Posted by: theoptimisticconservative | July 6, 2011

We have a regulation problem, not a revenue problem

Pace my colleague Jazz Shaw, who on 6 July defends the proposition that we have a revenue problem, I say we don’t.  Our problem today is a regulation problem, and until we fix that, tinkering with tax rates will only make things worse.

It should go without saying, but I’ll say it again, that increasing tax rates does not produce a commensurate increase in revenues.  The truth about tax rates is that raising them produces a less-than-proportional increase in revenues, whereas lowering them produces a greater-than-proportional increase in revenues.  Tax rate changes do not produce a one-for-one change in revenue levels, period.  Arguments are usually made as if they do, but history demonstrates otherwise.  You cannot solve a public debt problem by raising tax rates.

The chief reason for this is that people change their economic behavior when tax rates change.  An excellent way to discern this effect is through the tool falsely referred to as a “tax subsidy.”  There is no such thing as a “tax subsidy.”  There is only a “tax break.”  Oil companies get tax breaks on drilling leases; they do not receive subsidies.  It is important to understand this and not to buy into the false proposition that a tax break is a subsidy.  And an important aspect of that reality is that the imposition of a tax is a cost added to production from outside the intrinsic production process – and it is passed on to the customer.

When government imposes a tax, it makes the product cost more, and the customer therefore has to pay more.  When government gives producers a break on the tax, that reduces the cost of the product, and the customer pays less for it.

Eliminating the tax breaks for drilling leases will cause the price of gas at the pump to go up.  It will also cause the prices of everything else made from a barrel of oil to go up.  This in turn will depress the economic activity that would have been more robust at the lower price point – and that depresses revenues for the government.

A similar principle is in operation with regulation.  The more there is, the greater the costs added to all economic activity.  All regulation imposes a cost.  There is no such thing as regulating without increasing the cost of a process.  We consider some amount of regulation to be necessary; there may be libertarian arguments against using a priori regulation to achieve the effects we desire, like unpolluted rivers and clean air, but in general, our society has agreed to the proposition of a priori regulation (rather than, for example, leaving all such issues to lawsuits among property owners).

But whether we favor specific regulations or oppose them, they all add costs.  In many cases, they go further and prohibit outright certain kinds of economic activity.  The overall effect of regulation is to discourage economic activity.  No argument can be made that regulation has any encouraging effect on the economic activities on which everything else hinges:  production, transportation, and sales.  Regulation serves in every case – every case – to make it cost more to produce, transport, and sell.

If a government wants revenues to increase, its best option by far is to let production, transportation, and sales increase, and the people prosper.  To a limited extent, government can encourage production, transportation, and sales by arranging for infrastructure like roads and sewage, which private individuals and businesses use in common.  If government is functioning properly, the reliable maintenance of law and order, respect for property, and a national defense ensures against obstacles to commerce.  But government’s main effect on commerce is routinely a discouraging one, because governments are so prone to enlarging the scope of regulation.

It ought to be obvious to us today that regulation is depressing commerce, and therefore revenues for the government.  There are wildly obvious examples like the hundreds of miles of coastline off which we prohibit drilling for oil and gas.  There are less obvious examples like the effects of freon licensing (minor) and disabled-access regulations (major) on small businesses.  Even when such regulations don’t drive small proprietors out of business, they force price increases – and they slice into profits and investment, and therefore depress the prospects for revenue.  They also increase the entry price for small businesses, guaranteeing that fewer will get started, fewer will make a go of it, and more sectors of the economy will be less subject to competition and innovation – the mighty engines of revenue generation.

What we need today is a regulatory version of what Reagan did with taxes.  (Reagan also lifted some important regulatory restrictions, of course.)  California, for example, could close much of its budgetary gap with breathtaking speed and efficiency if it merely did three things:  opened up its coast for offshore drilling; eliminated its alternative-energy policies; and favored delivering water for human use over actively preventing its delivery.  Even California’s mind-blowing pension obligations could be met if the state would also change its litigation environment, its posture on workplace regulation, and its practice of implementing virtually all regulatory policies by enthusiastically imposing costs on business.  The average person in California doesn’t even know that 90-plus % of regulations have been imposed; all he knows is that things keep costing more and more, and businesses keep pulling up stakes and moving elsewhere.

Across America, regulatory policies are actively inhibiting the economic activity that produces revenues for the government.  The only way to change that is to lift the burden of regulation.  Raising tax rates will merely exert an upward pressure on consumer prices, and drive private money away from the taxable categories that strengthen the economy.  Lightening the burden of regulation, however, will unleash the economy to produce, sell, and deliver significantly increased revenues to the government – without raising tax rates.  Oh, and it will also reduce government spending.  Regulating less means government spending less, on regulators and their infrastructure.

J.E. Dyer’s articles have appeared at Hot Air’s Green Room, Commentary’s “contentions,Patheos, and The Weekly Standard online.


Responses

  1. YES!
    ABSOLUTELY!!

    The only thing I would add is to note that every single regulation on the books has a beneficiary defending it, and cheering it on.
    None of them are going to go quietly into that dark night.

  2. Jhn1 — welcome! Apologies for the delay in getting your post through. There’s a one-time “approval,” but you’re “in” now, so don’t be shy.

  3. http://thehill.com/blogs/on-the-money/801-economy/167929-bayh-card-plan-roadshow-for-chamber-on-regulations

    Looks like some heave hitters have read this post (and previous ones) on TOC and have decided to take some action!

    • Hey, TOC’ll take the credit!

  4. –‘-increasing tax rates does not produce a commensurate increase in revenues.’—-

    way back in high school, my physics teacher taught that no electric circuitry was entirely efficient and that some of the energy involved always was not electrical but instead was heat.
    this, he pointed out, did not mean that electricity was a failure and, parenthetically, a he stated that he really loved toast.

    the rest of the opticon’s paragraph that contained the part that I quoted is mucho incorrect.

    —-” lowering them produces a greater-than-proportional increase in revenues.”—-

    is fallacious

    and

    —-“You cannot solve a public debt problem by raising tax rates.”—

    is just a contentious crock

    Tax rates and spending cuts to slow the momentum and trim the debt.

  5. We have an entire new school of economic theory here, folks. And just when leftish and rightish economists (who disagree on many things) had reached a consensus that in the modern capitalist economy there is no essential difference between taxes, the removal of tax breaks, and the withdrawal of tax subsidies. This is because income or profits in the hands of individuals and companies are in fact a very notional thing when you take into account the infrastructure provided by the community which enables the modern capitalist economy to function, and the taxes on profit which which pay for the infrastructure which enables the same profit to be made.

    The regulatory state has been with us for some time now, and like any other laws, regulation needs to be kept under review to ensure that it is at a minimum necessary to maximize freedom and minimize abuses which would erode the balance of freedom. There will always be obsolete and unnecessary regulation. And there will always be activity which exploits the lack of regulation to limit our liberties and entitlements. It is certainly not necessary to have to warn us against eating flowers. However, given the historic behaviour of the food industry, we surely have a right to be informed on the packaging of processed foods what ingredients or additives we are buying and eating. We can then exercise our freedom to buy antibiotic laden beef – or not. Of course the food industry would prefer I didn’t have the information which would enable me to exercise that freedom. Their PR people and apologists attack the regulatory warning not to eat violets when their real target is the regulations which provide me with the information to avoid buying cheap (and profitable) rubbish posing as food.

    The regulatory issue is a nuanced one which cannot be reduced to simplistic and jingoistic ideological polemics. As everyone knows, Sweden, a highly regulated, high tax nation, is dirt poor. On the other hand, the Congo, a country which has neither taxes nor regulations to any discernable extent, is a true fountain of human wealth and liberty. In fact I am thinking of trading in my obsolete 2009 Volvo for the latest green-technology Congolese mule drawn cart.

    By all means lets be vigilant in keeping the regulatory state to the minimum necessary to maximize freedom. That is the essence of Utilitarianism – and the true philosophical progenitor of the modern capitalist liberal democracy. We could make a good start by looking at the burgeoning security state and its burgeoning and intrusive security regulations and securocracy. As far as dealing with the tax-burden is concerned, an out-of-control and self-perpetuating military, its pension-cossetted and priviledged personnel, and its perpetual foreign wars, would be an equally good place to start looking for economies.

  6. I am not so bold as to speak for the Opticon, but I would suggest that the statement “lowering [taxes] produces a greater-than-proportional increase in revenues” may be true in some cases. But in almost all cases lowering taxes does not cause as much of a drop in public revenue that a simple ceteris paribus calculation would predict. And, this, precisely because of the factor that our host noted: people change their behavior in response to changes in the tax environment.

    Further, although we cannot tax our way out of our current deficits, we could grow our way out, and reduction of the regulatory burden is a great way to kickstart such growth.

    It is interesting that our “Paulite” can only bring himself to criticize the armed forces — one of the few essential function of our federal government — when discussion burdensome regulations. As I said, this is more Paul Robeson than Ron Paul.

    • The Opticons conclusion that decreasing taxes increases revenues is only true in certain circumstances. There is little question that reducing taxes on the poor and middle classes is a good for the community because these groups are inclined to spend their discretionary income at home. On the other hand, decreasing taxes on the very rich (The Republican option) only enriches the inhabitants of places like Monaco unless the tax-breaks are targeted to incentivise investment in the domestic economy.

      As for my views on regulation. You seem not to have read what I said. Our heritage is a synthesis of locke, Hobbs, Voltaire, and Montesque, as well as Adams. The greatest happiness with the minimum government intrusion is the ideal. Government intrusion can be both economic (by taking taxes from our pockets) and brutally direct (By intruding on our personal liberty). It is the latter that is most egregious by far. And it is for that reason that I prioritize the regulation that stems from the military/security state. Of course, it is the spending from this source that has also most infringed on our economic liberty as well due to the huge tax-burden imposed by unnecessary foreign wars. On the other hand, it was the lack of proper regulation of our financial institutions (another Republican idea for the benefit of their investment-banker friends) that led to the economic implosion which shrank the economy and left us (and our children) less able to pay for all the zillions wasted on foreign wars.

      • Paulite, I challenge you to name one instance where our military forces have infringed on your personal freedom. Granted, our Founding Fathers were afraid of a large standing military, and there is a good argument to be made for the minimum necessary military establishment. But, as you would say with regard to economic regulation, we need a lot more today than we did 200 years ago.

        You are also about 180 degrees off in the cause of the financial collapse. It was not underregulation that was primarily responsible, but overregulation. Government at least incentivised, and at most compelled with lawsuits and regulatory retaliation, loans to people (and on properties) that the lenders would not normally make. Combine that with a government history of bailouts for fat institutions who take reckless chances with their money, and you had almost everything needed to first overinflate and then to deflate our little beach ball. Yes, the private financiers, arbitragers, and investment bankers bear some blame, too. But we have bred an entire generation of financial whiz kids who can’t take a whiz without government guarantees. They were responding to government encouragements, guarantees, subsidies, incentives and mandates like Pavlov’s dogs, while “deregulators” like Barney Frank resisted any significant oversight of Freddie and Fannie and his pots of political patronage..


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