The Cost of Compliance

If taxes and regulations are the price we pay for a civilized society, there are some things you should know regarding the cost of compliance.

November 7, 2022

By: Bobby Casey, Managing Director GWP

T​axes can be a huge burden on businesses, no question. But equally miserable are the cost of compliance and regulation. As if tax codes weren’t cumbersome enough, compliance with them is just further extortion for your own money. Now pile onto that the costs of regulations.

A​ common euphemism for local police in the US is “road pirate”. That’s because they will take a benign act and issue a citation that could cost you hundreds of dollars. Those funds are typically placed in a “general fund” with the city or county.

T​his is the “surprise” tax people get just for going about their lives.

T​here’s the “hidden” tax of inflation when countries’ central banks just decide to print money in excess of their actual production. That’s where they decide to let you keep your money, and only steal the value of it.

Regulation and compliance are yet another way in which governments at some level drain the economy.

While I’m no fan of Donald Trump, and I didn’t spend a whole lot of time in the US during his presidency, I respected the policy of removing two regulations for every one that was proposed. There’s so much clutter these legislators refuse to revisit and abolish, he actually had to dangle the carrot of allowing a new regulation in order to get them to find archaic useless ones to abolish as a trade.

Let’s be clear, though, Trump is only a walk in the park when juxtaposed with someone like Obama. During Trump’s 4 years, his administration averaged 66,490 pages of regulation per year. Contrast that with President Obama’s average of 80,420 pages per year.

But each country has their surprise, hidden, and covert sources of revenue. Consumers think that bilking large companies will offset their own obligations, when in fact they cost of those taxes are built right into the price points of goods and services.

I​t’s not very easy to cull the data on regulation and compliance. But a few countries have been assessed to some degree, which at the very least provides directional guidance on what to look for when considering where to set up shop.

Mexico

Mexico has a strong workforce with a tremendous work ethic. So why is it that many still struggle economically? Could be the barriers to entry to even start a business. The bureaucratic procedures involved in starting and running a business are bad enough. But the uncertainty of which rules apply to which businesses, and how to comply with them make it that much worse.

Even if we accept these measures as “well-meaning”, there is no chance to conclude that those intentions carried over in practice.

In Mexico, only in 2016, businesses reported having 76.5 million administrative procedures with the government, according to official data. The average per business was 20 procedures per year. The bigger the business, the higher this number, reaching levels of up to 67 transactions per year.

Between 2019 and 2020, the regulatory burden or cost to comply with government regulation in Mexico represented about 3.4% of GDP, according to data from the National Commission of Better Regulation (CONAMER).

England

England has a run-away compliance problem when it comes to their Anti-Money Laundering regulations. When I talk about US prohibition of alcohol or drugs, one of the most glaring issues with it was it was more deadly to enforce it than was to just let people have it. Not because drugs and alcohol are good for you, but because enforcement always comes with the promise that they are willing to hurt or kill you to get their way.

T​he same is true when it comes to the cost of enforcement and the cost of not enforcing anything at all:

…[A] total of around £28.7 billion was spent annually in the UK as compliance costs and this is expected to exceed £30 billion very soon. When this is compared to the £37 billion that is the annual cost of organized crime, we have a situation where the compliance cost is the same as the cost of the crime itself.

What is even more disappointing is the fact that the compliance costs far exceed the total criminal funds that are recovered…

U​S

The United States has more regulations than laws. Put another way, unelected bureaucrats have issued more edicts than elected officials have duly passed bills.

Congress passed 105 bills in 2019. Compared to 2,964 regulations, This means federal agencies issued 28 regulations for every bill passed.

T​he regulatory regime of the US is unto itself a large economy.

The estimated $1.9 trillion “hidden tax” of regulation is greater than the corporate and personal income taxes combined. If the cost of federal regulations were a country, it would be the 8th largest, behind Italy and ahead of Brazil. This does not include state and local burdens.

I​f I thought of the one thing I was most passionate about, I don’t think I could come up with this much content, much less this many rules about it, yet here we are.

A​nd look, the US is one of the most tax friendly places for everyone except Americans. So it’s tempting to look at the US as an option from the outside. And for some things, it makes sense. But you should be as clear on the regulations to your business are you are about your tax obligations when setting up anywhere.

Below is the economic toll compliance with taxes takes in the US. This is what Joe Biden recently added $80 billion in IRS funding to enforce, complete with 87,000 new agents to do that enforcing. So the cost of tax compliance is going to go throug the roof!

…[T}he 6.5 billion hours needed to comply with the tax code conservatively computes to $313 billion each year in lost productivity. This is equal to 1.4 percent of U.S. GDP and is 23 times larger than the IRS’s annual budget.

Canada

Canada has a small business problem. For as progressive as Justin Trudeau presents himself, to be or to start a small business in Canada is economically demoralizing. So much so 63% of small business owners would not recommend their own children start or run a small business in Canada.

Canada basically regulated the entrepreneurial spirit out of their own constituents. That’s tragic.

Small businesses pay five times more per employee than larger businesses.

Regulation costs small businesses $38.8 billion annually, roughly 30 per cent ($10.8 billion) of which can be considered unnecessary, redundant, or overly burdensome regulation or red tape.

Businesses with fewer than five employees spend $7,023 per employee to comply with government regulation, while businesses with 100 or more spend $1,237 per employee.

The thing is, not only can regulation create an entrepreneurial existential crisis, it can do it to whole economies and deindustrialize them:

• European industries including ferroalloys, fertilizer plants and specialty chemicals are shutting down as a result of the ongoing energy crisis.  They are shutting down factories, downsizing, or relocating.
• Certain industries may not come back, even if the energy crisis eases.
• An increasingly tight regulatory environment is another reason for de-industrialization in Europe.

If you are evaluating countries to either take up residency or citizenship, remember to look at more than the over taxes they level.  Depending on how you make your living, the hidden taxes could be devastating.

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