Print

Regulations: The Hidden 11 Percent Tax on Pharma

on .

By the end of 2011, all but four of the 242 Republican House members had signed Grover Norquist’s Taxpayer Protection Pledge, committing to refuse to raise taxes on individuals or corporations. This was a welcome sign for many, indicating that Republicans in Congress were not only serious about reducing the deficit but that they would do it without stifling American productivity.

The harmful effects of high tax rates have been well documented and perhaps no greater proof of this exists than the fact that it is now nearly impossible impossible to find politicians who wish to return to a pre-Reagan 70 percent marginal tax rate, even among the most anti-business circles. But while the pro-business argument has won in the realm of tax rates, it has largely been without effect when it comes to government-imposed regulations.

While the costs of complying with regulations do not appear on a business’ ledger, make no mistake, these are real costs that that choke growth by imposing invisible taxes on business or all sizes — taxes that are then passed on to consumers. More than $1 trillion of such taxes to be precise.1

Take the pharmaceutical industry for example. In 2004, the last year for which data is available, drug companies spent $26.66 billion complying with FDA regulations.2 In a year where Pharma made $235.4 billion in domestic sales, this translates into a hidden tax of 11.32 percent.3 This invisible tax is in addition to the 35 percent corporate tax rate — now the highest in the world — or an effective rate of 31.3 percent.4 Considered together, this means the pharmaceutical industry spends 42.6 percent of its revenues either to the federal government or in complying with its standards. This does not include taxes paid to state and local governments.

Certainly, it is true that the public benefits from these regulations which keep unsafe drugs off the market. It should be remembered, however, that all taxes are deemed to serve some public purpose and that the value of this purpose does not make the cost imposed any less of a tax. Even more, not all regulations are equally effective or valuable to the public. Duke economist and public policy analyst Christopher J. Conover researched the effects of FDA regulations and found that the $26.66 billion imposed on the industry only produced $704 million in benefits. That’s a -97.4 percent return on investment for those doing the math.

The costs and benefits of regulations on an industry, however, are more elusive when drug safety and potential lives are at stake. What price, after all, could we place on human life? While there is much truth in this, Conover’s study shows that 4,000 people die every year from the costs and delays imposed by the FDA’s approval process, which now span more than a decade. Simply put, bureaucratic red tape needlessly prolongs the time between a drug’s research and development and the time it hits the markets and begins saving and benefiting lives. Further, he estimates these inefficiencies cost Americans more than $10 billion in mortality and other health losses compared to the $166 million in estimated gains. Once again, that’s a miserable -98.3 percent ROI. Is there any entity other than government that could sustain such losses or whose stock holders would tolerate such mismanagement? 

At this time when national and state candidates are making promises up and down the campaign trail to be frugal stewards of taxpayers’ money, Americans must ensure these individuals realize that tax rates and government spending are just one portion of the problem. While few Americans would even entertain the thought of an 11 percent tax hike on any industry, this is precisely what Congress has allowed the unelected FDA to gradually impose on the American people’s pharmaceuticals. It is not enough for candidates and politicians  to rail against high tax rates. Pro-business public officials must do what they can to eliminate needless regulations and make those which are indeed necessary more efficient. Eliminating this waste should be a top priority. And politicians should begin this process by finally squaring with the American people and calling these regulations what they really are — a economy-killing tax.

Brandon Dabling is a Ph.D. candidate at Claremont Graduate University where he is studying political theory and American government. He is also the Managing Editor for the John Adams Center for the Study of Faith, Philosophy and Public Affairs where his work frequently appears.


1 Conover, Christopher J. 2004. Health Care Regulation: A $169 Billion Hidden Tax. Cato Institute. Available at http://www.cato.org/publications/policy-analysis/health-care-regulation-$169-billion-hidden-tax. 

2 Personal Communication with Professor Christopher J. Conover. 21 March 2012.

3 Siers-Poisson, Judith. 9 Jan 2008. Drug Companies’ R&D Spending Lags Behind Promotion. PR Watch. Available at http://www.prwatch.org/node/6873.

4 Guenther, Gary. Federal Taxation of the Drug Industry and Its Effects on New Drug Development. Congressional Research Service. Available at http://www.policyarchive.org/handle/10207/bitstreams/18823.pdf.