Politicians Prefer Taxes That Are Invisible
Most business regulations add to the costs of doing business, raising prices to customers who must ultimately pay the costs. Regulators have theoretically determined that citizens benefit from the regulation by an amount greater than the costs imposed. However, a new type of regulation is increasingly being pushed by politicians, one with benefits meant for a small, targeted group. These regulations are being used for the purposes of income redistribution, hidden in many of the prices that we face every day.
Once the country decided that income redistribution was constitutional, government was the mechanism for accomplishing the goal. Taxes were collected from either all citizens or the wealthier ones, and then government transferred those monies to the targeted group (e.g., poor, old, rural or other favored citizens). Whether this is a good policy depends on one's views on social welfare and the propriety of income redistribution, but at least it is fairly transparent.
In contrast, accomplishing redistribution through opaque schemes based on business regulations is harder to track and harder to target both the groups who are supposed to be gaining and those who are supposed to be losing in the redistribution. The two most common forms of this business-based income redistribution are the minimum wage and affordable housing.
The minimum wage transfers money from business owners and customers to low-wage workers. Ostensibly designed to help the poor, in reality more of the benefits go to households earning at least three times the poverty level than those living in poverty. Additionally, many of the costs are paid by other poor people since many low-wage workers work in inexpensive restaurants frequented by customers who themselves are low-income. This is a perfect example of how trying to accomplish income redistribution through business regulation makes it hard to target the program benefits and costs precisely.
New York City's new mayor, Bill De Blasio, plans to expand the city's inclusionary affordable housing program and perhaps even make it mandatory for all new developments on parcels he plans to rezone for increased density. The idea behind these programs is that developers are granted the permission to build more units on their property in exchange for some percentage being offered at below market rates to low-income renters. In New York City this percentage is generally 20 percent, and the rental rates on these units can be as low as 10 percent of the market rate.
In this case, the redistribution is being paid for by other New York City residents, likely most in what passes for the middle class in that high cost-of-living city, as the rents on the market rate apartments must be raised to recoup the losses on the subsidized units. Those gaining from the subsidized rents can be targeted by verifying income eligibility so this is a more efficient redistribution program than the minimum wage; still, no costs are imposed on those renting in buildings with no affordable rate units or those who own their own house or condo unit. In New York City, most of the wealthiest residents own their residences, so they avoid paying any costs for the affordable housing program.
If such regulation-based redistribution policies are inefficient from an economic point of view and have difficulty being targeted as precisely as when government is the middleman for the redistribution, why is government increasingly favoring this approach? The answer is simple: the costs of the programs and the amount of redistribution going on today can be hidden.
Increasing the minimum wage to $10.10 per hour will involve redistributing close to $100 billion per year to lower-wage workers from business owners and customers. The prospect of Congress passing a new, $100 billion per year income redistribution program is pretty close to zero. New York City's affordable housing program involves much smaller numbers than a national policy such as the minimum wage, but at the local level the amount involved is still large with the program raising the market rate rents by between 10 and 20 percent.
Politicians want to be re-elected. That means they prefer hidden taxes to obvious ones. A customer buying a burger at a fast food restaurant does not stop to think that some of the price being paid is for the purposes of income redistribution, not simply to produce a burger. A renter in New York City cannot easily determine how much of her rent is going to offset the subsidized units in her building. With the public attitude for new taxes and new government spending both very low at the moment, politicians are being innovative in finding hidden ways to accomplish what they want. Regulations may be a second-best policy option, but they can be passed more easily.
Politicians are increasingly relying on regulations to hide the true cost of their redistributive policies. By forcing businesses to do their bidding, politicians can spend their time extolling the benefits of the regulations that they are passing without needing to dwell on or admit that there are few if any costs. The scheme will work if politicians can fool enough people into neglecting all the hidden costs. Let's hope enough people are smarter than the politicians.
