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Bad Regulation is Isomorphic to Taxation January 26, 2007

Posted by federalist in Regulation, Taxation.

Gary Becker and Richard Posner have an excellent essay in today’s WSJ, “How to Make the Poor Poorer,” exposing just how bad an idea is a minimum wage.  They reason that a minimum wage “has the same misallocative effect as monopoly pricing.”  And all of the pandering politician and union arguments to the contrary, “The losers are therefore likely to lose more than the gainers gain; they are also likely to be poorer people.”

However, my favorite line is the more general observation that “most people don’t understand that regulatory laws can have the same effect as taxes.”  Let me take that one step further and suggest that we can define a Bad Regulation as one that could be implemented through some scheme of taxation.  To some this may be self-evident: Taxation is the confiscation of property by government for unrelated purposes — properly to serve the “public good,” but corruptly to serve special interests.  Since we know government thrives on feeding special interests, so we also know that government has every incentive to obfuscate these corrupt transfers of assets by embedding them in opaque regulations instead of (generally) more explicit taxes.

The “minimum wage” is nothing more than a tax on low wages that is immediately transferred to the people earning those wages. I don’t know if it helps illustrate the absurdity of the proposition to imagine the government going to every business and saying, “We’re going to tax you $2.10/hour on all your least-productive employees.”  What about other bad regulations?  If you’re a small business that wants to raise funds in our public markets, we’re going to levy an enormously regressive tax on you and give it to accounting firms (Sarb-Ox).  If you want to sell a life-saving pharmaceutical in this country, the price of entry for each drug is a one-time tax of something like $1 billion (FDA).  The reader is invited to map other bad regulations to functionally identical taxes.

It is also straightforward but still illuminating to consider all taxation as nothing more than bad regulation, invariably distorting the marketplace, discouraging productive activity, and subsidizing special interests.



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