America’s small business, the engine of jobs, is being over-regulated by federal rules costing more than a trillion dollars, a learned study reports. Small firms, defined as those employing fewer than 20 employees “bear the largest burden of regulation…an annual regulatory cost of $10,585 per employee,” the new study said.
These enormous dollar figures don’t even include the multifarious rules of ObamaCare or the Dodd-Frank Act, with new finance and consumer rules. Both became law in 2010. The reason costly laws enacted this year were not included in the study is that it used 2009 dollar values. But, if projected to 2010 figures, the cost to the country’s 5,430,000 small firms would be more than $1.5 trillion.
The rather startling conclusion of the study—released in September–is the work of economics professors Nichole V. Crain and W. Mark Crain, who have been analyzing the impact of federal regulations for the Small Business Administration Office of Advocacy every few years since 1991. They teach at Lafayette College, Easton PA.
The cost of regulations for the whole U.S. citizenry was calculated to be $1.75 trillion in 2009 dollars. As for the flash-flood of Obama Administration regulations, a 40-page Congressional Research Service report which examined ObamaCare could not fully count or explain the pieces, parts, and rules of this regulatory nightmare.
The ObamaCare law’s 1099 reporting requirement will slam small businesses particularly hard, the Heritage Foundation pointed out, because “the paperwork burden will force them to redirect scarce resources from productive activities.”
The small business tax credit in the health law is of little help. It will impact at most 12 percent of the firms with 25 or fewer workers and will expire after two years, according to the Congressional Budget Office (CBO). ObamaCare also will increase the Medicare tax and impose a new Medicare non-payroll “investment” tax, with new rules reaching a significant number of small businesses.
Under the 2,300-page Dodd-Frank law, regulations will restrict small business bank lending. Small businesses trying to raise capital will be adversely affected by a new “net worth” test.
“Government regulations pervade modern life in America and other nations,” the Crains’ analysis noted. “Regulations are needed to provide the rules and structure for societies to properly function. This research, while mindful of this fact…looks at the overall costs imposed by them…. Unlike most fiscal actions taken by government, the costs of regulatory actions are relatively hidden,” the study said.
The Office of Management and Budget (OMB) reports an estimate of annual costs and benefits of federal rules and paperwork “to the extent feasible. But it includes only major regulations that cleared in the previous 10 years.
“Burdensome economic regulations such as import restrictions, antitrust policies, telecommunications policies, product safety laws, and many other restraints on business activities are implemented outside of OMB’s regulatory review process,” the Crains’ study points out.
The analysis says further that it “seeks to identify the federal regulatory burden on small U.S. firms and to assess whether and to what extent this burden disadvantages small businesses….” Underlying the significance of this assessment is the fact that “89 percent of all firms in the United States employ fewer than 20 workers,” according to the study.
The study further explained:
By comparison, large firms (defined as those with 500 or more employees) account for only .3 percent of all U.S. firms. If federal regulations place a differentially large cost on small business, this potentially causes inefficiencies in the structure of American enterprises, and the reallocation of production facilities to less regulated countries, and adversely affects” our international competitiveness. Result: negative consequences for the U.S. work force and national income, particularly at a time of joblessness near 10 percent.
While the cost per employee per year is calculated to at $10,585 for businesses with fewer than 20 employees, the cost is $7,454 in medium-sized firms (20 to 500 employees). For companies with more than 500 employees, the cost of regulation is $7,755 per worker. This differential is “easy to understand,” explained the study. “Many of the costs associated with regulatory compliance are ‘fixed costs’” So, a firm with, say, only five workers “incurs roughly the same expense as a firm, with 500 employees.” In large companies, “these fixed costs are spread over a large revenue, output, and employee base, which results in lower costs per unit of output as firm size increases.” This well recognized phenomenon is known as economies of scale.
“The cost per employee of environmental regulations is more than four times higher in small firms than in large firms.” As for taxes, the cost per employee is three times higher in small business firms than in big companies. But the cost of economic regulations falls most heavily on large companies. This mainly reflects the fact that industrial structures such as utilities, mining, or telecoms are large scale by their very nature.
The analytical study detailed regulatory costs for five major sectors of the economy: manufacturing, trade, services, health care, and “other.” The costs for the 5,340,000 small business firms were: manufacturing–$210,000; trade (retail and wholesale)–$942,000; services–$2,600,000; health care—$526; other (all other businesses)–$944,000. All are in 2009 dollars. No state regulations were calculated.
“Reports from government regulators show that Washington imposed 43 major new regulations in fiscal 2010—an unprecedented number—at any annual cost of $26.5 billion,” Heritage Foundation President Ed Feulner wrote in an op ed piece in the Washington Times Nov. 2. He referred to rules applicable to all Americans.
Looking at tax compliance, businesses of all sizes expend 2.3 billion hours figuring what Uncle Sam says they owe in income levies. It costs them $96 billion to do their federal taxes.
Federal regulations, costing an estimated $1.75 trillion (in 2009 dollars) are 14 percent of national income. Add federal tax receipts at about 21 percent of national income in 2008 and the two costs consumed 35 percent of national income.
So, while the President and all but the most unstable members of Congress are talking about keeping the Bush tax cuts alive, no one seems concerned about the inordinate over-regulation of our nation’s many millions of job-providing small businesses.
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