Hidden Taxes

The U.S. plant will employ 100 people, and more than a year ago the company bought a former liquor warehouse outside of Baltimore, thinking they would be open in nine months. But it’s 13 months and counting. Xu and Wang have already spent $1 million more than planned and they don’t yet have an occupancy permit.

The storage room Wang and Xu budgeted to cost $25,000, would have cost $250,000 to comply with the city’s requirements, so the company will not store as many fragrance oils on site, making it more difficult to meet orders.

The building has to be equipped with fire sprinklers and handicapped restrooms. In total, code compliance is estimated to be 30% of the $3.5 million the company has spent on the plant.

One oft-overlooked tax is that of compliance costs. Quite simply, compliance costs refer to the costs of meeting regulations set forth by the government. As this story indicates, compliance costs can be quite expensive, and in many cases prohibitively so. I suspect the main reason why compliance costs are overlooked when discussing tax policy is because compliance costs are largely invisible.
In the first place, the government does not directly receive money from compliance costs. In fact, ensuring that businesses and individuals have complied with government regulations usually costs the government a decent amount of money. Plus, the only ones who profit from regulatory compliance are those who sell products that ensure compliance. It is probable that there is a significant amount of corruption associated with this, but it does not necessarily follow that the government profits from this, either directly or indirectly. (Certain government officials may profit from regulatory corruption, but it seems highly unlikely that said officials use their illicit gains to, say, reinvest in the government. It seems more likely that they simply pocket the money for themselves.)
In the second place, compliance costs aren’t always recorded by businesses and individuals because there are times when it is impossible to tell how large a role regulatory compliance plays in a purchasing decision. For example, a fast food restaurant may decide to replace its ice machine. The restaurant will pay for the ice machine, and will thus bear some of the cost of the machine. However, since it is impossible to tell what sort of machine, specifically, the restaurant would have purchased were there no regulations with which to comply, we cannot be certain how much regulations cost the restaurant, if at all.
Finally, compliance costs remain invisible because they are hard to measure, in total. The sale of gasoline provides a perfect example of this, for it is impossible to say how oil refinement regulation compliance impacts the final cost of gas, how pump safety standard compliance impacts the price of gas, and so on. Compliance with these different regulations and standards occur at different points in the supply chain and, as such, the costs are assessed at different points in the supply chain. They have a cumulative effect, to be sure, but determining the extent of these costs is a fool’s errand, particularly if one tries to do so on a per-unit basis.
At any rate, the lesson to take away from this is that the cost of regulatory compliance should be part of the debate on taxation. That the costs are hard to see and difficult to measure doesn’t mean that the costs don’t exist. Nor does it mean that the costs should be ignored. Thus, when it comes to tax policy, regulations should be fair game.

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