliamentary Liberal Party has promised to introduce voluntary student unionism for the ANU and CCAE, should it be returned to office.  However, the education policy with which it entered the 1987 Federal election all but ruled out the possibility of using Federal financial powers to force the states into legislating for VSU.  It declared its intention to "provide the strongest possible support and encouragement to like-minded State governments" to legislate along similar lines.  Unfortunately, "encouragement" is nowhere near enough for State Governments faced with the vehement opposition of university councils to any legislation.  Now that the 1987 election is behind us, one hopes that an unambiguous policy of freedom, free association, and free choice for students will be adopted.  Compulsory student unionism is such a stain upon Australia's tertiary institutions that no effort should be spared to eliminate it.



ENDNOTES

1.  [1976] 1 WLR 613.

2Baldry vs Feintuck [1972] 1 WLR 552.

3.  [1978] VR 457.

4.  Quoted in The Real AUS, Bulletin No. 2, published by the National Committee for the Student Control of AUS.

5.  For example, in 1975, first-year students picketing the National Office of AUS, who were protesting about a PLO speaker's tour paid out of students' funds, were attacked by Maoist supporters who broke off from the May Day march.  A Channel 10 news camera captured the radicals from LaTrobe and Swinburne bashing student opponents with poles used in the May Day banners.  During a crucial stage of the 1977 direct election debate the present author received national publicity when he was bashed unconscious by club-wielding AUS supporters outside the office of former Federal Treasurer Frank Crean.  In 1978 Peter Costello, then chairman of the Monash Association of Students, had his arm broken by an anarchist AUS supporter who boasted to the Bulletin that "assassination is the penetrable point of the tyrant".

Taxes and growth:  the London conference

Edited transcipt of an address to a conference co-directed by
The Manhattan Institute for Policy Research and the Adam Smith Institute.


INTRODUCTION

Supply-side economists contend that unemployment will disappear and living standards soar if only people are given free market signals to produce the things other people want.  Tax, which drives a wedge between production and its rewards, is an important part of their story.  Nonetheless, before the evidence started to come in, the Laffer Curve, with which popular debate associates them, embarrassed some supply-siders.  It seems a fiscal fairy story:  government revenues can't be increased by lowering tax rates -- or can they?

We know with reasonable certainty that smaller government, involving less regulation, causes an economy to grow faster than a regulated economy, and that the growth will eventually give more to everyone, including the government -- Korea, Japan, Singapore, Taiwan and many other countries testify to that.  We also know that certain types of taxing and public spending, particularly deficit budgeting, inhibit economic growth.  There is no similar clear correlation of big budgets with poor economic performance but there is no reason to believe that big budgets increase aggregate wealth.  This evidence is neatly summarised by Michael James in the recent CIS publication How Much Government?

Professor Laffer, with direct reference to his famous curve, puts another proposition.  He argues that cutting some tax rates will increase revenues almost immediately and that existing levels of government expenditure can be financed at less economic cost this way.

Taxes discourage people from earning and declaring income.  Tax revenue is the base times the (average) rate.  Should the base grow proportionately more than the rate is cut, then revenue rises.  If an income tax were 100 per cent, no-one would undertake any taxed activity, and both the tax base and the revenues would be zero.  At the other extreme a zero tax rate yields zero revenues whatever the tax base.  Anywhere in between the government gets some money:  see the diagram below.

The Laffer Curve

Far from being a fairy story, the Laffer curve is a truism.  But the crucial question is:  where do we sit on the curve?  On the top half where higher tax rates would decrease revenues or on the bottom half where higher tax rates increase the government's bag?

In the United States a battle royal has raged over the Laffer curve.  Meanwhile, governments in many other nations, including our own, have quietly accepted that very high marginal tax rates don't work.  Mr Hawke reduced the top rate from 60 to 49 per cent.  Does that make him a supply-sider?  Did he expect to get more revenue or less from Australia's top taxpayers?

Before Mrs Thatcher reduced the top marginal rate in the UK from 83 to 60 per cent, 10.4 per cent of income tax collections came from the one per cent of people with the highest incomes;  six years after the cut, they provided 12 per cent.  The top three per cent once parted with 18 per cent;  now it is nearly 21 per cent (see Table 3).  When the US top marginal rate was cut from 70 to 50 per cent -- lo and behold! -- the share of the taxes paid by the rich increased.  Apparently one way to get more money from the rich is to cut their marginal tax rates.  The top rate in the US is now only 34 per cent.

What is true of those paying the top rates is not true for everyone.  This was the problem that Reagan ran into leading to first a domestic deficit and in turn a foreign account deficit.  Mainstream economic opinion in the US now accepts that if the government reduces income tax rates across the board it will recoup only between a quarter and a third of the lost revenue,

Australia's deficit problem is already worse than America's.  Our government cannot afford to spend appreciably more than it raises.  If rich Australians are like rich Britons or Americans, the tax cuts which came into effect on July 1 will collect more from them, but there are not enough rich people to balance the budget.  Government must make expenditure cuts, over and above those needed to balance a pre-tax-cut budget, to compensate for the effect of the tax cuts on low and middle incomes.

The evidence on the Laffer Curve is starting to come in:  it seems clear that the marginal income tax rate which collects most tax is somewhere between about 33 and 50 per cent.  When top marginal taxes are above this rate, cutting them will increase revenue as well as stimulate economic growth.  This suggestion should not be confused with Colin Clark's famous prescription that government spending (and by implication taxation) cannot be allowed to rise permanently above 25 per cent of GNP without grave economic and social dangers:  Laffer is talking about marginal tax rates, Clark about average rates.

Richard Wood does not usually see his role as telling the government how to collect the largest possible amount of tax;  he favours low tax rates because he believes these encourage the natural growth of the economy.  Mr Wood sees no virtue in low tax revenues achieved by destroying the economy, and he does not wish to see a rapacious government, in ignorance, kill its goose and ours too.  It is better that the government knows which taxes are counterproductive even from its own narrow perspective.

John Hyde


PREFACE

When, in October 1986, the Manhattan Institute brought together a group of journalists, academics and politicians from both sides of the Atlantic for the London Conference on Taxes and Growth, it triggered an immediate debate about how America's supply-side experience could be applied to Britain and its European neighbours.  My remarks were reprinted in both the Times of London and the Wall Street Journal (Europe).

"The particular genius of the London meeting," said a Wall Street Journal editorial, "was its ability to combine the broad framework outlined by Mr Wood with more detailed works of economic analysis. ... It's from meetings like this that the fire of tax reform -- and the economic liberation of Europe -- is going to spread."

The Sunday Times, which gave extensive coverage to the conference proceedings, remarked in an editorial that "the supply-side Manhattan Institute had organised a fascinating conference on taxes in London".  Christopher Smallwood noted, "The original claims made by the tax-cutting supply-siders who followed Reagan into office were wildly exaggerated. ... The supply-siders are now bouncing back with arguments which are better defined and better researched."  In his column, Brian Walden added, "The advocates of confiscatory taxation have had their way in Britain for two generations. ... Surely the time is ripe for trying a different system."

An opposing salvo came from the Financial Times:  "As the Manhattan Institute argued last week, the availability of tax cuts means that Europe is now on the brink of a Golden Age.  Cynics hide your heads in shame."

The Guardian, although generally sceptical of supply-side arguments, was respectfully so.  "The American 'supply-siders' have injected some elements into mainstream thinking which has shifted the debate in their direction."

As the European Wall Street Journal observed on 24 October 1986, the "battle lines in Britain's tax debate are coming into focus."

Here are some of the highlights.



SUPPLY-SIDE ECONOMICS:
RADICALISM OR COMMON SENSE

In England, there used to be a cricket match every year called Gentlemen versus Players.  Most of the time, the professionals would win, but there were occasions, very rarely, when the amateurs would win.  There are moments in history, as well, when the amateurs, as represented by journalists and others, do know more than the professionals, although that is not normally the case.  The supply-side movement has been one of those moments.  Supply-side economics has been a movement of amateurs invading a field of professionals, the field of economics, from which common sense has been fairly rigorously excluded for two or three decades.  Supply-side economics is really just an elaboration of the notion that you shouldn't kill the goose that lays the golden eggs.

Socialists were almost immediately hostile to supply-side economics.  That's because they are not interested in collecting the fruits of production.  Socialists are interested in controlling the means of production.  They don't want the eggs.  They want the goose.  If you explain to a socialist that lowering tax rates will generate more revenue for social programs, he's not interested, because he knows at the same time there will be some people who will be getting richer.

Socialists are also hostile to the whole notion of incentives in economic discourse.  For socialists, the only morally proper incentive is working for the collective good.  The idea is that you're supposed to be willing to work in a situation where the government takes most of your money and spends it for things that you know nothing about, on people that you've never met, for causes that you do not perhaps support.  If you are opposed to this, then you are considered selfish.  But in fact you are not being selfish, you are being rational.  It is irrational to let someone take the money that you have worked hard to earn and allow them to spend it on things that you know nothing about.

In any event, we can understand why socialists oppose supply-side economics.  Marx, in the Communist Manifesto, listed ten socialist commandments, the second of which was that the state should enact a steeply progressive income tax.  Supply-side economics, after all, is really a proposal to sharply reduce the progressivity of the tax code.

The conservative resistance to supply-side economics is somewhat more puzzling.  If you lower the top tax rates, revenue does increase.  There is just no doubt about that anymore.  I was discussing this the other day with a friend of mine in Washington who is a senior Tory Treasury official on loan to the IMF.  I asked him, "Why don't you reduce the top tax rates in England?  There's no point in trying to tax people at a 60 per cent rate."  He replied that "Everybody in the higher reaches of the Tory Government knows that the top rates are not collecting revenue.  They know there wouldn't be much of a decline in revenue if you reduced them.  It's all political."  The Tories are afraid of what the reaction would be if they were to reduce the top rates.  They are afraid of the outcry that Mrs Thatcher is helping the rich.  Essentially what we have is the appeasement of envy.  There is a fear that the Opposition will launch an envy-arousal campaign.

It's true that in 1981 when the Reagan Administration cut the top tax rate, just such an envy-arousal campaign was immediately launched in the news media.  The encouraging thing is that this year when the top rate was being reduced from 50 to 28 per cent, a similar envy-arousal campaign didn't materialise.  People in the news media have finally figured out that if you lower the marginal rates, the rich do pay more.  Passage of the tax reform bill was much easier than everybody had expected.  I think that you might find the same lack of resistance in England.

There is one other important point to raise about the Tories.  I have often wondered about the continued persistence of the class system in England.  There is no doubt that if you go and live in America, you become immediately conscious of the fact that the class system, such as it is found in England, doesn't exist there.  It occurred to me that the tax structure might have something to do with this.  There may be a kind of subconscious Tory class interest in the maintenance of the present tax structure.

If you or your ancestors had had the opportunity in an earlier period of history to convert your income into wealth -- buying an estate in the country, buying a house in London, buying Chippendale furniture, or what have you -- you would now be at a great competitive advantage over someone who has no wealth or land and who has 60 per cent of his marginal income intercepted by the government.  That person can never catch up with the individual who had the opportunity to convert his income into wealth at a time when the income tax didn't even exist.

High marginal tax rates tend to prevent upward mobility.  They prevent the rotation of elites.  If you perceive a society as a ferris wheel of elites, then it is only natural for the people who are at the top to say, "Let's freeze it, right now.  Let's not let the wheel rotate anymore."  I am not saying that there are people in the Tory Party who have consciously worked out this idea, only that people often subconsciously have a way of figuring out what is in their class interest.

In summation, I would suggest to you that if you lower tax rates it will not benefit the rich but rather people who want to become rich.  That is why it is extremely important to make this change.



TAX COMPETITION IN EUROPE

Just as private companies compete in the marketplace by cutting the prices of their products, so also do nations compete for scarce labour and capital by cutting tax rates.  Since April of 1976, when supply-side economics was first given a name, there have been reductions in tax rates in a number of European countries as well as in the United States.

In Europe, those reductions have been rather timid.  Sweden reduced its top tax rate from 87 to 80 per cent;  in Portugal it went from 77 to 65 per cent;  in Ireland from 72 to 62 per cent;  in Italy from 72 to 60 per cent;  Norway's went down about seven points.  The only significant reduction in Europe was in Turkey, from 68 to 50 per cent.  Turkey happens to be the fastest growing economy on the continent.  In the United Kingdom, the top rate went from 83 to 60 per cent, a substantial reduction, but having started too high, you ended up too high.  Only Belgium swam against this tide by increasing its tax rate from 60 to 72 per cent.  Belgium, of course, has experienced an economic growth rate of zero for the past five years.

Smaller economies have very recently enacted relatively bold tax reforms to lower the highest rates.  Jamaica went from 58 to 33 per cent.  New Zealand is about to go from 65 to 48 per cent.  The Philippines under Aquino is going from 60 to 35 per cent.  India dropped its top tax rate down a year ago from 65 to 50 per cent.  The Indian stock market doubled in one year and revenues from the individual income tax increased by 40 per cent.  China, in effect, instituted a zero marginal tax rate on agriculture:  a 15 per cent average rate.  They said, "If you make more than your quota, you can keep the rest and sell it in what used to be the black market."  The economy boomed so fast that it frightened them, something like a 12 to 15 per cent average rate.  Real tax revenues rose by 50 per cent in three years.

There are other reforms that are explicitly planned to reduce marginal tax rates, which are supply-side reforms, not Keynesian reforms.  There are currently plans in Canada, France, Germany, Japan, and Singapore.  The United Kingdom, which got on the bandwagon first, is now lagging behind.  International tax competition affects many things including capital flows, exchange rates, interest rates, and labour costs.  A country where the overall tax climate is getting relatively worse, because in other countries it's getting better, will tend to lose both financial capital and human capital.  This forces the central bank to keep interest rates higher than otherwise to prevent the capital outflow from causing an inflationary depreciation of the currency.

Taxes, tariffs and regulations, i.e. the cost of government, also affect production through both labour and capital costs.  Payroll taxes, consumption taxes and income taxes on labour income create what is called a "wedge" between what the employer pays for labour and what the employee ultimately receives.  The employer has to pay quite a lot.  The employee looks at his after-tax take-home pay and sees nothing.  A 5 per cent pay increase in a 28 per cent marginal bracket is just as desirable to an employee as a 9 per cent pay increase in a country where the marginal tax rates are 60 per cent.  If labour is overtaxed relative to capital, as I believe is the case particularly in Ireland and the UK, it tends to foster the uneconomic substitution of machines for men and results in unemployment rates of 13 and 17 per cent.

Taxes on capital such as property taxes, dividend taxes, and capital gains taxes introduce a wedge between the return of capital to the economy as a whole and the return to the individual capitalist.  Among other things, high marginal rates on capital income add a tax premium analogous to the inflation premium in interest rates.  People would have a higher demand for bonds if they got to keep a larger portion of the return.  Thus a reduction in marginal tax rates, other things being equal, tends to lower interest rates.

High marginal rates don't yield high revenues.  It is because of steep marginal tax rates, not despite them, that the individual income tax yields only 2 per cent of GDP in Mexico.  Steep marginal tax rates yield only 4 per cent of GDP in Greece, 6 per cent in France, 9 per cent in Austria, and 10 per cent in the UK, all lower than in the US, where it is 12 per cent.

Belgium raised tax rates with unprecedented enthusiasm.  Real tax revenues fell in that country by 9.1 per cent from 1981 to 1984.  As a result, Belgium's budget deficit is 13 per cent of GDP.  In the Netherlands, where tax rates reach 72 per cent on $99,000 and there is a value added tax that goes up to 33 per cent, real tax revenues fell by 3.2 per cent between 1980 and 1984.  In the United States, by contrast, real tax revenues rose at the federal level by 5.4 per cent in 1984 alone.  Oppressive tax rates are a luxury that Europe can no longer afford.

High marginal tax rates no longer just affect the wealthy.  In the 1970s, inflation pushed ordinary working couples into tax brackets once reserved for the very affluent.  This happened in both Europe and the United States.  It actually steepened the progressivity of the tax code.  I call this "greasing the rungs on the ladder of opportunity."  These steep marginal tax rates did succeed in what they were intended to do.  They succeeded in preventing people from earning high incomes.  The result was that the tax burden had to be shifted down to lower incomes.  We increased VAT and payroll taxes on people of modest means.

High taxes also affect the balance of trade.  It is impossible for the whole world to export more than it imports.  The growth of world trade requires growth in imports.  Who are the laggards here?  It turns out that the countries with the highest tax rates have reduced their imports for several years.  From 1981 to 1985, the dollar value of imports fell in Germany, France, Austria, Belgium, Finland, Ireland, the Netherlands, Norway, Spain, Portugal, Sweden, Saudi Arabia, Yugoslavia, and Hungary, among others.  In a world of poor countries who are desperately trying to earn dollars, this isn't much help.  In the supply-side countries, by contrast, imports rose:  by 97 per cent in China, 32 per cent in the United States, 20 per cent in Hong Kong and 19 per cent in South Korea.  Tax systems that suffocate domestic income and sales are not just a national problem, they hinder world trade as well.

It has to be emphasised that the supply-side objective is to reduce high marginal tax rates on added income.  That does not necessarily mean reducing the average tax rate.  In the Netherlands, the average tax rate on an income of $28,000 is 21 per cent, which isn't that high.  The marginal rate on the same income is 52 per cent.  You'd better be very careful before making $28,100 because they will take more than half of the next one hundred dollars that you earn.  This is one measure of the inefficiency of a tax system, the difference between average and marginal rates.  Such a large gap creates the maximum disincentives and the minimum amount of revenue collected over time.

I have made some rather rough estimates of marginal tax rates for all of the major countries in Europe. (1)  The estimates are based on three major taxes -- the income tax, the social security tax, and the VAT sales tax -- and are applied to four levels of income ranging from $28,000 to $49,000 a year.  The figures are for 1986, except for the United States which are for 1988, when the marginal tax rate will drop from an average of 49 per cent to 35 per cent on labour income.

In the UK, Ireland, Norway, Denmark, Finland and Greece, the total marginal tax rate on labour income ranges from 60 to 64 percent On an even more extreme level, marginal tax rates run from 72 to 84 per cent in Belgium, from 66 to 79 per cent in Portugal, 66 to 76 per cent in the Netherlands, and 87 to 92 per cent in Sweden.  A 1985 OECD study concluded that "the evidence for almost all countries suggests that the tax system overall has relatively minor effects on the income distribution."  That's an understatement.  The evidence suggests that there is no effect at all.  Europe's high marginal tax rates are quite simply a barrier to upward mobility.

The lowest marginal tax rates on labour income are in Switzerland, the United States and Turkey.  The highest rates are in Belgium, the Netherlands, Greece, and Portugal.  The cumulative increase in real GNP from 1980 to 1985 was 27 per cent in Turkey, 13 per cent in the United States, and 9 per cent in Switzerland.  Among the overtaxed economies over those five years, total growth, not annual growth, was 2 per cent in Belgium, 3 per cent in the Netherlands, 4 per cent in Greece, and 5 per cent in Portugal.

Until marginal tax rates are reduced in Europe, along with an increase in the income level at which those thresholds take effect, Europe will continue to be plagued by chronic stagnation.  Employment, real tax receipts, imports, and living standards will all continue moving steadily downward unless real supply-side reforms take place.



ANATOMY OF A TAX REVOLT

The best news that we've heard from Britain in a long time came out of the Tory Party conference last week.  Mrs Thatcher has apparently decided to focus her energies on policy issues at the town hall and council level.  Issues like taxation and supply-side economics can and should be fought out in the local arena.  In the United States, the supply-side movement drew much of its force and power not from Washington but rather from various state movements, particularly in 1978 with California's Proposition 13 and in 1980 with Massachusetts's Proposition 2½. (2)  Unfortunately, the foreign press has chosen to ignore or trivialise the supply-side revolution on the state level.

Last July, a national news story in the American media reported that the fastest growing real estate market in the United States was the once totally moribund Boston metro area.  At the same time, last summer, the Massachusetts State Department of Revenue announced that the state's total property market value, both commercial and residential, had risen more than 40 per cent in the last two years, reaching an all-time high of $217 billion.  This was a 90 per cent increase in real terms from the 1981 level of $87 billion.  That's the fastest growth in a state property tax base since the numbers have been compiled

These numbers are no lucky accidents.  They are the direct result of the decision of the people of Massachusetts to take power into their own hands through the voted referendum and slash their highest-in-the-nation property tax rates by 40 to 50 per cent.  They were warned in this referendum process by the leaders of both parties, and most of the corporate business community, that this was a dangerous and radical step because it would cut property tax income, destroy social services and drive the economy into the ground.

Fortunately, these warnings lacked credibility since they came from the leaders who had presided over the state's economic decline.  The rest, shall we say, is history.  The once-stagnant Massachusetts economy, the third slowest-growing state economy in America in 1978, has become the third fastest-growing one over the last three years.  The current unemployment rate is 3.4 per cent, down from 9.5 per cent when Proposition 2½ was passed.  Companies have to bus in workers from neighbouring states to fill available jobs.

Those who opposed the Proposition 2½ referendum would have you believe that this transformation would have happened anyway because of the burgeoning high-tech boom or, as The Economist reported, "Governor Dukakis's industrial policy initiatives".  The trouble with that explanation is that it's wrong.  Massachusetts's manufacturing jobs since 1980 have actually fallen by 7 per cent.  What really turned Massachusetts around was the rejuvenation of its dying property tax base which had long been depressed by excessively high real estate tax rates.

Even the Boston Globe, which opposed Proposition 2½, admitted in a lengthy article last June that the referendum's passage was largely responsible for turning that state's stalled economy around.  In the article, Ralph Whitehead, Jr, a liberal advisor to Governor Dukakis, was quoted as saying, "Massachusetts has a dirty little secret.  Without Proposition 2½, we would be on our way to becoming a banana republic."  The Globe article admitted that "the worst political problem for businesses considering relocation or expansion [in the state] was the perception of the state as Taxachusetts".

From 1970 to 1979, Massachusetts's tax burden had risen steadily from about 3 per cent below the national average to 11 per cent above it.  During that same period, the personal income of the state fell from 10 per cent above the national average down to only 2 per cent.  The moment Proposition 2½ was passed, we began to see a reversal of the two curves.  Personal income soared.  This year, it rose to 19 per cent above the national average, the highest in the state's history.  The tax burden is now almost 5 per cent below the national average.  The effect of all this was to generate large and accumulating surpluses in the state's tax revenues.  The state now has a surplus of $1.1 billion accumulated over the last two years.  Ten years ago, it had a $1 billion deficit.

Why did such a simple reduction in property tax rates have so dramatic and immediate an effect on total economic growth?  The answer is equally simple.  Growth ultimately is the appreciation of value of a nation's capital stock and taxes have a direct effect on the value of that capital stock.  The term used by public accountants to describe the phenomenon is tax capitalisation.

If you have a piece of property worth $100,000 and your taxes on it are $2,000 and your mortgage payment rate is 10 per cent, you wind up paying $12,000 a year -- $2,000 in taxes and $10,000 in mortgage loans.  If for some reason your $2,000 in tax payments were eliminated, you could then finance $120,000 in property value with the same $12,000 a year.  Your $12,000 a year could now support a much higher value.  What that means is that for every $1 you reduce the taxes on property, you increase the value of that property by $10.  For every $1 you raise property taxes, you decrease the value of that property by $10.  If you understand this principle of tax capitalisation, you understand Massachusetts's economic boom.  The passage of Proposition 2½ increased the value of property in the state by $12 billion because it involved a statutory property tax cut of $1.2 billion.

What happened in Boston alone is even more dramatic.  In 1980, the property tax rate in Boston was $82.70 per $1,000, the highest in the nation.  The tax base was stagnant at $5.3 billion.  Over the next five years, the tax rates came down dramatically to $18.64 per $1,000 and the property value base shot up from $5.2 billion to $24.4 billion.  That's an increase of 366 per cent!  What this amounted to was a $19.2 billion infusion of wealth into one small city economy.  It helped take the unemployment rate of that city down from 10 per cent to 3.5 per cent.  You don't have any cities in England with that low an unemployment rate.  What happened in Boston is nothing more than tax capitalisation.

This concept is not confined to property taxes.  Look at what's happened with payroll taxes.  It is no accident that since 1970 when American social security payroll taxes started to soar, that we also experienced the first decline in real wages in the nation's history.  Over the last decade, social security taxes were increased 450 per cent while wages only went up 226 per cent.  The extra increase had to come out of the wage packet.  That's why more people have to work, sometimes two or three members in the average family.  That hasn't happened in the United Kingdom because of the unions.  Here the tax capitalisation has taken the form of unemployment.  You have taken more and more of the capital supporting employment and moved it into the tax base.

Once you realise that economic growth is nothing more than asset appreciation, you can understand why studies show much higher rates of economic growth in the countries that have lowered their tax rates.  Since 1979, the United Kingdom has raised its tax burden by 17 per cent.  In that same period the unemployment rate rose from 6.5 per cent to 13.5 per cent.  I suggest that there's a direct and immediate link between those two increases.  Conversely, the two countries that have kept their taxes more or less at the lower end of the scale, Japan and the United States, have had infinitely faster rates of job growth and much lower rates of unemployment.

What we're talking about is not a theory.  We're talking about a law.  It's also been proven in California.

Again, your own press is misleading or trivialising this issue.  Last July 15, the Financial Times took a very sour look at California's Proposition 13 and argued that the tax-cutting experiment in that state had "stifled rather than nurtured the pioneering spirit which set California apart from the rest of the United States."  I have a few economic facts that I want to close with that were never reported in the Financial Times.

Since 1978, while Britain's total employment has fallen by half a million jobs, California, with less than half the population, has created two million new jobs.  California's unemployment rate is 6.5 per cent in constant terms, yours is over 15 per cent.  Britain's total real GNP in the period from 1980 to 1985 rose by 8.7 per cent.  California's real GNP rose 32 per cent, four times the British rate of growth.  While you have created 30,000 new businesses since 1983, California is now creating 80,000 new businesses every single year, 300,000 since 1980.  The reason for this wide disparity is quite clear.

Since 1978, California has cut its third-highest-in-the-nation tax burden from 19.2 per cent of income down to 14.7 per cent last year.  That's a 23 per cent drop in its total revenue burden.  As I pointed out before, in the same period, Britain's burden went up 17 per cent.  By bringing down these rates, the new Governor George Deukmejian has watched tax revenues boom.  He's been able to increase government spending at the fastest rate of any major state in the nation.  The Laffer Curve is working.

The Financial Times and The Economist have both been rather snide about these state experiences.  Yet they can only dream of the kind of economic growth that is now going on in Massachusetts and California.  So long as the press peers down its nose at America's supply-side ideas, the country will continue to stagnate.



THE AMERICAN CHALLENGE

I'd like to present a broader perspective on the supply-side developments which will be taking place in the coming years.  The key to those developments is the emergence of new technologies.  From George Orwell to John Kenneth Galbraith to Jean-Jacques Servan-Schreiber, the general conviction has always been that technology favoured the state over the individual and that we were moving toward 1984 and the triumph of Big Brother.  1984 did come, but there was no Big Brother.  On the contrary, in the United States we experienced the fastest growth of small businesses in the history of the country.  During the previous five years, there had been a doubling of small business starts from about 280,000 to 640,000.  There was also a massive upsurge of venture capital, 200-fold above the average between 1970 and 1977.  There was an incredible efflorescence of new companies on the stock market;  new public issues rose some tenfold.  Overall there was a massive surge of small business growth on the frontiers of high technology.

In Europe, however, the results were less positive.  This is in no small part due to the fact that for the past twenty years Europe has been operating under the influence of the ideas of Jean-Jacques Servan-Schreiber as voiced in his book The American Challenge (Le Défi Américain).  Servan-Schreiber perceived a great competitive threat to Europe from America in the form of the military-industrial complex and the massive rise of government-subsidised research carried on by multinational corporations.  Servan-Schreiber's book helped to persuade Europeans to rely on state-subsidised business efforts at the very point when new technologies were shifting the balance of power away from the state and toward the individual entrepreneur.

The first effect of these new technologies has been to create global capital markets.  Many of our economic concepts are still based on an historical period when capital moved more slowly than goods.  You brought gold down to a sailing ship and sent it across treacherous seas, exposed to pirates.  Our mercantilistic preoccupation with the balance of trade is derived from this period.  But today, entrepreneurs can bounce capital off satellites in microseconds or down fibre-optic cables at the speed of light.  Capital now moves much faster than goods.  A country that adheres to supply-side economics will tend to run a trade deficit if other countries don't follow suit.  This is merely a reflection of its hospitality to capital.

The second major change has been the declining significance of natural resources.  A car is comprised of about 50 per cent natural resources.  Oil technologies are 90 per cent natural resources.  A silicon chip is less than 2 per cent natural resources, and much of that is sand.  There's been a drastic decline in the significance of natural resources in economic growth.  Energy usage has steadily declined as a share of output

Finally, the new technologies, particularly some upcoming changes in the computer industry, strongly favour individual entrepreneurs over big government projects and multinational corporations.

The three most fundamental changes in computer technology are related to artificial intelligence, the silicon compiler, and massively parallel processing.

Artificial intelligence allows computers to compute without using mathematical formulas.  They can now deal with symbols and perform work requiring common sense in a variety of uncertain circumstances.

The second major breakthrough, the silicon compiler, allows individuals to design a micro-chip on a computer from beginning to end.  To understand the significance of this breakthrough, imagine that in order to publish a book you had to own a printing press -- in other words, a situation where the printers essentially sponsored all the writing of books.  This is the way it's been in the computer industry up until now.  In order to make a chip, you had to own a wafer-fabrication facility which cost $100 million.  This restricted the design of chips to a few companies in the semiconductor industry.  Now, anybody, anywhere in the world with a $50,000 work station can design a chip.  This is a major breakthrough which enhances the role of entrepreneurs in the semiconductor industry.

The third major development, with probably the greatest long-run impact, is parallel multi-processing.  This essentially allows a magnification of computing power by 10,000-fold, a massive increase in the efficiency of computer architecture.

To get an idea of what this means, imagine that all the work at General Motors took place in one room and that all the workers had to line up in front of that room and wait to carry out their work orders.  Most of the corporation would be inert most of the time.  This is the way it's been in computing ever since its conception.  Now computers will be able to operate like a real General Motors with large numbers of individual processors.

The combination of these three developments will be explosive.  It will result in an incredible variety of new technologies.

One example is the talkwriter which is soon to be launched by a small entrepreneurial company in the United States.  You'll be able to talk to your typewriter at a pace of 150 words a minute with a device which will originally be priced at about $20,000.  Since it's made of silicon, however, once silicon compilers become prevalent, the price will drop to $5,000.  Eventually, the keyboard will vanish from most computer applications.

Another key area is strategic defence.  Massively parallel processing is precisely the technology that's needed for the kind of pattern recognition of enemy warheads required by Star Wars.  The defence industry can now enter the computer industry learning curve, creating defence technologies that are cheaper and more effective.

The overriding theme of these new technologies is that they favour the individual over the state.  The individual can send his money across the ocean in micro-seconds.  He can move his company without moving himself.  The entrepreneur doesn't have to forgo all the joys of life in Britain.  He can spend much of his time in Britain but also enjoy the tax rates in America.  There are many British engineers, particularly in Silicon Valley, who are making vital contributions to American technology and yet who still retain British citizenship.  They are not patriotic enough, however, to pay confiscatory tax rates.

The real promise of supply-side economics in the long term is the triumph of the individual entrepreneur.  The state has no role in the new global economy.  The state can send thousands of workers down into mines to dig out gold.  It can even find oil with the help of international consultants.  The state can have a functioning role in these natural resource-based industries.  It is completely impotent and at bay, however, in confronting the proliferating opportunities found in the new information technology.

That is why the triumph of supply-side economics is inevitable.  Any country that does not respond to the new "défi américain" our 28 per cent top marginal tax rate, will find itself losing its capital, its entrepreneurs and its future in the global economy.

Britain's initial tax cut led the world in supply-side economics.  Since then, the rest of the world has moved ahead.  Our newly emerging technologies make it absolutely mandatory that Britain continue to fulfill the supply-side promise.



TAX RATES VERSUS TAX REVENUES

When the tax legislation of 1981 was passed in the United States, the implicit assumption was that changes in the tax rates did not affect the tax base.  If we had a 10 per cent increase in tax rates, it was assumed that revenues would go up by 10 per cent.  Similarly, if we had a 10 per cent decrease in the tax rate, the popular wisdom was that revenues would go down by the same percentage.  Supply-side economics, however, has demonstrated that the view is incorrect, particularly for high marginal tax rates.

Consider the impact of an across-the-board 25 per cent reduction in tax rates.  The top rate in the United Kingdom is 60 per cent.  A 25 per cent reduction would slice that top rate from 60 per cent to 45 per cent.  When you have a 60 per cent top rate, people in that tax bracket get to keep 40 cents of every additional $1 that they earn.  When you slice that tax rate by 25 per cent to a 45 per cent top rate, people then get to keep 55 cents of each additional $1.  There is an increase from 40 cents to 55 cents in the amount of money each individual can keep for every additional $1 that they earn.  That comes out to a 40 per cent increase in take-home pay.

Let's try a lower base of 16 per cent.  Suppose the 16 per cent rate was also cut by 25 per cent.  The 16 per cent rate would now be sliced to 12 per cent.  What impact would it have upon the incentive to earn additional income?  The person originally gets to keep 84 cents on each $1 that they earned.  After the cut in the tax rate they would get to keep 88 cents, an increase of 5 per cent in their take-home pay.  This is far less than the increase in the higher bracket.  The largest increases in the incentives to earn come in the higher brackets.  As a result, if you cut tax rates across the board by 25 per cent, you can expect that this will increase the tax base more in the upper brackets and thus you will gather a larger share of tax revenue from high-income individuals.

Again, when the 1981 tax cut was passed, the popular view was that it would be a windfall for the rich.  Some of us who had looked at previous historical tax rate reductions strongly questioned that view.

From the period between 1921 and 1926, the top marginal income tax rate in the United States was cut from 63 per cent to 25 per cent. (3)  The bottom rate was cut from 9 per cent down to 4 per cent.  At that time, there was a lot of the same talk about how these cuts would be a windfall for the rich.  The numbers tell a different story.  You had a tremendous increase in the tax revenue that was collected from high-income people in 1926.  Individuals making over $100,000 in income paid 86.3 per cent more in tax revenues in 1926 than they did in 1921, in constant dollar figures.  In contrast, those with income of less than $25,000 paid over 50 per cent less in taxes in 1926 than they did in 1921.

The 1964 tax cuts show a similar picture.  In 1964 we cut the top rate from 91 per cent to 70 per cent, and cut the other rates proportionally, roughly a 20 per cent reduction in each income bracket.  The top 5 per cent of taxpayers in the United States paid 7.7 per cent more in taxes after their rates were reduced.  In contrast, the bottom 50 per cent of taxpayers paid 9.2 per cent less in taxes in 1965 than they did in 1963.

It was data like this that led Richard Stroup, an economist at Montana State University, and myself, to argue in an article that the 1981-1984 tax rate reductions would more than likely increase the share of tax revenue derived from high-income individuals compared with that from taxpayers with lesser incomes.  We made that prediction in late 1981.  The data are now available to measure the impact of the tax cut legislation.  Once again, if you look at the bottom 50 per cent, you'll find that they paid 8.3 per cent less in revenues in 1984 than they did in 1981.  In contrast, the share for the top 5 per cent of taxpayers increased.  In 1981, they paid 35.3 per cent of the total tax revenues collected.  In 1984, they paid 38.9 per cent.  Five percent paid almost 40 per cent of the total taxes collected, a thirty-year high in terms of the share of revenues collected from upper-income taxpayers.

Far from the popular wisdom at that time, what the Reagan tax cut did was soak the rich by cutting the top rates.  The implication of this is rather straightforward.  Tax rates above a certain level are counterproductive.  They result in the tax base shrinking.  You would actually end up collecting more revenue from high-income people if you cut their tax rates.

I am not arguing that if you lower tax rates overall, you'll collect more revenue.  The evidence will not support that argument.  What you will do is expand the tax base, particularly at the top range.

This challenge to the conventional wisdom is beginning to sink in.  One difference with respect to the most recent tax legislation passed in the United States and the legislation passed in 1981 is in the media's handling of the issue.  In 1981, there was no discussion of the fact that the tax base would be affected by changes in the rates.  In 1986, there was a widespread recognition that the base is affected by the level of marginal tax rates.  The "windfall-to-the-rich" argument did not nearly carry the weight this time around that it did in previous debates.  The implications for the United Kingdom are clear.  The U.S. experience indicates that a 60 per cent top marginal rate is too high.  If you want to soak the rich, you have to cut that rate.



THE LAFFER CURVE:
A LOOK AT THE EVIDENCE

In early 1984, the first tax data since the 1982 tax cuts were then coming out, and -- lo and behold! -- the tax share paid by the rich had risen.  This upset the establishment in Washington.  They argued that the numbers were deceptive.  Their objections were twofold.  First, some of the early analyses looked just at the number of taxpayers.  Obviously, with economic growth and rising income, there will be more people at the top.  Needless to say, more people at the top will pay more taxes at the top.  Their second objection was that 1982 was a peculiar year.  Indeed it was.  We were in the midst of the worst recession in post-war experience.  They argued that the distribution of income in America had changed.  We had record high nominal interest rates.  Interest income is concentrated at the top of the income distribution, so when you see a rise in interest income, you should expect to see a rise in the share of income and taxes at the top of the distribution.

I decided to accept these arguments as valid and run some regressions with those assumptions built in.  I took all of the critics' arguments into account about changes in the distribution of income and the number of taxpayers and I plugged them into the National Bureau of Economic Research forecasting model to see what levels of revenues were predicted at different marginal rates.  In 1982, the top rate was dropped from 70 per cent to 50 per cent.  That rate applied to people with incomes of over $200,000.  Under the old 70 per cent rate, they would have paid $25.95 billion in taxes.  Under the new 50 per cent rate, assuming the base didn't broaden at all, we would have expected them to pay $22.44 billion.  When the tables came out, however, it was discovered that they had actually paid $26.62 billion.  In other words, the top 180,000 taxpayers paid more in taxes than we would have expected them to pay at the old 70 per cent rate.  Taking all of the critics' arguments into account, people at the top paid more taxes with lower rates than they would have paid with higher rates.

If you look at the figures for 1983, the situation persists.  People in the top bracket paid $31.7 billion instead of the $29 billion predicted at the higher rates.  In 1984, their actual tax payments were $42 billion compared to the $34 billion predicted using the old higher set of tax rates.  Quite clearly, what we have is the Laffer Curve.  Prior to the 1982 tax cut, we were at the negative end of that curve where higher rates produce diminishing revenue.  Seventy per cent was too high a tax rate.

What is true at the top, however, is not necessarily true for everyone.  In 1982, for all taxpayers, we expected to take in $311 billion.  We actually took in $277 billion.  The tax cuts did bring about a loss of revenues.  Note, however, that if we didn't have any revenue response, we would have only collected $267 billion.  In other words, we did get a positive revenue response of about $10 billion.  We made up about a quarter of the total cost of the tax cuts.

In the final part of my study I tried to discover what a revenue-maximising tax rate would be.  I looked at the actual taxable income reported compared to what was predicted.  My revenue-maximising tax rate came out to be 33 per cent.  I talked to some anti-supply-siders about my findings and again I decided to stack the case against myself.  I took all of their statistical ideas into consideration so as to make the revenue-maximising tax rate as high as possible.  My new maximum rate was 50 per cent.  I would call that an upper limit on the revenue-maximising rate with the 33 per cent rate as the lower limit.  One could split the difference and say that a 41 per cent marginal tax rate would be the point at which you would take in the most revenue.  That's a lot better than your current 60 per cent rate.

It's important to point out, however, that a hypothetical revenue-maximising income tax rate is not an ideal which policy makers should shoot for.  There's nothing wonderful about a tax system at the revenue-maximising rate except that it produces the most revenue for the government.  There is not a single economist who would tell you that that is optimal for society.  A smart society will have a tax rate well below the revenue-maximising level.

Yesterday I was having a talk with David Willets, a member of the Prime Minister's staff, about your experience here in England.  You might find it reassuring to note that the British numbers on tax cuts and revenue collections among the wealthy parallel my own findings.  In 1979-80, prior to the 1979 tax cut which lowered Britain's top marginal income tax rate from 83 per cent to 60 per cent, the top 1 per cent of taxpayers in Britain paid a 10.4 per cent share of total revenues collected.  In 1985-86, six years after lowering the rates, the top 1 per cent of taxpayers paid 12 per cent of total revenues.  The same was true in the next highest bracket.  The top 3 per cent of taxpayers in 1979-80 paid 18 per cent of total revenues.  In 1985-86 they paid 20.7 per cent. (4)

The irony is that these numbers were requested from the Treasury by a Labour member of Parliament who wanted some evidence that the rich were getting a big break from the tax cuts.  Obviously, he didn't run to the newspapers with these results.

Finally, I do not recommend that the results I obtained be directly applied to the British experience.  My breakdown of taxpayer groups does suggest, however, which individuals will respond the most to changes in tax rates.  The people you should expect the most response from are people who are entrepreneurs.  They have the most discretion regarding their income and how they will arrange their compensation package.  My figures show that business income exploded at the top end of the income distribution.  If that's also true in England, if your top bracket earners are primarily entrepreneurs who control their own compensation packages, then I think your revenue-maximising rate should be very similar.



TAX AVOIDANCE AT THE MARGIN

I'm sure some of you have been sitting here wondering how it is that by cutting the tax rates of the rich they end up paying more money.  Some have referred to this as soaking the rich.  The rich are too clever to get soaked.  The rich are winners and you have to do something which appeals to their incentives.  Lower tax rates provide individuals with a greater incentive to work, save, and invest which in turn broadens the base of wealth that is taxed.  The economic models currently being used measure these incentive effects.  None of them, however, explicitly take into account the effect that different tax rates have on tax evasion and avoidance activities.  As a result, they underestimate the revenue-raising potential of lower marginal rates.  They don't take into account the evasion and avoidance activities that are spawned by high tax rates.

Estimates have been made for different countries regarding the extent of evasion activity.  In Great Britain, the studies that have been done have tended to underestimate the amount of illegal activity that goes on.  These studies, with the help of the British Treasury, attempt to measure tax evasion by reviewing family survey questions.  What happens, as you might imagine, is that when they select a sample of people to put their questions to, often 30 per cent or more of the sample will not respond.  What they report, therefore, are estimates of evasion only on the basis of those people who do respond.  These studies' authors admit that this underestimates the amount of evasion activity that's going on.  They generally estimate unreported income in the United Kingdom to be in the range of 3 per cent of GNP.

Other studies done by people outside Great Britain, however, estimate a larger degree of evasion activity.  They take into account all kinds of activities which the British researchers can't get a handle on through family surveys.  A summary of that outside research estimates that between 8 to 12 per cent of GNP in the United Kingdom goes unreported.  Thus there's a considerable amount of revenue that the government is not able to get its hands on.  That is why the numbers that Lawrence Lindsey and James Gwartney have been reporting to you are totally plausible.  When you cut high marginal tax rates, it becomes less worthwhile for you to hire accountants and attorneys to discover ways you can avoid and evade taxes.

But even if you don't accept the argument that lowering tax rates will generate more tax revenue from the rich, you should still consider cutting rates as a way of getting your high unemployment rate down.

The United Kingdom currently has an unemployment rate of 14 per cent.  Both Keynesians and supply-siders will tell you that if you cut tax rates, you'll stimulate your economy and lower that rate.  Of course, the argument is then raised, "Since it is unlikely that government spending will be reduced significantly, won't tax cuts increase the deficit?"  I don't think cutting rates will widen the deficit at all.  I've done some revenue estimates based on a study in the United States by Charles Clotfelter of Duke University who looked at over 47,000 U.S. income tax returns.  By examining those returns as well as audits of the returns, Clotfelter was able to estimate the effects of changing marginal tax rates on the amount of unreported income.

He found that if you lower the marginal tax rate by 10 per cent, you will increase reported income by 5 per cent.  In some cases the increase in income reported was 15 per cent.  For the sake of argument, let's split the difference.  That would mean if you cut British marginal tax rates by 10 per cent, reported income should, likewise, go up 10 per cent.  In addition, the cuts in rates should stimulate production and income as well.  If a 10 per cent cut in rates stimulated income by an additional 8 per cent, and this was coupled with a 10 per cent increase in reported income, the British Treasury would pull in the same amount of revenue as it did at the higher rate.  Would a 10 per cent cut in rates stimulate income growth by 8 per cent?  You now have 14 per cent unemployment.  You certainly can't argue that you don't have excess capacity in your economy.  You have little to lose.  By cutting those rates, you'd probably get an increase in income, a reduction in unemployment, and little overall negative effect on tax revenues.  Moreover, it would help to stop the so-called brain drain of British engineers who are flocking to the United States where marginal rates will soon be less than half as high as they are in Great Britain.  I would urge those of you with influence to promote the idea of cutting marginal rates for those reasons.



A DISSENTING VIEW

It is fitting that we meet in the United Kingdom, a country whose Prime Minister, Margaret Thatcher, was the first among post-war democratic leaders to bring right-wing rhetoric out of the closet.  She's had more time to succeed and more time to waste than any of the other western conservative leaders.  I suppose if she's not being called the "Iron Lady" much lately, it is because her promises to cut government spending and taxes in 1979 have somewhat rusted.  But if the gap between promise and performance has become noticeable in Britain, it is a veritable chasm in the United States, especially with regard to government spending and the fiscal deficit.  I think it is useful to review the relative performance of the United Kingdom and the United States with regard to spending, taxation, and deficits.

If you look at government expenditures as a percentage of GNP, you'll find that government spending in the United Kingdom rose from 42 per cent in 1979 to 45 per cent in 1981.  Spending has stayed at that level partly because the United Kingdom never fully recovered from the world-wide recession of 1982.  In addition, as an oil-exporting country, it was adversely affected by the decline in oil prices.

In the United States you had the same measure of government expenditure rise from 30 per cent of GNP in 1979 to 35 per cent in 1982.  Again, spending has remained at the 35 per cent level in spite of the fact that the United States has experienced a strong economic recovery.  One might argue that the United Kingdom had a passably good excuse for not reducing its spending rate.  The United States had none.

The story about fiscal deficits is a familiar one.  In fiscal 1980, the United States had no fiscal deficit of any size worth speaking of.  Since then, the deficit has reached astounding proportions.  In the United Kingdom, on the other hand, the deficit as a percentage of GNP has slightly declined from 1979, in spite of the fact that the United Kingdom never fully recovered from the recession.  How did this come about?  In the United Kingdom, the tax rate was increased from under 40 per cent of GNP in 1979 to just over 40 per cent more recently.  In the United States, a succession of phased tax reductions kept the aggregate tax rate flat at the level of 30 per cent, at the same time that government expenditures were increasing, thus producing the enormous deficits.

We should perhaps not give Mrs Thatcher too much credit for reducing her deficit through tax increases.  It would have been more consistent with her own philosophy to approach that goal through spending reductions instead of tax increases.  However, if you can't get spending down, the least you can expect an honest government to do is to make the full cost of government explicit to its citizens by relying on current taxes rather than deferred ones.  In that sense, at least, Mrs Thatcher deserves a great deal of credit

In comparison to Britain's, the United States's economic policy has been characterised by a great deal of pretence.  The pretence has been most noticeable in the area of fiscal policy where we currently are running annual deficits in excess of $200 billion.  We have promised the world that the deficits will go away by magic by 1991.  The magic I'm talking about is not the magic wand of Laffer, it is the magic of law.  It is the magic of the Budget Control and Deficit Reduction Act passed in December 1985, an act known by its sponsors, Gramm, Rudman and Hollings, otherwise known as "Grrrrrh"!  Unfortunately, this dog doesn't bite anymore.  It is now expected that the deficit in the current fiscal year will be between forty and fifty billion dollars above the target set in Gramm-Rudman, which allows a maximum leeway of only ten billion dollars.  We can expect very little to be done to unmask this fraud-inducing act before the November elections.  But even after the November elections, it will be very difficult to get spending down.  There are always some new elections to prevent spending cuts.

Moreover, it's becoming increasingly difficult to reduce spending because the net interest paid on the debt is becoming a larger and more uncontrollable part of the budget.  The Reagan Administration has raised the ratio of government debt as a percentage of GNP from a 1979 low of one-third to almost two-thirds.  That kind of increase cannot go much farther without precipitating an external payments crisis which in turn will cause nominal interest rates to rise rapidly, and place pressure on the government to adopt austerity measures.

At some point there will be a change in course.  That change will most likely involve a tax increase and a freeze or a substantial reduction in defence spending.  At that point, you will find the United States adopting the policy combination of tax increases and spending cuts that Prime Minister Thatcher tried to adopt very early in her term.  When that has happened, what will we be left with?  We will be left with Reagan's tax reform which is a solid economic achievement.  On the other hand, we will also be saddled with a large addition to the national debt and a deterioration of the United States's external trade position.  The net effect of these pluses and minuses on economic growth is difficult to determine.

The gentlemen on the right and the gentlemen on the left all have their spending favourites.  The gentlemen on the left spend to make the poor poorer.  The gentlemen on the right spend to make the defence industry richer.  Between them, spending continues to rise.  Given that fact, it is unlikely that we will soon see lasting tax reduction, meaning by that, a reduction in the ratio of taxes to GNP.  What can be done and what has been done in the United States is tax reform.  The lowering of marginal rates and the broadening of the tax base is an abiding achievement which will soon produce positive economic results.  It is an accomplishment which I hope will be emulated by other countries, including the United Kingdom.



GENERAL DISCUSSION

Q:  You have mentioned that lowering tax rates increases the incentive to earn.  Then, he pointed out, lower rates also increase the incentive to declare earnings.  I would like to add a third factor.  Lower tax rates also increase the incentive to take earnings as income.  A company director, for example, might take less options on shares and opt for a bigger salary, or an individual will invest more in income-producing assets than in capital-gains producing assets.  Have you seen these behavioural changes in your research of the American economy?

Richard Wood:  The most responsive area of income was in capital gains.  In 1983, $43 billion in capital gains were declared.  If you looked at the projections for that year, given household wealth, it should have been $32 billion.  That's a 30 per cent increase over what was expected.  The second most responsive area was business income.  That's exactly what you're talking about with regard to earnings declared.  In 1982, 88 per cent more business income was declared than was expected by people earning over $200,000.  Business and entertainment deductions proved to be extremely responsive to changes in tax rates.  The third responsive area was in wages and salaries for high-income earners.  These are basketball players or corporate executives who make $200,000 a year or more.  They are the people who can choose to take money now or take it later.  People who had control over their compensation package did take substantially more wages than they otherwise would have.

In terms of businesses, it's often difficult to differentiate between valid business expenses and consumption perks.  You get into all these issues about the thickness of rugs in offices, the kinds of equipment that you're working with, and whether you fly first class or not.  A side effect of high marginal tax rates is that they make these kinds of expenses relatively cheap.  The higher the marginal tax rate, the cheaper it is to consume something that shows up as a deductible business expense.  Lower marginal rates, on the other hand, raise the real costs of these items.


Q:  Is there any trend in fringe benefits over this time period?

Richard Wood:  I don't have any aggregate data but I do know of individual instances where companies were setting up various kinds of retirement programs, but now with the lower tax rates, employees prefer to take their benefits in higher salaries.

The U.S. Chamber of Commerce does the only national survey in the United States of employee benefits.  We've witnessed huge increases in employees' fringe benefits as a percentage of total workers' compensation in the post-war period.  But in the last few years that has slowed down.  The growth rate in benefits has declined since the tax cuts.  We've been surveying our corporate people as to what impact the new tax reform is going to have.  Many corporate executives say they will be much more sensitive now to the costs that Jim Gwartney mentioned -- travel, entertainment, etc.  Lowering the tax rates will increase the real cost of many of those items.


Q:  I've reviewed reports by the Institute for Fiscal Studies which suggest that lowering tax rates does not broaden the tax base to the extent implied here today.  Is there a conflict of evidence?

Richard Wood:  I've read those reports from the Institute for Fiscal Studies.  Those studies do not deal explicitly with social security cheating, financial offshore arrangements, or other kinds of activities that we typically associate with high-income tax avoidance.  Those studies are looking at working household families.  The other problem is that since the Institute is a government agency, if it asks questions that are too direct, the incidence of response starts going down and defeats the purpose of the inquiry.  That's why I don't think their findings contradict the evidence presented here today.  I would suggest the Institute pattern some research for the United Kingdom on the basis of the findings that we have reported.

It seems to me that some people on the right have been used to living in opposition for so long that they can never understand when they've won, so they keep on fighting.  The basic points I have presented here today are part of American mainstream economic opinion.  If you reduce tax rates across the board, irrespective of macro economic effects, you will recoup about a quarter, or maybe a third, of the lost revenue.  The spectrum of respected opinion has shifted.  My views are part of the economic mainstream.


Q:  I've often heard it said that the supply-side movement in the United States has been discredited because when taxes were cut the deficit soared instead of falling.  Fiscal conservatives say that kind of policy isn't for us.

Richard Wood:  We had a theoretical problem at the very beginning.  The supply-siders argued that a non-monetised tax cut would not be inflationary.  The Federal Reserve disagreed and tightened the money supply, driving the economy into a recession.  The computer model which we used for spending sided with the Fed.  It assumed a core inflation of 8 per cent even though the price level plummeted from 13 per cent to 4 per cent in two years.  Because the government was projecting 8 per cent inflation for the foreseeable future, our spending appropriations included an inflation premium that wasn't needed.  That's where the deficit came from.  Tax revenues remained fairly constant all along at about 19 per cent of GNP, the historical average.  It's the outlays that soared.  Moreover, the deficit as a percentage of GNP is not that large.  At this point, the Congressional Budget Office projects that under current law, assuming 3 to 4 per cent real growth, the deficit will continue to shrink as a percentage of GNP.  We are over that hump.

One of the reasons why the deficit is a political issue is because it's the only thing on which the Left can make any inroads.  Economic growth is up and unemployment and inflation are down.  Basically, they don't care about the deficit at all.  What they're interested in is using the deficit as an argument to raise taxes.

One of the great benefits of the deficit has been that it's put the Left in a bind.  It's kept them from coming out with any new spending programs like national health care.  I like to hear the Left talking about deficits because that plays into the hands of those who want to shrink government.

We heard earlier that the one great achievement of the Reagan Administration was the tax reform.  I think there's another one that ought to be mentioned.  In the last three years we've created eleven million jobs.  The European community has had no job growth in the last ten years.  I believe that America's supply-side, classical economic ideas can bring some new economic vigour to the nations which in fact gave them birth.  If you do bring these ideas home again, you'll find that you've also recaptured the moral high ground.  There's nothing more moral than putting people to work.


Q:  You mentioned that the emergence of new technologies would greatly reduce capital requirements.  Doesn't that open us up to a much wider international competition?  What natural advantages are left for the older industrialised countries, including the United States?  Aren't the individuals who really benefit from the new technology the individuals in developing and newly industrialised countries?

Richard Wood:  Yes, and I think that's wonderful.  I don't think it's a zero-sum world.  If they work harder and more creatively than us, they'll get richer than us.  It won't be a tragedy.  We'll get richer too.  Any triumph of capitalism in the Third World is a triumph for us.  Any advance of socialism in the world is a setback for us.

If the Chinese continue their course of economic liberalisation, they will become one of the most important powers in the world economy.  To the extent that any nation is willing to emancipate the creativity of its individuals, it will triumph.  That doesn't disturb me at all.  If Americans don't exploit these technologies as well as other countries do, they'll grow relatively poorer than other countries.  But to the extent that the whole world turns toward capitalism, the whole world will be richer.

For the Third World and to an extent some European countries, natural resource wealth has been a curse in disguise.  Their wealth in natural resources has allowed them to avoid freeing up their economies.  Britain was direly hurt by North Sea oil in this respect.  The Third World will actually be liberated by the declining importance of raw materials in their economies.


Q:  You put the matter very much in terms of the American Challenge.  All I'm trying to say is that America will be very much among the challenged.

Richard Wood:  The American Challenge is the 28 per cent top marginal tax rate.  That is the new "défi américain".  To the extent that other countries follow our example, that means we'll be challenged too.  Everybody benefits the more widely this challenge spreads.


Q:  I think our commentator has been a little bit too optimistic about the impotence of the state.  The governments of Europe, working through the OECD, have been actively working to block the ability of people to move their capital around.  At this very moment, there is a tax treaty being pushed within the OECD which would enable one signatory government to ask for and demand the tax returns of individuals living in jurisdictions of other signatory governments, whether or not there is a criminal tax prosecution or investigation underway.  The treaty is intended not only to thwart illegal tax evasion, but also perfectly legal tax avoidance activities.  This is an ominous development which I think we should be aware of.

Richard Wood:  I don't think I meant that the state was limited in its ability to do mischief.  What he's saying is that governments are going to become increasingly limited in their ability to do things that are beneficial to their national economies, particularly at the expense of other economies.

Their strategy will be to prevent the escape of capital and people.  I don't think they'll succeed.  It's a big world out there.  If the major countries were to get together to prevent capital flows or migration, I can assure you there will be other countries that will welcome their engineers and scientists with open arms.  The high-tech industry will move to Brazil or some other unlikely place just as the textile industry is moving to Jamaica where the tax rates have suddenly been lowered.

It's another way of saying sanctions don't work.  Sanctions ultimately fail.  Massachusetts tried to keep companies from moving to New Hampshire.  It was a fruitless cause.  Companies physically stayed in Massachusetts, but they expanded elsewhere.


Q:  One thing we have to take into consideration in this discussion is the election cycle.  In 1982, in just three months, five European governments shifted over from fragmented left-centre coalitions to strong right-centre parties.  In that honeymoon period, those governments implemented some important supply-side measures.  I think the next cycle is critical, particularly with the new government coming into power in Germany in January.  What they do will help to determine whether the supply-side revolution will go forward.

Richard Wood:  I'd like to know why you think that is true.  So far, the Kohl government has shown itself to be even less of a supply-side government than the Thatcher government.

This isn't really a partisan issue.  One of the major architects of the latest tax reform in the United States was the senator from the state of New Jersey, Bill Bradley, a Democrat.  Some of the supply-side success stories that I mentioned are India and China, socialist countries.  If one were to look at disappointments, I would point to the surtax in Canada under a conservative government.  What the Tories should be concerned about is that the opposition might turn to supply-side economics.  It is a very effective way to unseat the incumbent party.


Q:  Governments could reduce taxation to nil and still control our entire lives through regulation.  To me, the real issue is who owns assets and who has responsibility for their efficient use, not whether taxation is too high or too low.  Unfortunately, these issues are not encapsulated in what we have talked about today.

Richard Wood:  Part of the supply-side agenda has always been deregulation.  Supply-siders in the United States were very active, early on, in helping to deregulate transportation, communications and finance.  It's not that we're oblivious to those problems.  It's just that in the United States we've already fought and won many of those battles.

Indirectly, we have been talking about government control.  We live in a global market.  If tax rates are dropped in a few countries, the effect will be to drive them down everywhere else.  Technology is helping to make market forces dominant over political forces.  Governments have to conform to the realities of the marketplace.

Look at Africa.  You don't find any love for capitalism among African potentates who once were very content with their corrupt socialist bureaucracies.  They're making market reforms because they have no choice.  Their people are starving.  The new technology that I mentioned combined with the lowering of tax burdens is going to force a revolution on the rest of the world.  You won't have any choice in this country.  You'll have to lower your tax rates.



TAX PAYMENTS BY TAXPAYER GROUPS
US 1980-1984

$200,000
& over
($billion)
All
Taxpayers
($billion)
1982
    Old Law
    New Law
    Actual Tax

$25.95
$22.44
$26.62

$311.01
$266.76
$277.60
1983
    Old Law
    New Law
    Actual Tax

$29.01
$23.52
$31.73

$340.33
$265.90
$274.18
1984
    Old Law
    New Law
    Actual Tax

$34.11
$27.04
$42.11

$385.79
$286.12
$303.97

Old Law:  Estimate of what would have been collected at the old higher tax rates.

New Law:  Estimate of what would have been collected at the new lower tax rates, assuming there was no Laffer Curve effect.

Actual Tax:  The actual revenues collected.



AN HISTORICAL LOOK AT TAX CUTS IN THE US

1920s Tax Cuts

Tax Revenue Collected
(in millions of 1929 dollars)
Taxpayer Group19211926% Change
Over $100,000194.0361.5+86.3
Less than $10,000155.132.5-79.3

1960s Tax Cuts

Tax Revenue Collected
(in billions of 1963 dollars)
Taxpayer Group19631965% Change
Top 5 per cent17.1718.49+7.7
Bottom 50 per cent5.014.55-9.2

1980s Tax Cuts

Tax Revenue Collected
(in billions of 1981 dollars)
Taxpayer Group19811984% Change
Top 5 per cent100.4103.6+3.2
Bottom 50 per cent20.618.9-8.3

Source:  Internal Revenue Service.



TAXES PAID BY TOP INCOME EARNERS IN THE UK

Total Share of Taxes Paid:  1978-79 versus 1985-86

Taxpayer Groups1978-791985-86
Top 1 per cent11.2%12.0%
Top 2 per cent15.4%17.0%
Top 3 per cent18.8%20.7%
Top 4 per cent21.6%23.9%
Top 5 per cent24.0%26.7%

Source:  UK Treasury.



TAX BURDENS AS A PERCENTAGE OF GNP VERSUS JOBS

19791984Per cent
Change
1980-85
Job Growth
1985
Unemployment
U.K.32.88%38.51%17.10%-1.00%13.50%
Germany37.69%37.73%0.10%-1.90%9.30%
France41.08%45.49%10.70%-2.00%10.50%
Canada31.05%33.72%8.60%-2.50%10.40%
Japan24.43%27.38%12.10%+4.00%2.60%
U.S.A.29.91%28.99%-3.10%+8.20%7.10%

Source:  OECD.



MARGINAL TAX RATES AND ECONOMIC GROWTH

Avge Marginal
Tax Rate (1986)
Cumulative Real Growth
in GNP (1980-85)
United States (a)35%13% (b)
Switzerland37%9%     
West Germany50%6%     
Turkey51%27% (b)
France52%6%     
Italy53%5% (b)
Finland60%7%     
Norway62%14% (b)
United Kingdom62%9% (b)
Spain63%10%     
Denmark63%11%     
Greece63%4%     
Austria64%8%     
Netherlands72%3%     
Portugal74%5%     
Belgium79%2%     
Sweden90%9%     

Source:  OECD GDP Figures.

(a) US tax rates are the new projected lower rates for 1988.

(b) Countries where marginal rates have been reduced since 1975-1979.



ENDNOTES

1.  See table "Marginal Tax Rates and Economic Growth", page 39.

2.  Not proposition number 2½, but proposing a maximum property tax rate of 2½ per cent.

3.  See table "An Historical Look at Tax Cuts in the US", page 36.

4.  See table "Taxes Paid by Top Income Earners in the United Kingdom", page 37.



BIBLIOGRAPHY

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