Strangling Entrepreneurship and Job Creation with $1.75 Trillion of Regulation and Red Tape

A new study from the Small Business Administration's Office of Advocacy concludes that annual regulatory costs jumped by nearly $600 billion between 2005 and 2008. Thanks to the Obama Administration's big-government agenda, the burden of red tape today doubtlessly is much higher, but the 2008 estimate is enough to generate some very sobering numbers. A $1.75 trillion regulatory cost works out to be more than $15,500 for every household and more than $8,000 for every employee in the country. Red tape is especially challenging for smaller firms, as noted in these key findings from the summary:

The research finds that the total costs of federal regulations have further increased from the level established in the 2005 study, as have the costs per employee. More specifically, the total cost of federal regulations has increased to $1.75 trillion, while the updated cost per employee for firms with fewer than 20 employees is now $10,585 (a 36 percent difference between the costs incurred by small firms when compared with their larger counterparts).

To be sure, some forms of regulation, such as environmental protection, generate benefits. There generally are not good estimates needed to produce cost-benefit analyses, but it is quite likely that the costs are much higher than necessary - particularly for economic regulation, the burden of which is more than three times larger than the costs of environmental regulation.

Two More Reasons to Hate Taxes

When all you have is a hammer, everything begins to look like a nail. That old saying makes a lot of sense. As a tax economist, I'm sometimes guilty of looking at all sorts of issues based on their relationship with the tax code. In my defense, however, the tentacles of the IRS now reach into almost every nook and cranny of our society. And greedy tax collectors on the state and local level make a bad situation even worse. Two things from today's inbox illustrate my point.

First, you may remember that the IRS is going to be a chief enforcer of Obamacare. Well, our friends at the tax collection agency have just released a draft form for the "credit for small employer health insurance premiums." We already have a tax system that takes up 72,000 pages and requires more than 1,000 different forms and publications, but now we can add 25 more lines of mind-numbing, eye-glazing bureaucratese, all of which doubtlessly will lead to innocent mistakes that cause many more taxpayers to have nightmarish interactions with the IRS. (click here to see a full-size version of the form)


Second, Hiwa Alaghebandian at the American Enterprise Institute has an article on telecommuting which largely focuses on the environmental and quality-of-live advantages of people working from home. What does this have to do with taxes, you ask? It turns out that greedy state politicians have an annoying tendency of trying to tax people who live elsewhere. This form of taxation without representation imposes both bureaucratic and economic barriers that hinder an otherwise desirable development.

Possibly the biggest barrier to telework are state tax laws. Many states implement some form of double taxation on out-of-state teleworkers. For example, New York applies a “convenience of the employer” doctrine on out-of-state teleworkers who work for a New York–based organization, which requires them to pay income tax to New York for telework days outside of the state. All work done outside of New York is subject to New York income tax, unless the work is done outside of New York out of necessity to the employer . In 2005, the New York State Court of Appeals upheld the “convenience of the employer” doctrine in Huckaby vs. New York State Division of Tax Appeals. Thomas Huckaby, a Tennessee resident, worked for a New York–based company, but teleworked 75 percent of the time. On his New York State nonresident tax returns, Huckaby allocated 25 percent of his income to New York, and 75 percent to Tennessee; however, the New York State tax department determined that Huckaby should have paid New York income tax on 100 percent of his income. The court sided with the New York State tax department, stating that the doctrine was constitutionally applied. As many as 35 states have some form of double taxation for teleworkers.

The Dodd-Frank Bailout Bill and the Looming Red-Tape Nightmare

The Wall Street Journal opines about the number of new regulations that will be generated by the so-called financial reform legislation that has been approved by Congress. The big winners will by lawyers, the federal bureaucracy, and politicians. The big losers will be shareholders and consumers.

The Dodd-Frank financial reform bill passed by the Senate yesterday promises to generate historic levels of red tape. But apparently the 2,300 pages are so complicated that a debate has broken out over precisely how many new regulatory rule-makings it will require. This week we reported on an analysis by the Davis Polk & Wardwell law firm that at least 243 new federal rule-makings are on the way, not to mention 67 one-time studies and another 22 new periodic reports. The attorneys were careful to note that this was a low-ball estimate, counting only new regulations mandated by the bill. Now comes Tom Quaadman of the U.S. Chamber of Commerce, who doesn't quarrel with the Davis Polk estimate but has added rule-makings authorized by this legislation to those that are mandated and says that American businesses should expect a whopping 533 new sets of rules. To put this number in perspective, Sarbanes-Oxley, Washington's last exercise in financial regulatory overreach, demanded only 16 new regulations. Thus he reasons that Dodd-Frank "is over 30 times the size of SOX." ...While it might seem that the regulatory uncertainty created by the bill won't last much longer than a decade as new rules are implemented, that also could be optimistic. When regulators are granted new authorities without expiration dates on their powers, the rule-making possibilities are infinite. ...The most likely result of Dodd-Frank in the near term is a generally higher cost of credit, and a bigger market share for the largest banks that can more easily absorb the new regulatory costs. In the longer term, do not expect it to prevent the next financial mania and panic.

Great Moments in International Bureaucracy

Europe's economy is stagnant and many nations are on the verge of bankruptcy. But one thing you can count on in this time of crisis is for prompt, thoughtful, and intelligent action by the super-bureaucrats of the European Commission. Right? Well, maybe not. You can be confident, however, that they will generate idiotic regulations that increase costs and trample national sovereignty. The latest example is some new red tape that will prohibit grocers from selling items based on numerical quantity. I'm not joking. Here's a blurb from the UK-based Telegraph:

Under the draft legislation, to come into force as early as next year, the sale of groceries using the simple measurement of numbers will be replaced by an EU-wide system based on weight. It would mean an end to packaging descriptions such as eggs by the dozen, four-packs of apples, six bread rolls or boxes of 12 fish fingers. ...The changes would cost the food and retail industries millions of pounds as items would have to be individually weighed to ensure the accuracy of the label. Trade magazine, The Grocer, said food industry sources had described the move as "bonkers" and "absolute madness". Its editor, Adam Leyland, said the EU had "created a multi-headed monster". Caroline Spelman said: "This goes against common sense. Shopkeeping is a long standing British tradition and we know what customers want. They want to buy eggs by the dozen and they should be allowed to – a point I shall be making clear to our partners in Europe." ...Andrew Opie, food director of the British Retail Consortium, which represents 90 per cent of UK shops, said: "This is a bad proposal – we need to help consumers, not confuse them."

The Hidden Tax of Regulation

Even though today is tax day, let us not forget that taxation is just one of several ways that government dimishes propserity. Government spending financed by borrowing also is destructive, as is most regulation since it imposes substantially inefficiences and generally fails a cost-benefit test.

The folks at the Competitive Enterprise Institute have just released their annual estimate of the regulatory burden. The publication, entitled Ten Thousand Commandments, includes the following depressing factoids:

• A very rough extrapolation from an evaluation of the federal regulatory enterprise by economist Mark Crain estimates that annual regulatory compliance costs hit $1.187 trillion in 2009.
• Given 2009’s actual government spending of $3.518 trillion, the regulatory “hidden tax” stood at 34 percent of the level of federal spending itself. (Because of the recent federal spending surge, this proportion is lower than the near–40 percent level of recent years.)
• The dramatic reality that regulations and deficits now each exceed $1 trillion a year is an unsettling new development for America. In 2008, regulatory costs were more than double that year’s $459 billion budget deficit. Now, the 2009 deficit spending surge has catapulted the deficit well above the costs of regulation ($1.414 trillion compared to $1.187 trillion, respectively).
• The game has changed, with respect to government spending versus government regulation. Although the spending and deficit levels eclipse federal regulatory costs now, unchecked government spending can translate, in later years, into greater regulation as well...
• Regulatory costs dwarf corporate income taxes of $147 billion.
• Regulatory costs exceed estimated 2009 individual income taxes of $953 billion by 25 percent.
• Regulatory costs of $1.187 trillion absorb 8.3 percent of the U.S. gross domestic product (GDP), estimated at $14.253 trillion in 2009.
• Combining regulatory costs with federal FY 2009 outlays of $3.518 trillion implies
that the federal government’s share of the economy now reaches 33 percent.

New Video Exposes Nightmare of IRS Complexity

My all-time favorite former intern, Hiwa Alaghebandian, has just narrated a new Economics 101 video about the cost of the tax code for the Center for Freedom and Prosperity. I won't spoil the surprise by giving the details, but you if you're not angy now, you will be after watching.