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Our Huge Hidden Tax: Government Regulations

Posted 02/21/2017 6:56 am by

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Trump on right track: cutting regulations is as critical as tax relief

 

On day one, President Trump surprised business leaders gathered at the White House, declaring US regulations “out of control” and “in need of 75% or more reduction.”

 

A week later, he boldly signed an executive order requiring repeal of two old rules for every new one that government agencies implement.

 

The fact is that cutting regulations is as critical as tax relief in turning the US economy around. The two are the holy grail to repatriate a large part of the $2.5 trillion in offshore corporate capital, stimulate domestic investment, and create jobs — all central to “making America great again.” And it’s economic growth and broadening the tax base that can — in the longer run — finance rebuilding US infrastructure and the military without adding to deficits and national debt.

 

The Federal Register records regulations are imposed on business. Its annual pages generally grow with every administration, with a 19% year over year increase in Obama’s last year — setting a record-breaking 95,000-plus pages. Professor Alan Dershowitz notes that, “today the average professional commits three felonies a day without realizing it, thanks to the complex layers of regulation and legal requirements that have been built up over time.” The Small Business Administration estimates the compliance costs of regulations may be upward of $2 trillion a year — an enormous hidden tax nearly six times greater than the aggregate $350 billion in corporate tax revenue collected annually by the IRS in recent years.

 

We Need More Than Executive Orders

 

Executive orders provide temporary relief, but long-term structural change is needed for the US to free itself from the regulatory leviathan and permanently limit federal bureaucracies and their army of unaccountable regulators. Start with two statutory safeguards: (1) Congressional legislation that requires the delivery of $2 of regulatory cost reduction for every one dollar of new regulatory cost increase; and (2) Periodic Congressional reauthorization of regulations affecting industries and the economy — with sunset provisions for those not reauthorized.

 

But perhaps most importantly in the long run is the need for a renaissance in understanding the appropriate scope and principles for regulation in today’s free market information economy.

 

Toward this end it’s worth evaluating and learning from the three regulatory laws that have had the most impact on the economy over the last 15 years: (1) The Sarbanes-Oxley Public Company Accounting Reform and Investor Protection Act, which was signed into law by George Bush in 2002; (2) The Patient Protection and Affordable Care Act, aka Obamacare or ACA; and (3) The Dodd-Frank Wall Street Reform and Consumer Protection Act — the latter two signed into law by Barack Obama in 2010.

 

The Sarbanes-Oxley Disaster

 

Sarbanes-Oxley was hastily passed by a unanimous Senate vote in July 2002 to prevent the next WorldCom and Enron — both collapsing into bankruptcy in part because of accounting legerdemain. Its ostensible purpose was to improve corporate governance and prevent accounting fraud. But Sarbanes-Oxley’s one-size-fits-all approach to structuring corporate boards, determining their duties and those of officers, and requiring granular internal controls and audits was overkill and violated the primacy of public companies to choose and implement best management practices.

 

Sarbanes-Oxley dramatically raised regulatory costs for US public companies, and made them less competitive in world markets. And it diverted management away from innovation, while richly rewarding lawyers, accountants, and auditors. Small public companies and venture capital start-ups, which have typically generated more than 70% of new jobs in the US were penalized more than large companies as compliance costs, starting at around $2 million annually, were spread over fewer heads and less revenue. In reaction, US IPOs dramatically declined after the passage of Sarbanes-Oxley, resulting in reduced capital formation and job creation, with many start-ups choosing to stay private.

 

The aftermath of Sarbanes-Oxley also witnessed the advent of mega-billion-cap IPOs, such as Google and Facebook, whose late stage public offerings enriched the 1% insiders while providing less opportunity for the investing public. Uber’s recent announcement that it will likely stay private may also be in part due to the unintended consequence of Sarbanes-Oxley, as company insiders enrich themselves with private stock sales, while avoiding public company red tape.

 

Sarbanes-Oxley was intended to improve corporate governance and safeguard the little guy. In practice it has dampened innovation, hurt job creation, helped large companies relative to smaller enterprises, and facilitated the rich getting richer.

 

Obamacare: Keeping Businesses From Expanding

 

Obamacare provided a new health care entitlement for the uninsured, but it failed to improve the quality, choice, and cost of health care for the vast majority of Americans because it undermined free market mechanisms. In hindsight it was ludicrous to pass health care reform that required billions in new spending that also limited options for participants and weakened competitive forces that cut prices and improved quality, while also forcing some providers to render services that violated their Constitutional First Amendment rights. It also created a new hydra-headed government bureaucracy — all while doing nothing to address the failures and insolvency of the parallel health programs of Medicare and Medicaid. Additionally, ACA was the first bill that was so complex and lengthy at 906 pages that very few Congressional members read it before voting on it. In the words of then Speaker of the House Nancy Pelosi, “we have to pass the bill so that you can find out what’s in it.”

 

What was in the ACA bill was a Congressional surrender of the function of legislation to unaccountable government agencies and commissions, a relinquishing of budgetary control through the allocation of large appropriations for vague expenditures, and the authorization of a bureaucratic explosion that created some 159 new government agencies and boards that have churned out some 30,000 pages of new rules and regulations — all stemming from a 906-page bill that few in Congress ever read.

 

Obamacare also hurt economic growth with its mandate on employers to provide health care coverage when payrolls exceeded 49 full-time employees. Many companies approaching that threshold responded by either replacing full-time with part-time workers or simply choosing to limit the company’s growth.



 

The Dodd-Frank Bureaucracy

 

If Sarbanes-Oxley and Obamacare created new bureaucratic dysfunction and unaccountability, while emasculating beneficial incentives and constraints unique to private enterprise, Dodd-Frank went further. Passed in the aftermath of the 2008 financial crisis, it eroded the rule of law by creating yet more new federal agencies to arbitrarily regulate whole sectors of the capital markets as well as large corporations. One creature of Dodd-Frank — the Consumer Financial Protection Bureau (CFPB) — was unleashed with no Congressional oversight or budgetary control.

 

At 2,300 pages, the Dodd-Frank bill was more than twice the length of the Obamacare bill. It extends the same creeping regulatory socialism in the financial service industry as was imposed on health care. Now, more than six years since the law passed, 30% of the nearly 400 rules required by Dodd-Frank remain unfinished, while some 25,000 pages of new rules have been created.

 

But even after finalization, many of the Dodd-Frank guidelines — such as the Volker Rule — prove exceedingly difficult to interpret, requiring diversion of manpower and resources from profit-enhancing activity to profit-draining regulatory compliance. As with Sarbanes-Oxley, complex and costly financial regulations imposed by Dodd-Frank, have penalized the small and favored the large — resulting in accelerated consolidation and closure of small and community banks and the credit they traditionally extend to small business. Ironically, the Dodd-Frank law that was supposed to eliminate the need for government bailouts has in fact enlarged the number and size of institutions now officially designated as “too big to fail.”

 

The key lessons from the problems and collateral damage from the three most significant regulatory laws passed in the last 15 years are self-evident. Congress should move forward on legislative action to repeal and replace Obamacare and take statutory actions to correct the economically harmful parts of Sarbanes Oxley and Dodd-Frank. Looking forward, the Trump administration should enlist free market spokespeople and use the bully pulpit to develop a broad-based understanding about the appropriate scope and principles for regulation that can bring about limitations and lasting reduction.

 

What is underappreciated is that the free market system based on law is largely self-regulating, and relatively efficient in weeding out deficient, unsafe, and excessively priced goods and services, as well as fraud and corruption. Government regulations should not be driven by crises nor be overly complex. The scope of regulation of a market economy properly understood should protect transparency, competition, private and public property, and safety; promote individual and corporate accountability; assure level playing fields, and provide for equal treatment of small enterprises; and most importantly, protect Constitutional rights and equal opportunity and penalty under the law.

 

In summary, the core lessons of the modern regulatory leviathan are: (1) that it can’t keep up with complexity; (2) that solutions are not only tenuous, but invariably come with unintended consequences; and (3) that it’s unlikely to work because it is driven by politicians who are driven to raise money and solicit votes — promising to “fix” problems by taking actions that “help” some constituents at the expense of others and that generally interfere with the self-correcting nature of a free market system.

 

It may be counterintuitive, but as the economy continues to grow in complexity, trust in regulatory solutions should be tempered by more reliance on competition within the framework of existing laws. Applying new knowledge and best practices — rapidly transmitted in an information-based market economy — is likely to deliver better outcomes than new, ever-expanding and centralized government regulations.

 
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One response to Our Huge Hidden Tax: Government Regulations

  1. Tom February 21st, 2017 at 11:50 am

    The real reason for these regulations is that they disproportionately harm smaller businesses. A large corporation can assign regulatory compliance to some relatively low-paid cubicle jockeys. In a small business it’s likely to be the boss/owner who has to deal with it, during which s/he is not getting anything productive done. If they are the sole worker in the business, that means a 100% stoppage of anything useful being done; if they have one employee, it drops to a 50% stoppage, if two employees a 33% stoppage, etc. For a company with as many employees as Exxon to comply, it’s a .000001% stoppage. Regulations are a back-door way of harming the small competition of large corporations.

       

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