OPINION:
The inflation numbers reported this past week were the highest in nearly forty years. The inflation did not come from “greedy” oilmen who risk their capital and work hard to produce more energy at lower prices for all. The inflation did not come from farmers who, like the oilmen, risk their capital, face uncertain weather, pests and environmental nags to produce the best and most plentiful foods in the world. The inflation comes from one source — and that source is incompetent and politically driven government officials and bureaucrats who, through overregulation and taxation, drive up the cost of most everything and then try to cover their sins by printing more money than the increase in goods and services would justify.
A commercial builder might look at what the folks at the Federal Reserve, Congress and the Biden Administration are doing and expect inflation to continue. With the expectation of more inflation, coupled with very low interest rates paid by the banks, the rational decision might be to stock up on building materials — such as marble floor tiles, rare woods, aluminum sheet, tubes, rods and so forth — to fill up unused warehouse space. The builder might decide to pay cash for all the materials for financial privacy reasons — which would be totally legal.
Others not in the building business or having warehouse space might also expect that building materials will increase in price and would also like to purchase materials (real assets) as a hedge against inflation. Say an entrepreneur comes along and says to people who are trying to protect themselves against inflation, “I will buy aluminum and marble flooring for you and others, then digitize it so it can be sold in small affordable pieces to make it more liquid, store it for you at a very inexpensive rate, and charge you low transaction fees for my services.” Those who think the total costs of these services are going to be less than expected inflation might well say, “Sign me up.”
Ah, but not so fast. Government regulators will say that the proposed business might make it easier for those who wish to “launder money” or evade capital gains taxes. Therefore they will demand much more information on both the buyers and sellers. The information disclosure requirements may well be time-consuming, costly and privacy-destroying. Still, rarely do folks in government do real cost-benefit analyses of their regulations and often ignore the fact that the regulations may be liberty-destroying as if the Constitution does not exist.
A great deal of financial and business innovation is taking place that improves services, allows for much better allocation of resources and reduces costs. But at the same time, government regulators too often discourage or even prohibit innovation for fear their power will be undermined, despite considerable benefits to the public. Last week, the Oversight Subcommittee of the House Ways and Means Committee held a hearing entitled “The Pandora Papers and Hidden Wealth.”
The Pandora Papers refer to 12 million leaked documents showing how the global elite evade taxes and more. Congress is considering new laws and regulations to deal with the problem. For at least a half-century, the U.S. government and other governments have written rules and regulations prohibiting money laundering and tax evasion. Yet, when periodic scandals occur, they always contain names of many politicians from around the globe who have ranted and raved against the very tax evasion they are engaged in.
One of those who testified is a very smart, able and sensible lawyer and economist by the name of David Burton of the Heritage Foundation. Mr. Burton began his testimony by noting that, “In a free society, individuals and businesses enjoy a broad private sphere free of government involvement, surveillance and control. The U.S. financial regulatory framework is increasingly inconsistent with these ideals. The current regulatory regime is overly complex and burdensome, and its ad hoc nature has likely impeded efforts to combat terrorism, enforce laws and collect taxes. Moreover, the current framework appears to be grossly cost-ineffective.”
A current target of the global financial regulators is to demand more transparency about “beneficial ownership” or who really owns what – even though the term cannot be precisely defined. The regulators have required more and more reporting by companies on beneficial owners, even though the primary burden is on firms of 20 or fewer employees or less than $5 million in gross receipts. Again, Mr. Burton notes, “These are the firms most suffering from the calamitous, devastating effects of lockdowns and other government policies aimed squarely at small businesses. These are the firms that are the backbone of our communities.”
The increased complexity of the tax code and attendant reporting requirements undermine respect for the law and civil society. The Tax Foundation estimates that tax compliance costs exceed $400 billion. The never-ending anti-money laundering requirements probably cost another $8-10 billion, even though there is no evidence they have reduced the vague crime of money laundering. Yet, the number of small businesses being destroyed or throttled at birth by overregulation is increasing. Without a growing and dynamic new small business sector, an economy slowly withers away, along with jobs and prosperity.
• Richard W. Rahn is chairman of the Institute for Global Economic Growth and MCon LLC.
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