Who Pays the Cost of Regulation?
Insights from corporate income tax incidence
27 Jul 2007 in Regulatory Economics
Regulation is widely understood as a tax on the activity or person being regulated. Where these activities repair genuine market failures, benefits from regulation may result. If there are benefits from, say, automobile safety regulation, one would expect the beneficiaries to be persons who otherwise would have been killed or injured at the pre-regulatory safety level.
But what about the costs of regulation? Who bears them?
- Stockholders ("capital")
- Employees ("labor")
- Customers (other companies' "capital" and "labor")
- Suppliers (ditto)
Regulation has been described as a tax, and its incidence should follow a similar path. Capital, being the most mobile of inputs to production, is most able to escape bearing its costs. To be clear, this doesn't mean that firms in an industry can simply evade new regulatory requirements on their fixed facilities. It means that stockholders who wish to avoid bearing these costs can sell and invest elsewhere. The Acme Widget Company might be "stuck" with the bill, but its stockholders won't be -- only its employees (including its managers), its customers (whom Acme will try to charge higher prices), and its suppliers (whom Acme will try to pay less for raw materials).
The biggest regulatory policy proposals in the news today are plans to regulate carbon dioxide. Within the business community there are basically three camps: (1) those who want to prevent regulation; (2) those who want a cap-and-trade regime; and (3) those who want a carbon tax (preferably linked to a dollar-for-dollar reduction in corporate income taxes; global climate change may justify transforming the economy away from carbon but it does not justify growing the size of government).
Economic theory predicts that those who most want to prevent regulation will be companies (and especially their employees) who are the least able to avoid bearing the costs. Fans of cap-and-trade will be companies (and especially their employees) who believe that they can use the regulation to make a profit at the expense of others, at least in the short run. Companies that prefer a carbon tax will be the ones that run the most efficient operations in the economy and would gain the most from reducing the economic distortions caused by the corporate income tax.
We've previously posted on Rep. John Dingell's opposition to legislation that would significantly increase corporate average fuel economy (CAFE) requirements. Dingell represents Michigan-based automobile manufacturers, and especially their employees. This legislation would not address global climate change directly, but try do so by the indirect mechanism of forcing a specific industry to bear the burden. Within that industry, it's the legacy US manufacturers that would bear the brunt of this burden, and they also are the firms that have the unionized workers who are least mobile and thus least able to escape the costs. The companies' ability to shift costs to customers is very limited; they can (and have been for years) fleeing the Big Three for Japanese and German vehicles, many of which are now manufactured elsewhere in the US.
Dingell apparently believes that support for CAFE is linked to the widespread misperception that "corporations" would bear its costs, not workers or automobile buyers. (This is the same economic myth that Hubbard is describing with respect to the corporate income tax.) Furthermore, in Dingell's view if global climate change warrants legislative action, that action should not target a single industry like automobile manufacturing. Dingell intends to propose a transparent broad-based consumer-level carbon tax that captures the full cost of (say) 90% reduction in CO2 emissions. He believes that the US public would not support this, and the purpose of the bill is to discern how many Representatives disagree.
