Published in The Tennessean, Sunday, October 10, 2010
Paying for government is burdensome to taxpayers
by Richard J. Grant
To direct our attention to the cost of government, the Framers of the U.S. Constitution included in Article I, Section 9 that “a regular Statement and Account of the Receipts and Expenditures of all public Money shall be published from time to time.”
In compliance with this requirement, government agencies provide regular reports and projections of federal revenue and expenditures. The recent content of these reports, such as budget deficits reaching $1.4 trillion, which is about 40 percent of the budget, suggests that our government should try harder to comply with the other parts of the Constitution.
There are also costs of government that go beyond narrow fiscal matters. The expanding federal regulatory structure has costs that few perceive.
The best recent study of the federal regulatory burden is “The Impact of Regulatory Costs on Small Firms,” which was produced for the Small Business Administration by Nicole V. Crain and W. Mark Crain, both of Lafayette College. Their summary finding is that “in 2008, U.S. federal government regulations cost an estimated $1.75 trillion, an amount equal to 14 percent of U.S. national income.”
The Crains note that they have not traced all costs, but the regulatory burden as measured is clearly substantial. It rivals the burden of U.S. federal tax receipts, which equaled 21 percent of national income in 2008. This gives a combined federal tax and regulatory burden of 35 percent of national income. That is more than a third of people’s earnings.
Comparing the burdens of different types of regulations on companies of different sizes and activities, they find that regulatory compliance costs fall disproportionately on small businesses. For firms with more than 500 employees, the estimated cost per employee was $7,755. But for firms with fewer than 20 employees, the cost per employee was $10,585.
Small manufacturing firms are the hardest hit sector with per employee costs of $28,316. This is more than double the per employee burden on large firms, which can spread the fixed costs over a larger base.
The average cost over all firms was $8,086 per employee. The largest share of this cost was categorized as being due to “economic” regulations. The next most burdensome category was “environmental,” followed by “tax compliance” and others.
The total regulatory cost burden on the typical U.S. firm is about $161,000, which corresponds to about 19 percent of payroll expenditures. This burden is greater than the combined payroll taxes paid by employers and employees for Social Security and Medicare, which take 15.3 percent.
Measuring the burden on business is important for our understanding of the regulatory effects on economic growth and employment. The Crains emphasize that, although regulations might initially be incident on businesses, “ultimately all costs must fall on individuals.” We are all consumers, workers, stockholders, owners, and taxpayers.
The regulatory burden per household in 2008 was $15,586. When combined with the tax burden, that total burden is $37,962 per household.
From 1995 to 2008, the regulatory burden per household rose at an average annual real rate of 4.8 percent. This is cause for concern, given that this is higher than the real economic growth rate in the U.S. during the same period.
When we make choices between more or less government involvement in our lives, we are also making choices about the size of the burden that we must bear for any benefit.
Richard J. Grant is a professor of finance and economics at Lipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays.
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