Thursday, June 28, 2012

Mandates are Taxes

Perhaps the reasoning that 'mandate are taxes' in Judge Robert's decision for Obamacare will make it more accepted that taxes are a radical understatement for the size of government. Clearly, it is easier to proxy the size of government with things like number of employees, or total revenue or spending, but that doesn't mean this is a sufficient statistic, just an easy one.

 A friend of mine is a CFO for a large company, and says they are not expanding into California because of the excessive amount of regulations in that state, making the total cost of development much higher than any simple metric of property values or wages. Currently the Equal Employment Opportunity Commission mandates that things like disparate impact among historically disadvantaged minorities, using criminal records in employment, or firing alcoholics, can be illegal. Home Depot's founder says that he could never have built up his company today with all the environmental and employment regulations. And then there's the Hoover Dam, which many like to show what government can do, but now could never be built because of current regulations.

Obama was pretty adamant that a mandate is not a tax, and this was a common argument. Now that this bill was salvaged via the argument that mandates are a tax, I at least hope there's a concession that a mandate is a tax.  Cliff Asness has an article on this point, presciently written days before the decision.   


cig said...

Your source on the Hoover dam story is a little bit weak, isn't it?

As for regulations, they should be of no concern to entrepreneurs: it's a level playing field, all your competitors have the same cost, so it's ultimately born by the buyer of your products, who is ultimately the one who via democracy enacted the regulation. Indeed, you get a new channel to maximise profits by implementing the regulation component of your product better than competitors. If the customer wants products with high-regulation content, an entrepreneur will provide, rather than just go on a rant that they are entitled to define what a customer should want.

For export businesses that sell outside their place of operation it matters more, but then instead of ranting the entrepreneur just moves to where the regulation/conditions are optimal and let the market moderate the thing: if the desire that citizens of a locality have for regulations becomes in conflict with their desire for export businesses settling there, they'll fix the balance accordingly sooner or later.

(And I agree that mandates are tax, of course, it's obvious: most government activities could be implemented by mandates. It's a relative of the Modigliani-Miller theorem.)

Eric Falkenstein said...

eh, I agree that's a weak link, but I still think it's true: there's no way a major project like that could be built today. Think about the inability to create any high-speed rail in spite of a massive desire to do so.

Adding costs may leave relative competition unaffected, but it creates dead weight losses that lower income for everyone.

cig said...

Yes but everyone within a locality has (collectively) decided that they think there is more (aggregate) benefit than dead weight, so that basically the lower income is worth it for them. They may very well be wrong, but it's their money and if they want to spend it on dead weight that's their choice.

Systemic dead weight applies to purely private sector activities as well: if there's high demand for objectively pointless activities, the effort expanded there and not elsewhere makes every other product a bit more expensive than it would otherwise be, via missed opportunities in productivity improvement and economies of scale.

Anonymous said...

Level playing field an amazingly ignorant argument. It is the wealth not substitution effect we are talking about. Just embarrassing.

And "everyone has agreed" is just a lie. Special interests and thieving moochers steal from entrepreneurs and moron socialists think they make cogent arguments on blogs. Cig, learn something, and until then, shut up.

Anonymous said...

It's also not true that the effects are the same for everyone. Regulatory compliance costs are disproportionately high on small firms, and thus act as a powerful protector of incumbents.