Hidden taxes represent the deadliest threat to the economic well-being of a society. A clear example is our own state of California, where prosperity is being smothered not so much by direct taxes—which are high enough—but by the indirect, hidden taxes of employment mandates and litigation.
Leading the list is the huge worker’s comp system, regularly cited by businesses as the number one reason for leaving California. The costs are gigantic—$11 billion—or about one-fifth of the entire state budget, and are comparable in size to such well-known burdens as the state property tax, the income tax, and the sales tax.
Worker’s comp was established in 1913 as a means of guaranteeing no-fault physical injury insurance to workers hurt on the job, while protecting employers from the risk of lawsuits. Back then—in the days of Upton Sinclair’s The Jungle—private medical insurance was a luxury possessed by few, and a job-related injury meant losing a hand in an industrial accident. Yet as medical insurance coverage has vastly expanded and the number of Californians employed in dangerous factories has dwindled, worker’s comp rates have skyrocketed rather than fallen. Injury costs have risen as employment has become safer.
The reason is simple. We have extended the notion of workplace injury from clear, objective cases like lost limbs or broken legs into new types of claims such as mental stress “injuries” and all the gray areas in between. This has ideally suited the financial interests of the attorneys, who handle these claims and earn fees of $1.5 billion to $2 billion per year, generating increased business with TV ads containing phrases like “you may have been injured at work and not even know it.” Fraud is enormous and inherent under such circumstances.
The money that this system extracts from the productive sectors of our society is staggering. Individuals who work in blue-collar industries such as carpentry or construction are currently paying as much as a quarter or more of their entire incomes into hidden worker’s comp taxes. The numbers would imply that a fifth of the California workers in those professions were permanently disabled by workplace injury, and being supported at full salary by the premiums paid by the working members of their industries. Only the hidden nature of the tax—known to the employer but not the employee—has prevented a full scale tax revolt.
Most ordinary workers are paying more in worker’s comp taxes than they pay in California income taxes, with the tax rates being the most regressive imaginable (for example, carpenters may pay 25 percent while investment bankers may pay only 1 percent). Furthermore, the taxes are not even going to government, but instead are going largely to the wealthy and corrupt special interest groups that control the system.
A system so inherently bad cannot be improved through minor changes. The highly touted worker’s comp reform package of 1993 is expected to cut rates by just a temporary 10 percent or so through a hodgepodge of tighter claim standards and anti-fraud enforcement. For example, work factors must now constitute at least 50 percent of the cause of a mental stress injury rather than the previous 10 percent. This is obviously meaningless since the cause of mental stress injuries cannot be objectively judged.
The solution is to abolish the entire worker’s comp system and replace the massive hidden tax with a simple requirement that the individual employee purchase cheap, minimal physical injury insurance coverage. Since the most basic economic principles indicate that current premiums are coming out of the salary/benefit package of workers, abolishing worker’s comp would be the equivalent of abolishing the California income tax for most ordinary working people in the state or eliminating a fifth of all California taxes, representing the largest state tax cut in American history. By itself, this one decisive step would be enough to fully revive our state’s economy.
What started in 1913 as a means of protecting workers from the dire economic consequences of injuries has degenerated into a gigantic scheme for transferring wealth from the honest to the dishonest and from ordinary workers to some of the wealthiest and most corrupt elements in our society. It is a tax that California can do without.
Ron Unz, a Palo Alto businessman, ran against Gov. Pete Wilson in the June primary election, receiving 34 percent of the Republican vote.