The Huge, Hidden Tax You Pay for Government
Taxpayers rushing to fill out and file their form 1040 today may think their obligation to the federal government is complete. But it's really just beginning.
Although Americans paid more than $900 billion in income taxes last year, there's a far larger tax bill hidden from view. That tax is regulation.
According to the just-released 2010 edition of "Ten Thousand Commandments," an annual study published by the Competitive Enterprise Institute, businesses and individuals paid $1.187 trillion last year to comply with federal rules. Factor in the $54.3 billion that the federal government spends on administration and enforcement, and the full cost of the regulatory state comes to $1.24 trillion. By comparison, Canada's entire GDP last year was $1.32 trillion.
The Code of Federal Regulations is now over 157,000 pages long. Last year alone, 3,503 new rules went into effect — that's a new regulation every 2 1/2 hours, day and night, seven days a week.
Federal rules cover everything from pork rind imports to farm animal weighing procedures to what colors are allowed for surgical stitches.
So what do we get for all this bureaucratic red tape?
While the costs of regulation are relatively easy to calculate, quantifying the benefits of regulation is much trickier. Agencies do a limited amount of cost-benefit analysis, but they have a built-in incentive to downplay costs and overestimate benefits, in order to avoid budget cuts or worse.
And, because benefits are largely subjective, they are nearly impossible to quantify with any precision. The Office of Management and Budget recently picked 99 major regulations and estimated their benefits to be between $126 billion and $663 billion. The OMB might as well say it has no idea.
Some rules are entirely superfluous, so the benefits attributed to them are imaginary. Would manufacturers really bother making ladders less than 12 inches wide, even if a federal rule preventing such ladders weren't in place?
Another problem is that some regulations benefit one company at the expense of another. Such rules have little or no net benefit. For example, UPS has gone on record as supporting labor regulations that would disadvantage FedEx, its chief competitor.
And regulations often unfairly benefit established big companies at the expense of smaller firms or start-ups. In fact, regulatory compliance costs small firms (those with fewer than 20 workers) 43 percent more than it costs big firms, according to economist W. Mark Crain.
If the best that OMB can do is give a range of a factor of five for a hand-picked batch of major rules, it is pretty much impossible to know with any certainty what benefits the entire 157,000 page Code of Federal Regulations brings to the economy.
What we do know with certainty is that an overly burdensome regulatory system can stifle small businesses and make the market less competitive than it would be otherwise.
That's worth remembering as you file your income taxes this April 15.