Measuring hidden taxes. (Mercatus Reports: Commentary).

Johnson, Joseph M.

THE U.S. SMALL BUSINESS ADMINISTRATION recently released a study estimating that federal regulations cost Americans $843 billion a year. The study, authored by George Mason University economist Mark Cram and Rochester Institute of Technology business school dean Thomas Hopkins, further breaks down the total cost of regulation to reflect the cost borne by each American household -- a total of about $8,614 per year. That is a hefty sum, even when compared to the $19,613 average household share of federal tax revenues.

An important difference between the average household's federal tax bill and its regulatory tax bill bears scrutiny. Taxes are relatively transparent; they are reflected on the pay stubs of most workers and in the annual federal budget of the United States. But the regulatory tab is paid through reduced wages and salaries, lower returns on investment, and higher prices for goods and services. Regulations are, therefore, a hidden tax on American businesses, employees, and families.

One fact that makes the $843 billion regulatory tax bill even more disturbing is that it likely is an underestimate of the true regulatory burden. Again, unlike standard federal taxes, regulatory taxes are not collected by the Internal Revenue Service and placed in the government coffers in Washington, D.C. to be scrutinized and counted by federal accountants. Instead, regulatory taxes are estimated by those interested in understanding how much federal rules really cost, chiefly by looking at their effects or by guessing how much affected parties will have to spend to comply ex ante. Generally, that is determined by undertaking the grueling task of building estimates of the thousands of federal regulations, one by one. Thus, it is not surprising that we still do not know the total cost of all federal regulations.

Improving research Fortunately, progress is being made toward the goal of developing an itemized account of all federal regulations -- a "regulatory budget" -- by continually increasing the number of regulations for which costs have been estimated. In a recent Mercatus Center paper, I examined available information on federal rules regulating the workplace. I specifically was interested in the rules resulting from 25 statutes and executive orders relating to safety and health, employee benefits, wage standards, and civil rights, among other areas. Based on that research, I conservatively estimated the cost of workplace regulations at $91 billion annually. Crain and Hopkins used that research in their total estimate of regulatory costs, making their study the first to reflect workplace regulations as a separate category of regulatory costs.

My research brought to light the importance of continuing research into the costs and benefits of federal regulation. At present, any endeavor to understand regulatory costs is hindered by the scarcity of data available on many important regulations; that is why I say that my estimate of $91 billion per year is a conservative one. For instance, the costs of occupational safety and health regulations make up about half of that total ($48 billion) and are reasonably well researched. But the costs resulting from regulations based on civil rights legislation, such as the Americans with Disabilities Act, are less understood and likely are underrepresented in my total. (I estimated civil rights regulations to cost $6.5 billion annually when the cost of litigation is included.)

Bearing the burden While smaller in absolute magnitude than the costs associated with environmental, economic, and tax compliance regulations, workplace regulations nevertheless represent a significant burden on all Americans. Comprising roughly 11 percent of the $843 billion annual regulatory budget, workplace regulations place the most serious burdens on American workers.

Yet, to the casual observer, the assumption is that rich corporations pay the costs imposed by workplace regulations. To be certain, corporate shareholders feel the sting of higher costs and lower productivity due to regulation. Consumers, most often members of the workforce themselves, also tend to pay higher prices for goods when regulatory costs increase. Ultimately, however, it is the worker who pays, in the form of lower compensation -- or even unemployment in some cases -- when workplace regulations directly increase the cost of labor. Of course, regulations also convey benefits to some workers, but more often than not the cost of benefits mandated by workplace regulations is greater than most would be willing to pay without the regulatory impetus.

Considered more broadly, regulations affect everyone, and we all bear some of the costs. The annual regulatory budget of the U.S. government is becoming more clear as researchers continue to examine regulatory costs and as estimates become more refined. Currently, the benchmark stands at $843 billion per year, but that figure surely will grow as new regulations are promulgated and old regulations previously unexamined are added to the total.

The cost estimates are not merely figures that affect the balance sheets and income statements of corporate America. They increasingly are being recognized as hidden taxes that affect the paycheck of every American, even if they do not appear among the lines of federal withholding on every American's pay stub.

Joseph M. Johnson is a former research fellow at the Mercatus Center, where he specialized in the study of the costs and benefits of federal workplace regulations.