No Free Lunch

Legislation has been passed and someone’s got to pay for it. Certainly not the politicians. What about a general tax increase? Unlikely. There would be voter retribution. Okay, let’s vilify a person or group and pass the cost on to them (tobacco companies, Corporate America, ‘the rich’). Politicians get a free lunch: braggin’ rights for the new legislation and no new taxes. Hooray for our guy!

The lunch gets paid for with a devaluation of our democracy.

Contents

  1. No Free Lunch
  2. Democracy Devalued
  3. CFCs
  4. Proposal
  5. Closing Comments

Democracy Devalued

Politicians face an impossible mandate from voters: give me what I want but do not touch my wallet! They turn to hidden taxes. Democracy, voters weighing options and choosing what’s best for the nation, gets turned into backdoor collusion between business and government on how to quietly pass the cost of partisan legislation onto the voters. Businesses play their role as ‘villain’ as long as they profit. Politicians give businesses their profits as long as they can point voters to legislation with their signature.

You want prescription drug benefits for seniors? Sure! The government agrees to reimburse $150,000 per year prescription costs for (marginally-effective) drugs. Read my lips! No new taxes.

Those who vilify others are the ones who end up paying, either in higher prices for goods or fewer tax dollars for other government spending. Villains hire lawyers, lobbyists and accountants to get their money back in the form of tax breaks, shelters, incentives, government purchases, etc.

  • Proponents of the legislation are happy because their demands were met and villains were ostensibly punished
  • “Villains” are happy because they’re wealthier
  • Voters are happy because they’re dumb.

As long as voters cannot tie their impoverishment back to specific legislation they go along.[1] Who do you think voters blame for higher utility bills? Certainly not the politicians.

That hidden tax doesn’t affect me! My values are reflected in the legislation and make it worth the fiscal sleight-of-hand. I would willingly pay more to realize those values so it’s okay if others have to pay. The ends justify the means.

You didn’t pay this time because it wasn’t your turn. Look closely and you’ll find legislation completely at odds with your values, paid for by your hidden taxes. Whether you’re a fan of mandated coverage for prior medical conditions, or of oil exploration subsidies, there’s a hidden tax in there just for you, even if you nominally pay no federal taxes.[2]

Politicians and academics lament that we could balance the budget if we could just close those damned tax loopholes. Those loopholes are the price paid for the free lunch. Instead we see pitched battles to close the other guy’s loopholes, to take away the other guy’s free lunch. Democracy devalued.

CFCs

The Environmental Protection Agency warns Americans could suffer 40 million cases of skin cancer and 800,000 cancer deaths in the next 88 years because of depletion of atmospheric ozone … The Reagan Administration would propose a ”near-term freeze” on manufactured chemicals (CFCs) that depleted the ozone.[3]

Better safe than sorry. CFCs were banned. The ozone hole continues to grow significantly despite the ban. Skin cancer cases remain essentially flat (i.e., slight increase in white folk due to better detection). Consumers pick up the tab. Before the regulation CFC refrigerants were off-patent, widely available, and cheap. DIY consumers could recharge their air conditioners for $4.88. Now it costs $488.

Dow Chemical was delighted. They switched from selling low priced, low margin CFC to selling high-margin patented CFC replacements. Politicians burnish their ‘environmental creds’ without incurring the wrath of new taxes. ‘Scientists’ received increased government funding and presidential awards. Environmental groups receive large contributions from Hollywood.

And the voters? Dumb as ever.

Proposal

Today we reimburse local governments[4] for the costs of federal legislation (Unfunded Mandates Reform Act of 1995), and now we propose to do the same for businesses and citizens (No Free Lunch Reform Act of 2014). We reimburse all regulatory costs in excess of $100:

  • Includes expenses or losses resulting from wage and/or price controls
  • Includes funds used to build and maintain infrastructure, plant and equipment as mandated by regulations
  • Includes rebates for higher prices of goods and services purchased by individual citizens (e.g., higher premiums for ACA, higher costs for air conditioner repairs)

Costs of regulations are to be calculated and reported by an independent commission, and are used by businesses and taxpayers to claim their reimbursements. Higher priced goods and services come with rebate forms attached, addressed directly to the politicians.

Caution. Regulatory costs do not fall equally on all. We reimburse those burdened by regulations, but not to the point of shifting competitive positions.

  • In 1980s smokestacks from power plants dumped enormous amounts of sulfur dioxide into the atmosphere. Government addressed these emissions by mandating scrubbers be installed. These scrubbers are massive, a third the size of the power plants, and unbelievably expensive. It takes 20 percent of the power generated by the plants to run the scrubbers. Your electric bill increased 20+%. The same reduction in emissions could have been achieved simply by burning cleaner coal.
  • To reduce automotive emissions car makers were required to install catalytic converters. Honda cars already spewed fewer emissions than the limit, but were forced to install converters. GM held the patent on the catalytic converter.

If I’m to be reimbursed the unbelievable cost of installing and running a scrubber, I’ll do it since it allows me to purchase cheaper dirtier coal. If I’m to get reimbursed for catalytic converters, I’ll do that rather than re‑engineer my cars to achieve the emission levels of a Honda. To avoid these adverse incentives, we reimburse only the most cost-effective solutions.

We acknowledge too that mandated government changes to consumer goods (e.g., air bags in cars) can later be found an attractive product feature, and will be demanded and paid for by consumers even in the absence of regulation (i.e., repeal the regulations and car safety features stay).

Closing Comments

We shine light on the cockroaches. The No Free Lunch Reform Act of 2014 allows increased costs to be easily tied back to sponsoring politicians. Retribution can lock in on its target. Politicians are less tempted to overstate promises without considering costs. Politicians are less tempted to push for higher priced special-interest solutions (e.g., scrubbers) when cheaper solutions are available. Better-safe-than-sorry legislation gets assigned a real cost. The tax code becomes less cluttered. A bit more light shines on the democratic process: we see how all our money gets spent side-by-side with no separate accounting books for partisans to hide their back room dealings.


1. This was the main design flaw of ACA (Obamacare). It was too easy for voters to associate higher premiums and increased co-pays back to the specific legislation.

2. An evaluation by economists Nicole V. Crain and W. Mark Crain finds annual regulatory compliance costs hit $1.752 trillion in 2008. Given 2010’s actual government spending or outlays of $3.456 trillion, the regulatory “hidden tax” is over 50% of the level of federal spending itself (here ). The percentage is much higher; perhaps even a majority, when compared to discretionary spending. This does not include ‘other taxes’ – import taxes, fuel taxes, ‘sin’ taxes, airline/hotel taxes.

4. Sometimes, and only when a single regulation exceeds $500 million in costs. It also has ‘exceptions’ for legislation concerned with individual rights (as if any legislation would not be concerned with some individual’s rights).

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