Taxes, Regulations Hurt Economy

By David W. Kreutzer, Ph.D, Senior Research Fellow, Labor Markets and Trade at The Heritage Foundation.

If bigger government, higher taxes, larger subsidies, more regulations and double-digit minimum wages led to better middle-class incomes, the U.S. would be experiencing the fastest wage growth in its history.

However, they don’t, and we’re not.

Wages and incomes grow when the demand for labor grows. The demand for labor grows when the rewards for starting and expanding businesses grow. In America, however, we’ve been running the growth machine on rewind. Higher taxes and more regulations penalize expansion and start-ups. The costs are passed on to workers in the form of fewer jobs and lower wages.

In “Red Tape Rising,” my colleagues James Gattuso and Diane Katz document the phenomenal growth and cost of regulation. For instance, between 2001 and 2015 the federal government added nearly 50,000 new rules to the books. Economists Mark and Nicole Crain estimated that the annual cost of regulations was $2 trillion in 2012 — more money than was collected in federal income taxes that year.

And it has only gotten worse. For instance, in 2015, the Environmental Protection Agency added nine major rules with an additional cost estimated by the EPA at $11 billion per year.

Of course we all want clean air and water. However, twisting the definition of “navigable waters” to include a ditch that could barely float a Popsicle stick in a thunderstorm runs roughshod over local development decisions and makes a mockery of true environmental policy. Such rules provide negligible gains at a huge cost.

Compounding the regulatory problem is the fact that the U.S. has the third highest corporate income tax in the world. This one-two punch stifles economic expansion and drags down wage growth.

Some say we must accept tepid growth as the new normal for a new economy. These pessimists imply that all the big productivity-enhancing products and processes have already been invented. They point to the last couple of decades as proof. These no-can-do analysts are blinded to the ever-growing burden of taxes and regulations that threaten to make their theories self-fulfilling.

To read this commentary on The Heritage Foundation website, click here.

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