Bureaucracy is Eating the World
Disclaimer: This is an opinion piece. It is also a long one, because the subject is too tangled to compress without losing the thread. I have tried to look at the matter from different perspectives and include the strongest counter-arguments where I saw them. As this write-up had been in the works for a very long time, some of the referenced data isn’t the absolute latest data available today, which however does not impact the underlying message. As usual, summary at the end. A few weeks ago I sat down with a friend who, after twenty years in a steady job, had decided to start a small business in the European Union. Nothing exotic, just a one-person operation, selling a thing they had been making in their spare time for years and that other people kept asking to buy. By the time we were done, we had identified the trade register filing, the tax office registration, a separate VAT registration with its own threshold rules, the obligation to issue invoices in a specific format, the e-invoicing mandate, the beneficial-ownership disclosure under the EU’s AML regime, the bank’s own KYC questionnaire, the data-protection obligations under GDPR even though the operation collected practically no personal data, the CE marking requirements, the extended-producer-responsibility packaging registration, the WEEE registration, the social-security contributions for self-employed individuals, the mandatory professional liability insurance for the relevant guild, and the local trade-tax filing. None of these are illegitimate and most of them, taken in isolation, sound reasonable. Together, however, they constitute a mountain that my friend, who is a competent adult with a real product, was now expected to climb before they sold the first unit. That is when it occurred to me that the story I had been telling myself for years, that it has always been like this and every generation thinks the system is rigged , might not actually be true, and this post is the result of that thought. I want to walk through roughly three and a half centuries of how easy or hard it has been, in the western world, to simply do something economically. From the period when an Englishman with a ship and a bond could legally attack Spanish merchants for a living, through the early 1900s when an entrepreneur could incorporate a company on four pages, to the present, when the same kind of operation requires a stack of filings most people will never finish reading. I am going to argue that we have drifted, slowly and with the best intentions, into a regulatory state where the friction of doing anything new is high enough that the people best positioned to absorb it are no longer the small operators that once founded the today’s behemoth companies. I want to be clear up front that I am not writing a “libertarian manifesto” . There are regulations I am glad exist, including most of the worker-safety, environmental, and consumer-protection regimes that the post-war west put in place. The argument is narrower than abolish the rules , and it is roughly that the cumulative weight of three centuries of mostly well-intentioned rule-making (almost none of which was ever repealed, btw) has reached a point where it disproportionately punishes the small and rewards the large. That, I think, is a problem regardless of where you sit politically. Let me repeat: This post is not about political ideology and I urge you to read it as apolitical as humanly possible and focus on the real-world implications rather than some abstract political ideas. Also: While I’m no historian, I tried my best to investigate and find reliable information, which I linked where necessary. Anyhow, let me start with one of my favorite periods to dwell on, which is the time … Of course, we’re talking about the era historians loosely refer to as the Golden Age of Piracy (roughly 1650 to 1730). Back then, the relationship between private business and the state in the Atlantic world was so different from ours that it can feel almost like science fiction. If you were an English merchant in 1690, and you wanted to make money by attacking Spanish (or French) shipping, you did not have to do it in secret. You could go to the Lord High Admiral , or one of the Commissioners acting on his behalf, and apply for what was called a letter of marque . The application named your vessel, its tonnage, its armaments, the owner, and the intended crew. You posted a bond promising to observe the laws and treaties of England, and you got, in return, a piece of paper that legalised an activity that, without the paper, would have made you a pirate . The captures were later judged in admiralty courts, the Crown took a percentage (usually 10%, though Queen Anne later waived even that tiny bit of tax as an incentive ) and you kept the rest. This was not an obscure backwater of business, but in fact an arrangement that some of the most celebrated figures in English history operated under. Sir Francis Drake , whose 1577–80 circumnavigation predates the Golden Age proper but established the template, gave investors a return on capital that contemporary sources placed in the order of forty-seven pounds for every pound invested , with Elizabeth I ’s share alone reportedly enough to retire the Crown ’s debt. The exact figures are deliberately obscured in the surviving records ( Elizabeth had diplomatic reasons not to be specific), but I don’t think any historian disputes that the venture was extraordinarily profitable, and that it was funded by something close to a venture-capital syndicate of nobles and merchants. A century later, in 1695, William Kidd received a privateering commission from the Admiralty Commissioners , plus a special commission under the Great Seal , to seize French ships and pirates. His subsequent hanging in 1701, however, was less about the business model than about the fact that he attacked the wrong ships. Whoops , I guess. Note: It wasn’t only privateering that was comparatively easy to establish and run. In one of my favorite books, Moby-Dick , Herman Melville roughly describes how the economics of whale hunting worked at the time. The capital for the endeavour came from the town. A vessel like the Pequod had a couple of principal owners, the retired Captains Peleg and Bildad in the novel, but the rest of the ship was parcelled out among ordinary Nantucket citizens, a crowd of old annuitants; widows, fatherless children, and chancery wards , each one owning the value of a timber head, or a foot of plank, or a nail or two in the hull . A widow could put her late husband’s savings into a sliver of a whaler the way one might today buy a few shares of an index fund, and when the ship came home three years later heavy with oil, she retrieved her portion of the proceeds, minus the owners’ cut for fitting her out. The crew, meanwhile, drew no wages at all. Every man from the captain down to the greenest hand was paid in what was called a lay , a fixed fraction of the voyage’s total net profit, the size of the fraction set by his skill and rank. The smaller the number, the larger the slice, so a seasoned harpooner like Queequeg was signed at the ninetieth lay, while Ishmael , who had never so much as touched a whale, was first offered the seven-hundred-and-seventy-seventh by the pious and tight-fisted Bildad before Peleg talked it up to the three-hundredth. Nobody was paid for showing up, you were paid, if at all, only when the casks were full and sold, which meant every soul aboard owned a piece of the outcome and bore a piece of the risk, no payroll department required. This was not merely a novelist’s imagination, but it was how the real Nantucket and New Bedford fisheries actually worked. Ships were financed by pooling fractional shares among the townsfolk, every hand from captain to greenhorn took a lay instead of a wage, and historians today describe the whole arrangement as a precursor to modern venture capital, obviously with significantly less bureaucracy involved. Looking at the possible growth and power, the chartered companies of the same era operated on a scale that no modern private corporation could legally match. The English East India Company , chartered by Elizabeth I on the last day of 1600, was eventually granted the right to acquire territory, mint coinage, command fortresses and standing troops, form alliances with foreign powers, make war and peace, and exercise civil and criminal jurisdiction over its holdings. The Dutch East India Company ( VOC ) , chartered in 1602, went further and was given an explicit twenty-one-year monopoly, the right to wage war, sign treaties with sovereign powers, build forts, appoint governors, and mint its own coins. At its peak the VOC employed roughly twenty-three thousand people in Asia, fielded somewhere between one hundred and fifty and two hundred and fifty ships at any one time, kept a standing army of around ten thousand soldiers, and over its life sent close to a million Europeans to Asia on nearly five thousand ships. The Hudson’s Bay Company , chartered by Charles II on May 2, 1670, was granted absolute Lords and Proprietors status over Rupert’s Land , an area of roughly 3.9 million square kilometres, or about 40% of modern Canada, again with monopoly trade rights, lawmaking, civil and military jurisdiction, and the authority to wage war. For the ordinary merchant, who was neither a Drake nor a director of the VOC , the bureaucratic environment was correspondingly easy to navigate. There was no income tax, since Britain’s first income tax was a Napoleonic-era invention from 1799 , and there was no business registration in the modern sense. There was no payroll tax, no compliance officer, no insurance mandate, no occupational licensing, and certainly no equivalent of GDPR or beneficial-ownership reporting. The state extracted revenue mostly through customs and excise on specific goods, the Land Tax on real property, the Hearth Tax from 1662 to 1689 (two shillings per fireplace), and the Window Tax from 1696 onwards. In the American colonies in particular, enforcement of even the limited Navigation Acts was famously weak under what historians call salutary neglect , to the point that the Hoover Institution notes colonists in the late seventeenth century killed three customs officers, imprisoned two others, tried one for treason, and persuaded one to join them . That’s a level of “customs compliance” that would definitely not pass a modern audit. :-) Note: Of course there is a romanticised version of this period that isn’t as rosy as it first seems. For example, within chartered English boroughs (London especially), domestic trade was seemingly gated by guilds and the Freedom of the City . The 1562 Statute of Artificers required a seven-year apprenticeship for most trades, which was apparently the only national apprenticeship law in pre-modern Europe, and admission fees in the 16th and 17th centuries ranged from under one pound to twelve pounds and more, which was a substantial sum at the time. Guild monopolies were seemingly a real form of bureaucracy, just not a state-run one. So the open a shop with no paperwork framing is more accurate for rural England, the frontier American colonies, and overseas trading ventures than for established urban commerce. It was the commercial ventures specifically (the ships, the colonies, the trading expeditions) that operated with the kind of low-friction freedom we no longer have, not the neighbourhood bakery in seventeenth-century London, although that bureaucracy was still well below what we are facing in today’s world. The point I want to draw from this period is not that we should bring back privateering or massive chartered companies that can wage wars , which would be both impractical and politically unattractive, but that the basic relationship between private enterprise and the state was, at least for novel ventures, permissive by default . You could simply go ahead , and the state involved itself only when you crossed a specific line that had been drawn in advance. Yet, despite the lack of all modern bureaucracy, regulation and compliance, civilization evolved and societies developed, maybe at times even at a faster pace than we’re seeing it today. Skip forward two and a half centuries, and the world is unrecognisable in almost every way except that starting and running a business is still extraordinarily light on paperwork, even by modern standards. In 1896, New Jersey passed the first enabling general incorporation statute, allowing a company to be formed by simple administrative filing rather than by a special act of the legislature. Delaware followed on March 10, 1899 , and the modern American corporation was born. Before then, every incorporation in the United States required its own legislative act, but after it, you just mailed a form , figuratively speaking. The cleanest illustration of how thin that paperwork was is the document that incorporated the Ford Motor Company on June 16, 1903 . Henry Ford and twelve co-investors signed a four-page Articles of Association in Detroit . The document covered the name of the corporation, its purpose, its place of operation, its capital stock ($28,000), its term, and its stockholders. It was notarised, mailed to the Michigan Secretary of State , and the company was legally constituted by June 17, 1903. The same Ford Motor Company would go on, over the next four decades, to produce the Model T , build the Highland Park assembly line, employ tens of thousands of workers, and become one of the largest industrial enterprises on the planet, all without anyone needing to file beneficial-ownership disclosures, complete a Customer Due Diligence questionnaire, or commission a Data Protection Impact Assessment . The tax environment was also correspondingly simple. The 16th Amendment to the U.S. Constitution was ratified in 1913, and the Revenue Act of 1913 introduced a federal income tax with a 1% normal tax on net income above $3,000 (single) or $4,000 (married), with a graduated surtax topping out at 7% on income above $500,000. Approximately 3% of the U.S. population was even subject to the tax, and under 1% paid anything at all. In Britain, income tax averaged 2% to 3% of GDP from 1900 through 1913, and the super-tax , the precursor to surtax, was only introduced in Lloyd George ’s 1909 People’s Budget . Value-added tax, the workhorse of modern European public finance, did not exist anywhere in the world until Maurice Lauré’s reform was signed into French law on April 10, 1954, and was not mandated EEC-wide until two directives in April 1967. Note: If these are too many numbers and dates and words and you only want to remember one single thing from this chapter, then remember the following: Taxes, as we know them today, did not exist around a hundred years ago, and many of them only go as far back as ~70 years. It is also worth noting that even the way taxes were collected was different. Tax withholding at source, the now-ubiquitous mechanism by which your employer hands a slice of your salary to the state before you ever see it, was introduced in the United States only in 1943 with the Current Tax Payment Act , as a wartime measure to fund the war effort and to broaden the tax base from the wealthy to ordinary workers. Before 1943, Americans calculated their taxes annually and wrote a cheque, which is why tax-day filing was, for most of history, a relatively low-frequency interaction between citizen and state. Many EU member states introduced their withholding tax regimes only between 1952 and 2013. The withholding mechanism is, in many ways, the backbone of the modern administrative state. It works only because there is a persistent identity attached to every worker, a bank account they are paid into, and a payroll system that can route the deductions automatically. Banking, in the same period, was also fairly accessible. There was no formal Know Your Customer regime in the sense we now use it. The Bank Secrecy Act , which is the foundation of the modern American anti-money-laundering regime, was passed in 1970. KYC as a structured set of rules was not codified federally until the U.S.A. PATRIOT Act of 2001 introduced the Customer Identification Program under Section 326 . The Foreign Account Tax Compliance Act ( FATCA ) , which today shapes the experience of Americans abroad and the willingness of foreign banks to serve them at all, was only enacted in March 2010. If you were a working person in 1920 and you wanted a bank account, you walked into a bank, gave your name and address, signed a card, and received an account. There was no requirement to hand over a utility bill, to document the source of your funds, no electronic identity verification, no sanctions screening, and no algorithmic suspicious activity detection. De-banking , in the modern sense of having a financial institution close your account because of who you are or what you do, was not really a phenomenon at all in the early twentieth century. The Oxford English Dictionary records the verb debank as far back as 1929 , but the meaning that contemporary readers will recognise is essentially post-2014. This matters because the people who built the post-war economy did so in exactly this environment. The men and women of the GI Generation (born roughly 1901–1927), the Silent Generation (1928–1945), and the Baby Boomers (1946–1964) came of professional age in a regime where you could open a bank account in an afternoon, file a four-page incorporation document, hire and fire on a handshake, pay relatively low effective taxes, and grow a business through several decades without anyone asking for a beneficial-ownership statement, a tax-residency certificate, a data-protection impact assessment, or a sustainability report. This is not a moral observation about that generation, it is an observation about the environment they built businesses in. Before I move on to what changed, I want to take one short detour east, because it is the cleanest case I know of how much the regulatory environment can matter to outcomes. In 1953, at the end of the Korean War , South Korea had a GDP per capita of roughly sixty-seven U.S. dollars, which made it one of the poorest countries in the world , poorer than most of sub-Saharan Africa and on a par with Haiti. Seoul, its capital, had a population of about one million people and had been substantially flattened during the war. The country had no significant industrial base, no natural resources to speak of, and no obvious path forward. Seventy years later, South Korea’s GDP per capita is roughly thirty-three thousand dollars, the Seoul Capital Area is home to roughly twenty-five million people, and the country is a global leader in shipbuilding, steel, electronics, automobiles, semiconductors, and increasingly cultural exports. This is one of the most extraordinary economic transformations in recorded history. The popular story of Korea being a free-market miracle, however, is half right at best. The serious academic literature, particularly Alice Amsden’s Asia’s Next Giant and Robert Wade’s Governing the Market , makes clear that the Park Chung-hee regime (1961–1979) was an authoritarian developmental state , not a libertarian paradise. It directed credit, picked sectors, suppressed labour, and tolerated heavy chaebol concentration. What the regime did not do, however, was load new ventures with the kind of compliance and regulatory machinery that the modern OECD economies were already accumulating. New industries could be built quickly, factories could be thrown up, ports expanded, ships launched, because the bureaucratic overhead was thin and the political will to remove obstacles was high. I am definitely not holding Park -era Korea up as a model, as the political costs were severe. What I am pointing at is how fast a country can transform when the regulatory friction on building things is set close to zero. It is much, much faster than people who have only experienced modern OECD economies typically realise. The generations that built the post-war west ( GI , Silent , Boomer , and to a lesser extent early Gen X ) accumulated (or inherited) their wealth in this lighter regulatory regime. The generations that came after (later Gen X , Millennials , Gen Z , …) are trying to do the same thing in an environment that has significantly changed under their feet. The U.S. Federal Reserve’s Distributional Financial Accounts are the authoritative source, that shows, that as of late 2024, Millennials and Gen Z together represented 35.1% of U.S. households but owned only 10.1% of total household wealth , roughly 71% less than their household-share would predict. By contrast, Boomers in 1989, at a roughly comparable average age, held 19.5% of wealth while making up 42.2% of households. In other words, younger Americans today are more under-represented in wealth than Boomers were at a comparable point in their lives. Pew Research similarly found that the median net worth of households headed by Millennials aged 20–35 in 2016 was roughly $12,500, compared with $20,700 for Boomers at the same age in 1983, in constant dollars. That is, the Millennial household had about 60% of the inflation-adjusted net worth that the Boomer household had at the same stage of life . Homeownership data tells the same story. Apartment List ’s analysis of homeownership rates at age 30 finds that 55% of Silents owned a home by that age, falling to 48% of Boomers , 42% of Gen X , and just 33% of Millennials . In the United Kingdom, the Office for National Statistics reports that in 2024 the median home in England (£290,000) cost roughly 7.7 times median full-time annual earnings (£37,600), and the Resolution Foundation has shown that it now takes a typical young first-time buyer roughly 18 to 19 years to save a deposit from disposable income, compared with about 3 years in the mid-1990s . The Joint Center for Housing Studies at Harvard reports that in 2022 the U.S. median home price reached 5.6 times median household income, the highest ratio on record going back to the early 1970s. Note: I want to recognize that the wealth-comparison story is more nuanced than the Millennials are screwed narrative that I’m partially presenting here. For example, the St. Louis Fed has also found that, on a per-household basis, Millennials and Gen Z have been catching up rapidly since 2019. Critics, including New America and others, point out that this relies on average rather than median wealth and is heavily skewed by a thin slice of high-earning younger households. Both stories are simultaneously true, depending on which slice of the distribution you look at. The median younger household is materially behind, the average younger household less so. I am framing the argument around the median because that, in my view, is the more relevant indicator of broad opportunity. In addition, the crises that bracketed Millennial , Gen Z and later generation’s lives were not randomly distributed across generations. Those generations experienced the post-9/11 wars in Iraq, Afghanistan, and the broader counterterrorism campaign , the 2008 Global Financial Crisis , the COVID-19 pandemic , the Ukraine war , and the recent war in Iran with all its economic impact slowly unfolding. The cost of these, in the form of debt, inflation, and asset-price inflation through quantitative easing , has fallen disproportionately on the people who were/are not yet old enough to own assets when these events occurred. In fact, the Bank of England ’s own analysis of the distributional effects of quantitative easing acknowledged that a large share of the wealth gains flowed to households that already owned assets, and a 2023 Oxford Bulletin paper found that the asset-price channel of QE increases wealth inequality across most countries studied. There is a counter-argument from central banks that the alternative (a deeper recession) would have hit younger workers even harder through unemployment, and I think this counter-argument is partially correct, but the cumulative effect, on top of the housing-supply story documented by Glaeser and Gyourko , is a generational asset-price gap that compounds. I’m trying to be careful not to slide into a Boomers caused this framing, because that doesn’t appear to be what the data ultimately says, despite everything visually pointing towards this narrative. Boomers themselves appear to be highly stratified, with the median Boomer being noticeably less wealthy than generational averages seemingly suggest. The Urban Institute ’s research on the Great Inequality Transfer emphasises that policy regimes, not generational malice, are the proximate cause. What is true, however, is that the policy choices of the past several decades, made disproportionately by people who were already established in the post-war environment, accumulated into a stack of rules, asset prices, and compliance requirements that the people coming up behind them now have to navigate. In that sense, the current environment can in fact be attributed to the decisions made by Boomers , as well as the generations in their immediate proximity. Which brings me to the actual point about how big that stack of rules has become, and what its distribution of cost is. The U.S. Code of Federal Regulations , which is the codified body of federal regulatory rules, was a thin pamphlet at its origin in 1938. It is now, depending on how you count, somewhere north of 190,000 pages . The Mercatus Center ’s RegData project, which counts regulatory restrictions defined as instances of words like shall , must , and may not , finds that the federal CFR contained roughly 835,000 such restrictions in 1997, rising to over 1.08 million by 2019 and continuing to climb. The Federal Register , which is the daily journal in which new federal rules are first published, totalled 9,562 pages in 1950 across 15 volumes, and hit 86,356 pages in 2020 , the second-highest count ever recorded. Meanwhile, the European acquis communautaire , the body of cumulative EU law, has followed a similar trajectory, with estimates of the active acquis range from an 80,000-page figure to over 170,000 pages, depending on how you count, with more than 100,000 of those pages produced in the prior decade alone . The cumulative legislation since 1957 is on the order of 666,879 pages. The cost of complying with all this is, as you might have guessed, not evenly distributed. The widely cited 2010 SBA Office of Advocacy study by Crain and Crain estimated that U.S. small firms with fewer than 20 employees paid about $10,585 per employee per year in regulatory compliance, compared to $7,755 for firms with more than 500 employees, which is roughly a 36% gap. A more recent 2023 National Association of Manufacturers study put the total federal regulatory cost at $3.079 trillion in 2022 (about 12% of GDP), with small manufacturers paying $50,100 per employee per year compared to $24,800 for large manufacturers , which is roughly a 100% gap. Note: The Crain and Crain methodology has been criticised by the Congressional Research Service and others as including economic-impact estimates rather than just direct compliance costs, and using a cross-country regression that some economists consider unreliable. The NAM is an industry association with an obvious incentive to report large numbers. However, even if we discount both estimates substantially, the basic shape (that smaller firms pay disproportionately more per employee to comply with the same rules) is consistent across studies and across methodologies. A fixed cost of compliance simply hits a smaller firm harder, in per-employee terms, than a larger one. A few specific recent regulations are worth naming, considering their (cost-)impact: I will stop the list there, but the pattern is clear, and adding DAC6 , DAC7 , the DSA , the DMA , the CSRD , the CSDDD , UKCA marking, REACH , MDR , IVDR and the rest does not improve the picture. Each of these has a defensible rationale, and most of them addressed a real problem, but the cumulative burden, however, is significant . Sadly, there is no agency anywhere whose job is to look at the total weight of regulation on a small business and ask whether it is still proportionate. However, there are agencies, in many jurisdictions, whose job is to add to it. Tax complexity has followed the same arc. The U.S. Internal Revenue Code runs to roughly 2.4 million words, or about 10 million if you include Treasury regulations and IRS guidance. Wolters Kluwer ’s Standard Federal Tax Reporter , the practitioner’s reference, has grown to roughly 80,000 pages from a thin volume in 1913. The U.K.’s Tolley’s tax handbooks have grown from about 5,000 pages in 1997 to over 21,000 pages in current editions. The IRS Taxpayer Advocate , who is statutorily independent of IRS political leadership, has reported that Americans spend roughly several billion hours per year complying with the federal tax code. Meanwhile, the OECD ’s tax-to-GDP statistics show that the average tax-to-GDP ratio across member countries rose significatnly from 1965 to 2022. For example, France went from ~33% to ~46%, Denmark from ~29% to ~42%, the U.K. from ~30% to ~35%, Germany from ~31% to ~38%, Spain from ~14% to ~36%, and the U.S. from ~23% to ~28%. In other words, across most of the developed world, the share of economic activity passing through tax authorities has grown by roughly a third over six decades, and the complexity of the path it takes through those authorities has grown by considerably more. The crucial point, for my argument, is not about whether taxes are too high in some absolute sense, or whether taxation as such is actual theft , as that is a separate political question on which reasonable people disagree, but the point is that the complexity has grown to the level where it is itself a significant input cost, and that cost is again non-linear. A small business that needs to interpret 80,000 pages of tax guidance has to either hire someone to do it, or do it themselves at the cost of not running their business for the time that it takes. A multinational has a tax department, and frequently has the resources to make the complexity work in its favour. Which brings me to the most important part of the picture, which concerns tax *cough* planning . The Institute on Taxation and Economic Policy documented in its 2021 study, that 55 of America’s largest corporations paid $0 in federal income tax on $40.5 billion of pre-tax income in 2020. A 2024 update found 109 large profitable U.S. corporations paid 0% federal income tax in at least one year between 2018 and 2022, with an average effective rate of about 14.1% against a statutory rate of 21%. A 2022 study from the U.S. Government Accountability Office on large profitable corporations found an average effective federal rate of about 9% over the period 2014 to 2018, well below the statutory rate of the time. The mechanisms by which large multinationals (and wealthy individuals) achieve these rates are well-documented, largely legal and, most importantly, only available to companies (and individuals) of equal size and accounting firepower , and definitely not to your mom-and-pop-shop next door. The Double Irish with a Dutch Sandwich , used by Google , Apple , Facebook and others, was estimated by economist Gabriel Zucman to have shifted more than $100 billion per year at peak. Ireland closed it in 2014 with a phase-out completed by 2020. The European Commission ruled in August 2016 that Apple owed €13.1 billion in back taxes to Ireland, and the Court of Justice of the European Union finally upheld this on September 10, 2024 in Commission v. Ireland (C-465/20), eight years after the original ruling. The Tax Justice Network ’s State of Tax Justice 2023 report estimates that countries collectively lose roughly $472 billion per year to tax abuse, of which about $311 billion is corporate. It’s worth mentioning that the TJN’s methodology is contested by the IMF and others, and that the figure should be treated as an upper bound, but even at half that figure, the disparity is striking. The OECD’s BEPS Pillar Two , the global minimum corporate tax of 15% beginning in 2024, is estimated to raise corporate income tax revenue by roughly $155 to $192 billion per year, but it does nothing for the structural disparity between a small business (or regular individuals) that cannot relocate its profits and a multinational (or wealthy individuals) that can and, on the contrary, is likely to introduce even more bureaucracy for small businesses in future iterations of the code. There are honest reasons the system has ended up where it has, including the difficulty of taxing economic activity that crosses borders, but the lived effect is that a self-employed plumber in Paris or a small bakery in Chicago pays a higher effective tax rate than Apple or Amazon does on income shifted through the right holding structure. There is one more thread that I want to pull on, because it has changed character significantly in the past decade and is, I think, undertreated in the broader conversation, which is the slow conversion of banks from financial-services providers into compliance gatekeepers. One (in)famous exampale for this is Operation Choke Point , a U.S. Department of Justice initiative running from 2013 to 2017, that pressured banks to drop high-risk merchants, including payday lenders, firearms dealers, and adult-industry workers. The program was officially terminated in August 2017 after the FDIC settled lawsuits and pledged to cease informal or unwritten suggestions to banks, but the label Operation Choke Point 2.0 has since been applied to alleged debanking of crypto firms after the March 2023 collapse of Silvergate , Signature Bank , and Silicon Valley Bank . However, the evidence for a coordinated Choke Point 2.0 operation remains contested , and the framing has been used by politically interested parties on both sides. Less contestable, on the other hand, is the Nigel Farage / Coutts case, in which the U.K. private bank Coutts closed Farage ’s account, and an internal 36-page Reputational Risk Committee dossier from November 2022 cited his political views as “at odds with our position as an inclusive organisation” . The CEO of parent group NatWest resigned in July 2023, and the U.K.’s Financial Conduct Authority subsequently reviewed account closures across multiple banks, finding roughly 343,000 personal and business accounts were closed in 2021 to 2022 alone. Banks self-reported that few were for political views, but the FCA also noted significant data-quality problems. Disclaimer: I have no skin in the U.K.’s political game and I do not care about Farage as a political figure or even as an individual. However, the Farage / Coutts case is one of the most prominent cases, which is why I picked it up to give an example. Make no mistake to believe that de-banking is solely an issue on one side of the political spectrum , as it is clearly not. The volume of Suspicious Activity Reports filed by U.S. financial institutions to FinCEN has risen from about 1.3 million in 2014 to roughly 3.6 million in 2022 , and Currency Transaction Reports run at about 20.5 million per year. The European Banking Authority ’s 2022 opinion on de-risking is even explicitly acknowledged that AML rules are causing unwarranted account closures across NGOs, money-service businesses, and correspondent banks. To understand the real world implications of how these account freezes and closures impact even regular people on a day to day basis it’s enough to look at individual institutions’ bad ratings on any unbiased review site, e.g. for (Transfer)Wise on ConsumerAffairs . The mechanism here is, again, one I think is poorly understood. Banks are one part malicious, injecting their own policy and beliefs into their decision-making, and one part cautious, as they face fines for AML failures. For example for laundering $881 billion, the HSBC paid $1.9 billion in fines in 2012. But don’t worry, nobody at HSBC went to jail. Similarly, the U.S. Treasury Department settled with the Standard Chartered for $1.1 billion, for violations of multiple sanctions in 2019. On the other hand, however, AML over-compliance effectively carries no penalty at all, e.g. for closing the account of a legitimate small business or unbanking an innocent individual. The economically rational response is to weight profit vs. risk and to interpret risk conservatively for any account that does not pay enough to justify the regulatory exposure . The result is that the marginal small business, the freelancer with an unusual revenue pattern, or the person whose work happens to fall in a politically sensitive category, finds banking impossible, without any of this being written into any law as such. It is the emergent behaviour of a stack of regulations, none of whose authors probably intended this outcome. Add to this the ever changing regulatory environment and banking suddendly becomes yet another bureaucratic burden for small and medium businesses, let alone lower- and middle-class private individuals. The deeper irony is that this regime consistently fails at the very thing it was built to do. The list of major money-laundering scandals over the past two decades, including HSBC ’s settlement for laundering Mexican cartel money , Credit Suisse ’s Suisse Secrets leak revealing accounts held by criminals and corrupt politicians, the 1MDB scandal in which billions of dollars flowed through major Western banks, the CumEx tax fraud in which European treasuries lost an estimated €150 billion, and the Wirecard collapse in which one of its senior executives simply vanished, all happened despite KYC, AML, beneficial-ownership disclosure, and the rest of the modern compliance stack, without any of the involvement of cryptocurrencies or any other modern technologies, that are usually politically vilified for enabling these sort of schemes. The people the regulatory regime is supposedly catching are, with rare exceptions, not being caught. The people most affected are those who do not have a tax planner, a private banker, a trust fund, or a corporate structure that can absorb the friction and make issues simply go away . Take the popular case of Flipper Devices , the small hardware company behind the Flipper Zero , a multi-tool aimed at hardware hackers, penetration testers, and electronics hobbyists. The product’s Kickstarter campaign in 2020 was extraordinarily successful, raising nearly five million dollars from tens of thousands of backers. In late 2022, the company publicly reported that PayPal had frozen approximately $1.3 million of its funds, applying the platform’s standard 180-day review hold and citing only generic suspicious activity as justification. After significant media attention the funds were eventually released, but for a small hardware company in the middle of manufacturing and fulfilling international orders, going six months without access to over a million dollars of customer money is plainly a near-fatal event. Flipper survived because the tech press noticed and because they had alternative revenue streams, but the experience is far from unique. Most small companies that find themselves on the wrong side of a payment processor’s algorithmic risk score do not have a public profile large enough for anyone outside maybe their accountant or, ultimately, their lawyer to care. I believe that what is happening here is important and underappreciated. The bureaucratic delegation of compliance enforcement to private financial institutions has handed banks, payment processors, and similar gatekeepers a degree of power over private economic life that, historically, simply did not exist at this scale. A bank has the unique ability to create a business, by extending it credit on terms no ordinary lender would offer, or to destroy one, by freezing or even closing its account. If a major institution decides a particular firm is strategically valuable, it can throw virtually endless money at it through revolving credit facilities, underwriting commitments, intra-day liquidity, and market-making support, propping up balance sheets that, on the merits, would have folded years earlier. The opposite operation is just as easy, and considerably faster, as a compliance officer flagging a customer as inconvenient can, overnight, sever that customer from the payment rails on which essentially all modern economic activity runs. There is no court, no due process, and no meaningful right of appeal, and the customer typically receives a single boilerplate letter that does not even state the reason. This is a degree of power over individual livelihoods and corporate existences that, in democratic societies, used to require a court order. It is now exercised routinely by salaried risk officers operating under regulatory pressure that strongly incentivises closing first and asking questions later never. The same dynamic falls, sometimes even more starkly, on individuals, where a debanked person can find themselves locked out of housing, employment, and even the ability to receive their own salary, with no agency, court, or ombudsman that they can effectively appeal to. It’s this exact same financial-control infrastructure that has been used for instance by the Canadian government in response to the Freedom Convoy protests , or by the German government in response to Antifa . By freezing bank accounts associated with protest participants and donors, without conventional court orders, these individuals were cut off of modern life in an instant. Regardless of the underlying political debate and whatever you think of each of these cases individually, the precedent (specifically, a government using existing AML infrastructure to remove citizens from the financial system as a form of political pressure) is now established, in a world in which even the everyday use of cash, which is the official government-issued currency , has been recoded as suspicious in many jurisdictions. Large-cash deposits trigger reports, jewellers and car dealers face mandatory reporting thresholds, and several EU member states have explicitly capped what can be paid in cash at all. Going back to the more general topic of bureaucracy , especially in the context of business activity, I think the outlook is worrying when we project forward on the current curve. The U.S. Census Business Formation Statistics show that applications surged after 2020 from roughly 3.5 million per year to about 5 million per year, which is generally a welcome thing. But the underlying business dynamism has been declining for decades. Decker, Haltiwanger, Jarmin and Miranda ’s Brookings work documents that the U.S. startup rate fell from roughly 13% of all firms in the 1980s to about 8% by the 2010s. Additionally, multiple studies show that the share of employment at firms with fewer than 20 employees fell significantly in the past fourty years, and the OECD ’s Entrepreneurship at a Glance series finds similar declining startup rates across most member economies. So the recent surge in applications is encouraging, but it is seemingly happening against a multi-decade trend of declining small-firm employment and declining new-firm formation relative to incumbents. One plausible end-state, which I do not think is inevitable but which is clearly the trajectory we are on, might look something like this: Large incumbents accumulate the regulatory, tax, and compliance machinery (at their scale, the per-employee cost of compliance falls). Small entrants either do not start, start under the radar in regulatory grey zones (if even possible, see below), or get acquired before they can scale. The marginal new business is increasingly a side-hustle on a platform owned by an incumbent (think Amazon FBA , TikTok Shop , etc.), where the platform absorbs the compliance burden in exchange for a (hefty) cut, but also sets the terms unilaterally. The number of independent businesses falls, the share of actual, as well as paractical employment in incumbents rises, and the regulatory state both causes and justifies this concentration, on the grounds that fewer, larger firms are easier to oversee, while simultaneously likely to be corrupted bought lobbied by these exact firms. For most of the past century, the infrastructure of compliance was built and operated by bureaucrats , namely people sitting in offices, processing forms, applying judgement within the limits of their statutory remit. The friction generated by that arrangement was high, but the friction was also a feature, in a way, as it built in a small reserve of leeway , in the form of a human who could lose a form, mark a case as borderline, or exercise discretion. The trajectory we are now on is the replacement of that human by a system, with the bureaucratic structure inherited intact and made fully queryable . The bureaucrats built the cathedral, and the techno-/algocrats are now installing the 24/7 surveillance and the “AI” . Decades of beneficial-ownership filings, KYC records, CRS and FATCA exchanges, DAC7 platform reports, payment-service-provider data, e-invoicing pipelines, real-time VAT reporting (Italy’s SDI , Spain’s SII , Hungary’s RTIR , the impending EU-wide ViDA regime), property and Land Registry records, vehicle registries, customs data, and social-security feeds, all sitting in databases that, for most of their existence, were used in isolation, as data-silos. The techno-/algocratic project, broadly speaking, is to wire those databases together, to make them fully searchable, and to layer pattern-detection and “AI” on top. Make no mistake in believing that this is only hypothetical. The U.K.’s HMRC Connect , which is operational since 2010 and built for the tax authority by BAE Systems Applied Intelligence at a reported cost in the tens of millions of pounds, already cross-references dozens of distinct sources, including bank statements, social media, Land Registry filings, DVLA vehicle records, Companies House data, PayPal transactions, and offshore-account exchanges. On September 8, 2023, the U.S. IRS announced a major expansion of audit activity targeting large partnerships and high-income individuals, with Inflation Reduction Act funding and an explicit reliance on “AI” to identify return patterns that human reviewers would not have spotted. The OECD ’s forum on tax administration has, for years, been pushing member states toward real-time compliance and data-driven audit as the operating model of choice. With all of this the direction of travel is clearly set, and the technical capacity to act on it has now finally caught up. The cautionary tales of what happens when this approach is rolled out at scale, without the institutional caution that has historically slowed bureaucratic overreach, are already with us. For example Australia’s Robodebt scheme , which was in operation from 2016 to 2020, used automated income-averaging to issue hundreds of thousands of debt notices to welfare recipients on the basis of data-matching alone. The scheme was found unlawful by the Federal Court in November 2019, the government settled a class action for AUD 1.8 billion, and the Royal Commission that reported in July 2023 concluded the programme was crude, cruel, and produced disproportionate harm, including contributions to suicides . Also, the Netherlands’ toeslagenaffaire , in which the Belastingdienst ’s self-learning risk model wrongly accused tens of thousands of mostly immigrant-background parents of childcare-benefits fraud, demanding repayments that drove families into bankruptcy and, in over a thousand documented cases, the loss of custody of their children, was serious enough to bring down the third Rutte cabinet on January 15, 2021. Finally, the Dutch SyRI system , a separate algorithmic fraud-detection tool deployed in low-income neighbourhoods, was struck down by the District Court of The Hague in February 2020 for violating Article 8 of the European Convention on Human Rights on grounds of opacity and disproportionality. AlgorithmWatch ’s Automating Society reports have catalogued dozens of similar cases across European member states, in welfare, policing, education, and employment. What unites these cases, and what should worry anyone trying to run a small business or live a private life, are the integral features of the techno-/algocratic arrangement, which are that the system acts at machine speed, that the cost of being wrongly flagged is borne entirely by the citizen, and that the institutional pathway for appeal is essentially the same slow, human bureaucracy that has now been deprioritised in favour of the system that flagged you. The political-philosophy literature on algocracy , or governance by algorithm, has been making this point for over a decade, but has only recently moved it from academic concern into operating practice. The borderline situation, namely the small business that took a contested deduction, the freelancer with an unusual revenue mix, the side-hustle whose VAT return is six weeks late, or the consultant whose payment patterns trip an unexplained risk score, that, twenty years ago, would have been quietly tolerated, mis-filed, or simply missed becomes discoverable instantly. Once discovered, it is sanctionable with no human in the loop, and the same asymmetry that already shapes the regulatory landscape applies here, as large multinationals have the budget to deploy their own AI , hire armies of tax engineers, and structure around the algorithmic detection, while small businesses inherit the algorithmic enforcement without the means to defend against it. The leeway that used to exist in the system, a function of human inattention, finite processing capacity, and occasional judgement, is being engineered out as a deliberate goal, and sold as efficiency and fairness . The people who lose the most when that leeway disappears are precisely the ones who needed it most. I think this is sadly where we are headed if nothing changes, and I think it should worry people across the political spectrum, in every developed and developing nation. Probably the strongest argument against this is, that the reason 1700 looked deregulated is, that it was also worse on almost every dimension of human welfare. Workers had no protection, children worked in mines, the seas were full of slaves, rivers were poisoned, and banks collapsed routinely and took depositors’ savings with them. The reason the modern regulatory state exists is that the previous arrangement was actively killing people, and the slow accumulation of rules is the price of a society in which most people “no longer” die at work , drink contaminated water , or lose their savings to a bank’s bad bets . That’s at least what the bureaucrats , and technocrats , and algocrats keep telling us. In principle, cumulative regulation is not a flaw of the system, it is a record of every preventable disaster the system has tried to prevent from recurring, and removing the rules in aggregate would remove the protections in aggregate. And don’t get me wrong, I am glad when workers have meaningful safety protections, when consumers can sue over defective products, when depositor insurance exists, when environmental externalities are at least partially priced in, and when a small number of bad actors no longer get to externalise their costs onto everyone else. I do not think that the counterfactual world in which we kept the freedom of 1700 and added the income from 2026 is a world I or anyone else would probably want to live in. What I do think, however, is that there is a meaningful difference between essential protections (that actually work) and accumulated regulatory drift . The basic worker-safety rule that says you have to provide fall protection above a certain height is essential. The 47-page guidance document about how to file your beneficial-ownership disclosure for a single-member LLC is drift. The basic principle that consumers should be told what is in their food is essential. The 200-page set of EU labelling rules covering every permissible variation of free-range is drift. And the regulatory process, almost everywhere, is asymmetric, as rules are added much more easily than they are removed. The U.K.’s one-in, two-out initiative was an attempt to rebalance this, and was quietly abandoned. The EU’s REFIT programme was modest in ambition and modest in delivery. The basic dynamic, that political incentives strongly favour adding rules in response to any given incident and very weakly favour removing them in response to cumulative drift, is the big issue here. If you can grant me that distinction, between essential protection and accumulated drift , then I think the current state of the western regulatory system contains a lot more drift than its defenders are willing to admit, and removing some of that drift would not actually require dismantling any of the protections that make modern life better than in 1700. To wrap this up with something approaching constructive thoughts, I think we should want a regulatory state that protects against catastrophic externalities (pollution, fraud, systemic financial collapse, occupational deaths) while making it easy to start the kind of small, independent business that built post-war prosperity. I think we should want a tax system that is fair and simple enough that a person running a one-person operation can comply with it in an evening, and graduated enough that a multinational cannot escape it through accounting geography . Speaking of which, I also think that we should want a levelled playing field, in which accounting geography is either impossible, or possible for anyone regardless of the depth of their pockets or the political and economical influence they might have. I think we should definitely want banking that is open to anyone who has not been individually adjudicated to have done something wrong, and not closed to people on the basis of category-level reputational risk. And we should almost certainly want this lifeblood of our modern life to require a lot more effort to be simply turned off in an instant than it does today. I think we should want a habit, in the political class, of asking what should we remove this year , with the same energy we currently bring to the question what should we add . None of this is a return to 1700, but it is more like a return to the economic environment of, say, the 1950s, 60s, 70s and maybe even 80s, in which the post-war west had built a real welfare state and meaningful worker protections, but had not yet loaded on top of that the accumulated drift of seventy further years of rule-making. That is not a libertarian fantasy, and it may in fact be living memory for some of the people reading this. It was the environment in which their parents or grandparents started shops, opened bakeries, built small factories, and made middle-class lives. None of the rules that I think constitute drift were added in bad faith and probably each of them was a response to a real problem, designed by people who (in most cases) meant well, and voted for by representatives whose constituents wanted that specific problem solved. The cumulative effect was nobody’s intention, it is just what happens when a system has a stronger tilt towards adding than towards removing, and that runs on such an imbalance for several decades. Therefor, I think the next political project that is worth caring about, more than most of the noise that currently passes for debate, is the project of deciding what to keep, what to remove, and how to build an institutional habit of asking that question regularly. I do not have a clear policy proposal for how to do that, as I am far from being truly politically and economically knowledgeable, but I am reasonably sure, that the current trajectory ends somewhere I would rather not arrive at, and that the people who will pay the highest price for arriving there are the people who were not yet born when most of the drift was added. If you take only one thing from this post, take this: The bureaucratic weight that we treat as an immovable feature of modern life is, in fact, a very recent construction. It was built in living memory, by people we can name, in response to problems we can list, with consequences they did not entirely foresee or willfully ignored. It can be rebuilt, lightened, simplified, and reformed, in the same way it was built up. The question is whether we have the political stomach to treat accumulated rules with the same scepticism we currently treat proposed rules , and to remember that every line of regulation, however well-intentioned, is also a small tax on every future person who has to read it before they are allowed to do something useful. I would like to think we still have that stomach, but I am not certain we do. Footnote: The cover artwork is a real painting by Heather Castles . Sarbanes-Oxley ( SOX ) from 2002 added 3,000 to 10,000 compliance hours per company per year, with average direct cost of $1.7 million for accelerated filers, and average annual SOX cost for a small public company rose from about $1.5 million in 2001 to over $2.8 million by 2007. This is a significant part of the reason that the number of U.S. publicly listed companies has roughly halved since the 1990s. Dodd-Frank from 2010 required, at peak, around 398 distinct regulatory rulemakings, and the American Action Forum estimated cumulative compliance burden at over $36 billion and 73 million paperwork hours by 2016. The 2018 Economic Growth, Regulatory Relief, and Consumer Protection Act rolled back some of this for regional banks, but the substantive bulk remained. MiFID II from January 2018 cost the financial industry roughly $2.1 billion in first-year implementation costs and several hundred million in ongoing costs, with the top ten sell-side firms each spending more than $50 million. A documented side-effect, perhaps an unintended one, was a substantial fall in EU sell-side research analyst headcount over the following two years. The General Data Protection Regulation ( GDPR ) , in force from May 2018, has been one of the most consequential pieces of EU legislation of the past decade. Industry surveys at the time put average Fortune 500 GDPR spend in the mid-eight-figure range, with substantial recurring annual costs thereafter. More than a thousand U.S. news sites blocked European users entirely after GDPR came into effect, including major publications like the Los Angeles Times and the Chicago Tribune , and many of those blocks remain in place years later. GDPR was a serious response to a real problem, but the way the cost falls is itself an externality of how the rule was designed. Strong Customer Authentication ( SCA ) under PSD2 , enforced from 2021, made online payments in the EU more secure but, by Stripe ’s estimate, also lost European e-commerce roughly €57 billion in sales in the first year. The U.S. Corporate Transparency Act , effective January 1, 2024, requires beneficial-ownership disclosure on roughly 32.6 million existing entities plus another 5 million new entities annually, at first-year compliance cost estimated by FinCEN itself at approximately $22.7 billion . The constitutionality is currently in litigation, but the regulatory intent tells you a lot about where the trajectory is. The EU AI Act , passed in 2024 and phasing in through 2027, will impose high-risk AI compliance obligations whose cost the Commission estimated at roughly €29,000 per system, but which independent analyses (such as CEPS ) suggest could run closer to €400,000 for a small company deploying a high-risk system. The order-of-magnitude disagreement is itself a sign that nobody really knows what this is going to cost yet, which is not a reassuring property of a major piece of legislation.
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