The Hidden Taxes of Low Economic Growth
We all know that our own economic circumstances improve if we land a higher-paying job or get a raise. But what difference does it make to you how quickly the rest of “the economy” grows? If you have a good job today, should it matter how Nebraska performs in the creation of other new jobs or population growth?
Unemployment is low in Nebraska and is increasingly lower across the country. Still, in the first quarter of 2016, U.S. economic growth slowed to 0.5 percent, down substantially from the last quarter of 2015 and below previous projections. People may wonder why we aren’t growing more now that fewer people are on unemployment, or if there really isn’t much of a difference between a couple percentage points of growth.
Though it sounds mysterious, economic growth is essentially a measurement of our work becoming more valuable. Through efficiency and productivity, or population growth, our economic output can grow. Investments drive these improvements and attract people to new opportunities.
You can observe this process in a place as average as a local big box store. Trucks, forklifts, pallet jacks, fixtures, refrigerators, freezers, and computerized cash registers all help stores profitably sell you plenty of goods, often 24 hours a day.
But what would happen if these investments were not allowed to be made? Maybe they could transport groceries by covered wagon, stock inventories by hand, and individually price each order. More people would definitely need to be employed to get the job done. But without labor-saving technology, the value an individual worker could produce for the store would be much less, meaning less profit for the store and lower wages for the workers.
It would certainly take a person working in that poorly-equipped store many more years to reach their personal financial goals than in the one that exists in reality. While it may be less obvious, economic growth is encouraged or prevented in the same way. Often, unnecessary regulation and taxation is the culprit in reduced investment and innovation.
The Competitive Enterprise Institute calculates that compliance and economic costs of federal regulation reaches $1.88 trillion a year. A newly released working paper by the Mercatus Center at George Mason University bolsters this claim, finding the cumulative cost is 0.8 percent less GDP growth annually.
That may seem small, but years of robust economic growth multiply. If the federal government had frozen regulations starting in 1980, Mercatus’ economic model shows the U.S. economy would have been 25 percent larger than it was in 2012. $4 trillion in new wealth would have been created and U.S. per capita income would have increased by $13,000 a year. Imagine the problems government attempts to solve that more Americans could solve for themselves with that higher level of economic security.
These regulatory barriers to greater earning potential don’t just come from federal bureaucracy, though.
In Nebraska, state occupational licensing imposes higher costs on consumers and shrinks new job growth. A study by Heritage Foundation Research Fellow Salim Furth estimates the average Nebraska household could save $942 a year if the state enacted comprehensive licensing reforms.
This higher price is much like a tax for which the payer receives no additional services in return. By freeing that $942 spent on inflated prices for services that were once needlessly or onerously licensed (like hair braiding) more money can be spent on other, more valuable concerns. In addition to opening new job choices for Nebraskans, the savings for consumers are the basis for greater investments in Nebraska.
Taxpayers likely wouldn’t appreciate lawmakers raising their tax rates before considering alternatives. But when it comes to regulation, often the bluntest instruments are used first. Establishing a regular legislative review process that prioritizes alternatives to the most harmful regulations and licensing regimes can enable policymakers to reduce this hidden tax burden.
State governments can’t plan the economy or prevent a national recession. Sometimes officials won’t have the opportunity or the will to cut tax rates. But visualizing how regulations impact economic growth and removing policies that work against higher wages and new jobs can better position Nebraska for good and bad economic times.
