Sunday, September 06, 2009

The regulation tax

Stacks at the Federal Register

When most people think about the cost of government the first thing that probably comes to mind are taxes. That's not surprising given how many taxes Americans pay. There's the income tax, payroll taxes, gas tax, sales tax, utility taxes, property tax, tariffs, tolls, and various fees. This had led to a situation where Republicans are perennially vowing to cut taxes to ease the cost of government while Democrats promise to shift the burden so that it only falls on the ill-defined "rich".

And that's unfortunate, for taxes represent only a fraction of the total burden imposed by government. Much more important, in my view, are the cost of rules and regulations, which grow every year (the Federal Register was at over 78,000 pages as of 2004). These rules and regulations increase the cost of almost everything, serving as a massive stealth tax that goes largely unnoticed.

For example:
  • When purchasing an airline ticket you are almost surely aware of the taxes and fees paid. Unseen, however, is that the ticket also costs more because of government restrictions on cabotage, which reduces the supply of airlines available for you to choose from, promotes inefficiencies (particularly in international flights) and drives up costs.
  • When going to the grocery store you notice the sales tax on a pound of sugar but are likely unaware of the restrictions that exist on its importation, which lowers supply and increases the price.
  • There is widespread concern at the rising cost of health care, but how many people realize this is aided and abetted by government licensing of doctors, prohibitions on the purchase of insurance across state lines and a federal tax code that promotes the overuse of insurance?
  • In education you have to attend a 4 year college before you can apply to either law or medical school. In Spain, however, you can study to become a doctor straight out of high school and in the Netherlands you can perform your law studies as an undergraduate. While the proximate cause for the American system are cartels -- the American Medical Association and American Bar Association -- they are in turn supported by government policy. This imposes what is typically an $80,000 tax for being forced to attend undergraduate institutions.
  • When buying a house there are certain taxes and fees that are obvious, but the construction cost of the house itself has been increased by a plethora of rules and regulations that must be followed by the builder. In Washington, DC we have a building height restriction in place that serves to limit the supply of housing and drive up costs.
  • Minimum wage legislation artificially raises the costs of labor for employers and increases their expenses, forcing up the cost of the goods and services they produce and thus the price paid by consumers.
  • We all see the cost of a stamp at the post office, but how many of us realize that the cost of mailing a letter is higher than it would otherwise be due to prohibitions on competition with the US Postal Service?
These are but a few of the many examples of government rules, restrictions and regulations that increase the costs of everyday purchases and reduce our overall welfare. That's not to say all regulations are bad. I am thankful, for example, rules exist which prohibit companies from dumping toxic waste into the closest river. While this drives up their costs, the trade-off is eminently worthwhile.

But too many many of these rules, indeed perhaps most, would not withstand the scrutiny of a cost-benefit analysis and whose presence is better explained as aiding a special interest rather than serving the general citizenry. Try opening up the airlines or US Postal Service to increased competition and listen to the screams that would arise. Ditto for the sugar lobby or law and medical associations.

Reducing the regulatory burden would be a superb way of increasing economic growth and providing a very real tax cut to all Americans while coming at almost no direct cost to the government (indeed, a reinvigorated economy would likely increase tax revenue). Past deregulation initiatives, such as the telecom, airline and trucking industries, have proven quite successful as evidenced by lowered costs and improved quality in each sector. A successful push for deregulation, however, requires a willingness to take on special interests, a commodity traditionally in short supply in Washington.

While cutting taxes is admirable, and spending even more so, the real conversation that needs to take place is on reducing regulation.

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