Welcome to the Citizen Reagan podcast. As you may know, what I do with this podcast is discuss the contents of the Ronald Reagan Radio Commentaries produced between 1975 and 1979. Sometimes, I may decide to talk about some other topic, but with over 1000 of these Commentaries to cover, the bulk of my work will be on them.

This week, we're going to get some perspective on business taxes. Reagan is going to talk about Proposition 13, a California Constitution amendment placed on the ballot in 1978. It passed with 62% approval. The goal of the proposition was to limit the growth of property taxes over the course of time. Specifically, the value of properties was locked at their 1976 level and property values would only change when sold. Previously, there had been situations where properties were being reassessed with a 50 to 100% increase in a single year. Future increases in taxes would also be limited to no more than 2% per year. Sounds good, right? Well, the California AFL-CIO was unhappy because they saw this as a tax break for businesses. Reagan argues that a tax break for businesses IS a break for individuals, just of one of a different sort.

We the people need more common-sense economics and a lot less demagoguery, if we're to make or support decisions affecting our welfare. I'll be right back.

Early in July the leadership of the California AFL-CIO met in convention and made a few decisions that will affect the livelihood of the workers they represent. These leaders of organized labor were more than a little upset about the passage of proposition 13. Meaning no disrespect, I feel compelled to say the remedies they propose reveal that they believe too many of the economic fairy tales widespread in our land today. In the first place, they must be out of step with their own rank-and-file members, because those members voted for proposition 13 in large and enthusiastic numbers. But where the economic fairy tale shows up is in the conventions decision to battle for reimposing the property tax proposition 13 cancelled back on business and industry. They said it was a 3 and 1/2 billion dollar break for business and therefore, by their reasoning, bad for the individual citizen. If they have their way, that three and a half billion dollars will end up being paid by the very individual citizens they claim they want to help.

Whether it be corporation or corner store, taxes are part of business costs, and must be recovered in the price of the product, meaning that all of us, as consumers, pay those taxes. Now, let's take the case of a corner grocer at a nice middle-class neighborhood. The storekeeper rents the building. Everyone who shops there can understand that he must charge enough to cover the wholesale cost of the things he sells, wages to helpers, and his rent, plus a fair return for himself, so he can make a living. But now, supposing he buys the building. There's no more rent, but there's interest on the mortgage and property tax instead of rent. Obviously, he can't stay in business if those costs can't be recovered in the price of the things he sells. And, just like his wage-earning customers, many of them union members, he has to make enough gross income to pay his living costs after he's paid his income tax.

What this all adds up to is that government can't tax things like businesses or corporations. It can only tax people. When it says it's going to make business pay it is really saying it's going to make business help it collect taxes. Into our corner store comes a regular customer to pick up a loaf of bread on his way home. We've already covered the fact that the grocer's markup includes a share of the property tax on the store, but the truth is the wholesale price the storekeeper paid to the bakery included its taxes and more than a hundred and fifty others going all the way back to the farmer who raised the wheat. If he can't get a price for his wheat that'll cover the real estate tax in his farm, he can't stay in business either. If the trucker who hauled the wheat can't charge enough to cover his license fees and gasoline tax, he can't stay in business. Union leaders will serve the men and women they represent a lot better if they'll drop the demagoguery and take a simple course in economics.

This is Ronald Reagan. Thanks for listening.

Proposition 13 is still part of the California Constitution and has remained popular with voters. While there have been 8 modifications made since 1978, none significantly hampered the original intent.

In 2003, Warren Buffett, advised recently elected governor Arnold Schwarzenegger to repeal Prop 13 to help balance the budget. Fearing it would hurt a future re-election campaign, Schwarzenegger would publicly state that if Buffett mentioned Prop 13 again, he’d have to do 500 sit-ups.

It seems somewhat coincidental (maybe providential) that I started this podcast when I did. California, in this most recent election of 2020, attempted to change, imagine this, the business portion of Prop 13. Where's that California AFL-CIO! What a shocker, yes15.org says the "California Labor Federation, AFL-CIO" endorsed it. Proposition 15 was to increase property taxes on businesses with property over $3 million by matching the current market value. It was defeated.

But what of the substance of Reagan's point? His assessment sounds right to me. Anything you buy must include, in its price, the costs of every person involved along the way from its origin to your taking it home. When you buy an orange at the grocery store, tiny fractions of that money go to the owners and the workers of the grocery store, the owners and drivers at the company that transported the oranges, the owners and workers of the processing plant that packaged and sorted the oranges, the owners and workers on the farm that grew the orange. And that's just our first layer of people.

We could also talk about the power companies that supplied electricity all along the way, the resource exploration company that found the materials that produce the electricity, the gasoline company that powers the fleet of trucks, the refinery that made the gas, the fertilizer company, the chemical company that developed the fertilizer.

This reminds me of Leonard Read's "I, Pencil: My Family Tree" which was re-told by Milton Friedman in his PBS miniseries Free to Choose. In it, Friedman describes how improbable something like the average pencil would be without a free market.

Look at this lead pencil. There is not a single person in the world who could make this pencil. Remarkable statement? Not at all. The wood from which it's made, for all I know, comes from a tree that was cut down in the State of Washington. To cut down that tree, it took a saw. To make the saw, it took steel. To make the steel, it took iron ore.

This black center, we call it lead but it's really graphite, compressed graphite, I'm not sure where it comes from, but I think it comes from some mines in South America. This red top up here, the eraser, a bit of rubber, probably comes from Malaya, where the rubber tree isn't even native. It was imported from South America by some businessmen with the help of the British government. This brass feral--I haven't the slightest idea where it came from, or the yellow paint, or the paint that made the black lines, or the glue that holds it together.

Literally thousands of people cooperated to make this pencil, people who don't speak the same language, who practice different religions, who might hate one another if they ever met. When you go down to the store and buy this pencil, you are in effect, trading a few minutes of your time for a few seconds of the time of all of those thousands of people. What brought them together and induced them to cooperate to make this pencil? There was no commissar sending out offices, sending out orders from some central office. It was the magic of the price system, the impersonal operation of prices that brought them together, and got them to cooperate to make this pencil so that you could have it for a trifling sum. That is why the operation of the free market is so essential, not only to promote productive efficiency, but even more, to foster harmony and peace among the peoples of the world.

I suppose I've gotten off topic, this was supposed to be about business taxes. So, let's bring it back around and emphasize what Reagan said, that at every single step of the process, there's taxes, fees, licensing, etc. where the government gets its piece. How many things did I mention, talking about the oranges?

If those all went away, cost to the consumer would go down. Wait, wait, wait!!! I can hear them now. Greedy business owners won't lower their prices! Well, perhaps, but they'll give back some other way. Larger corporations will have the freedom to increase dividends to stockholders (which includes many more people than you think because of IRAs and 401(k)s. Maybe they'll choose to pay better wages to their employees or hire more employees. Or, yes, they could be greedy and take that money all for themselves, but unless they are saving cash under their mattress, that money will help grow the economy in some way.

We are all better off when taxes are low. Now, if we could just get government to learn some fiscal responsibility, so they would stop spending so much, we'd be putting the future generations in a better position.