February 4, 2005

February 4, 2005 | Commentary on Taxes

The Hidden Tax

What would you do with an extra $8,000 this year? Pay off your credit card debt? Fully fund your 2004 and 2005 I.R.A.? Make a down payment on a new car?

On the other hand, if the government announced plans to increase your taxes by the same amount, you'd certainly raise a ruckus. That's probably why the government keeps quiet about exactly how much its regulations cost.

Economists Mark Crain and Thomas Hopkins did a study for the Small Business Administration and found that in the year 2000, federal regulations cost us $843 billion. That's $8,000 per household -- almost half the amount collected in federal taxes that year. In other words, Washington didn't overtly increase your tax burden last year. However, its policies cost each American household more than $8,000 in hidden regulatory expenses.

That's unfortunate, because while some federal regulations are justified, even critical, many aren't necessary. And Congress needs to identify which are which.

To do that, lawmakers should set up an Office of Regulatory Analysis, modeled on the Congressional Budget Office. This ORA would study all existing regulations, explain to lawmakers what purpose those regulations serve, and determine how much those regulations cost citizens and businesses. Any outdated or overly expensive regulations then could be eliminated.

The Bush administration can help out, too. The president should let all federal agencies know that reining in regulations is a priority. He also ought to continue strengthening the Office of Information and Regulatory Affairs (OIRA) at the Office of Management and Budget. Again, before a new regulation is put into place, the government should have to explain what it will accomplish and how much it will cost.

Making any of these improvements will require a change in the Washington culture. There are more than 4,300 regulatory agency staffers for every OIRA staffer. Ronald Reagan once said that bureaucrats believe, "if it moves, regulate it." That attitude has added thousands of regulations and hundreds of pages to the Federal Register in recent decades. But it has to change if the U.S. economy is to retain a leading role in the 21st century.

For example, our telecommunications regulations haven't been updated since 1996, when few of us used mobile phones or the Internet. Congress should write new laws that reflect today's reality and minimize regulation.

Lawmakers should make sure that consumers have choices, because competition drives down prices. That means, first of all, reducing regulations so that a variety of Internet service providers, cell-phone companies and television services can continue to compete in each area. It's also important that the marketplace, not regulators, set prices, as that will ensure that prices fall as new technology becomes widespread.

Congress also should eliminate requirements that force companies to share their investments with competitors. These sorts of regulations discourage new ideas and investment and are unnecessary when multiple competitors exist.

The federal government also ought to ease its involvement in the financial industry, which has been tightly regulated for decades. Many of those rules are simply outdated, and they're costly: Because of government involvement, taxpayers frequently have been required to foot the bill for expensive regulatory failures, as they were with the Savings and Loan bailout.

Things have only gotten worse in recent years. Because of the Sarbanes-Oxley accounting reform law, businesses spend more than ever to comply with federal regulations. In fact, some firms have gone so far as to buy back their stock and retreat from public markets. That won't help the United States remain the world leader in capital markets.

Simply put, our economy is over-regulated. There's a saying, "Thank goodness we're not getting all the government we're paying for." Well, if we reduce the burden of unnecessary regulations, we'll have less government -- and pay less for it.

We'll never get that $8,000 per household down to zero -- but we can reduce it. And chances are, that extra money will come in handy.

Ed Feulner, president of the Heritage Foundation (heritage.org), a conservative think tank based in Washington.

About the Author

Edwin J. Feulner, Ph.D. Founder, Chairman of the Asian Studies Center, and Chung Ju-yung Fellow
Founder's Office