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129 IRET Congressional Advisory 1 (2002)

handle is hein.taxfoundation/iretcgadv0126 and id is 1 raw text is: IRET Adv isor May 20, 2002 No. 129 THE POSTAL SERVICE'S TRANSFORMATION PLAN: ONE GOOD IDEA FOR REDUCING LOSSES AND TWO BAD ONES Introduction The United States Postal Service (USPS) issued a proposed reorganization plan in April 2002. Called the Transformation Plan by the Postal Service,1 it described three possible structural forms the future Postal Service could take, and three main avenues for action to eliminate current T h e P o s t and projected deficits. Transfiomat The three structures range from: (1) a Government Agency, offering subsidized residual services not provided by the private sector; to (2) a Privatized Corporation, a competitive company owned by private citizens which would contract with the government for basic mail service and be free to engage in any other type of business activity; to (3) the Postal Service's preferred middle ground option: a Commercial Government Enterprise, owned by the government but structured and operated in a much more businesslike manner, with attributes appropriate to the unique role this institution plays in the nation.2 Among the attributes the Postal Service would like to keep are al ion Olicy its monopoly on non-urgent letter delivery, its monopoly on home and business mailboxes, its tax- exempt status, and continued access to credit at low interest rates due to the implicit government guarantee of its debt. The three avenues the Postal Service asserts could be used to reduce projected deficits are: 1) better cost management, 2) participation in more markets to expand volume, which the Postal Service claims would make better use of fixed-cost facilities, and 3) more flexibility and less regulation in setting rates. The first, containing costs, would be the chief avenue open under a Government Agency status, while all three would be in play under the other two structural changes. The Postal Service's Transformation Plan raises many public policy questions, some of which IRET has addressed in the past in studies of government-owned enterprises. Basic tax and economic theory tells us that it is wrong to favor one type of business or economic activity with a low tax rate while subjecting others to a high tax rate, because it creates economic distortions that reduce national income and output. The same holds for Service's subsidies for the production or Plan raises consumption of certain questions... products. It has been seen in practice how government sponsored entities such as Fannie Mae and Freddie Mac have come to dominate their market segments, nearly freezing out private competition, with only the advantage of an implicit government guarantee of their debt. These entities have become so large that they are generating concerns about the possible misallocation of capital in favor of the housing sector, and the effect they would have on the financial markets or on taxpayers should they get into financial difficulty. The Postal Service would have a double advantage. How much of the economy would the Postal Service take over if it Institute for Research on the Economics of Taxation IRET is a non-profit, tax exempt 501(c)(3) economic policy research and educational organization devoted to informing the public about policies that will promote economic growth and efficient operation of the free market economy. 1730 K Street, N.W., Suite 910, Washington, D.C. 20006 Voice 202-463-1400 9 Fax 202-463-6199 0 Internet www.iret.org

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