EVENTS

Date:	Friday, June 17, 2005
Time:	9:00 AM -- 10:30 AM
Location:	Wohlstetter Conference Center, Twelfth Floor, AEI 1150 Seventeenth Street, N.W., Washington, D.C. 20036

June 2005

How Much Do Regulations Cost?

Budgetary allotments for U.S. regulatory agencies provide a good measure of the growth of government as well as of the increasingly complex regulatory regime with which American businesses, workers, and consumers must comply. Americans are further burdened by a complicated tax code created by an increasing number of tax credits and other such fiscal expenditures in the U.S. budget. While not as visible as direct spending, these budgetary items impose large social and economic costs on Americans. At a June 17 AEI conference, a panel of budget experts discussed the cost of regulation and tax items in the U.S. budget.

Susan Dudley
Mercatus Center

Like taxes, regulations are used by the government to commit private resources to a public purpose. However, unlike the cost of taxes, the cost of regulations is unknown, but there are proxies for it. For starters, the shelf space needed to store the Code of Federal Regulations is ten times the size of the shelf space needed for the federal tax code and budget. The staff size and budgets for the departments that enforce these regulations have also grown significantly over the past decades. The White House’s budget proposal for 2006 calls for $41.4 billion for these departments, a 45.8-percent real increase since 2000. Much of the increase is for homeland security, but it also includes real increases for other regulators like the Food and Drug Administration, the Securities and Exchange Commission, and the Environmental Protection Agency.

Besides proxies, there are also some direct estimates of the costs. The Office of Management and Budget’s Office of Information and Regulatory Affairs (OIRA) estimates that the costs for major regulations are between $35 and $39 billion but that the benefits amount to between $68 and $260 billion. The Small Business Administration (SBA) estimates that regulations cost $843 billion or about $8,000 per household. The Mercatus Center estimates that water quality regulations cost $98 billion, workplace regulations $91 billion, and telecommunications regulations $105 billion. Also, the regulations are regressive, costing small businesses 68 percent more than large businesses. The SBA estimates that it costs 60 percent more. These regulations hamper U.S. ability to compete in international business, and consumers pay for it as many everyday items are regulated, from the amount of water per toilet flush to the size of holes in Swiss cheese.

Paul Noe
Office of Information and Regulatory Affairs

The OIRA estimates that the costs of major regulation under the current administration are 70 percent lower than the average cost of regulations since 1981, when OIRA started collecting data. In addition, the benefits from those regulations are double the amount in the previous administration.

While proxies such as the size of the federal register and the number of employees working for regulatory agencies can show long-term trends, they have problems in the short term partly because more staff or pages can substitute for, rather than compliment, regulation. For example, the number of regulatory agency employees increased by 57,000 (38 percent) when airport baggage screeners were made government employees, but they do not really make or enforce new regulations--they simply replaced private employees who did the same job. Also, the number of pages in the Federal Register need not be proportional to regulatory impact. Once the page count hit a record high because it included the Microsoft antitrust settlement. Even more relevant pages do not mean more regulation. For example, agency guidance documentation is being added, but that is not adding more regulations. Even looking only at the amount of regulations is not useful because the density of regulations on a page is not constant.

OIRA estimates have problems too. The OIRA only estimates the effects of “major rules,” and it relies on cost and benefit estimates from the agencies enforcing the regulations. However, the OIRA estimates that the major regulations make up 80 percent of the cost of all regulations. So when examining the cost of regulation, it makes sense to take both OIRA estimates and other proxies into account.

Chris Edwards
Cato Institute

In a state of nature, the first taxes and regulations have good returns to society. However, our government takes up 30 percent of GDP, so we are well passed that point. Taxes and regulations--usually created for special interest groups--often have negative returns and limit freedom. For example, a Cato Institute study on research done at Duke University estimates that the costs of health care regulation are $339 billion, while the benefits are only $120 billion.

The costs of taxes can be divided into three groups: compliance costs, dead weight loss, and unidentifiable costs. Compliance costs are mostly administrative costs. For example, over 200 million forms are sent to the IRS, which has 529 different forms and 61 thousand pages of rules--up 50 percent from 1995 according to CCH Incorporated, a provider of tax information. The IRS estimates that it takes 6.4 billion hours to complete these tax forms, and at $25 an hour that costs $160 billion.

Dead weight losses are caused by the disincentives to creative behavior and non-neutralities in the tax code, such as protectionist sugar trade rules or mortgage deductions. It is estimated that these costs come to between twenty cents and a dollar for every tax dollar. A flatter tax would help reduce this inefficiency.

Lastly, unidentifiable costs come from things like mental anguish from doing taxes and bad decisions made because of the complexity of the tax code. CCH estimates that two-thirds of people are unaware of basic aspects of the tax code, such as the fact that Roth IRAs are tax free.

AEI intern Leon Maurer prepared this summary.