Tuesday, May 22, 2012

No. 1 Barrier to Small Business Success? Not High Taxes, But Excessive Regulation and Licensing

This week is National Small Business Week, described as a time to celebrate the special impact made by outstanding American entrepreneurs and small business owners, according to the event's sponsor, the Small Business Administration.  So it's a good time to ask the question, What's the biggest barrier that small business owners face that prevents them from expanding, investing, hiring more workers, and becoming more successful?  Taxes?

Well, it turns out that small-business owners place relatively little weight on tax issues when surveyed, according to Matt Yglesias in his recent Slate article "Licensed to Decorate." Here's an excerpt:

"Small-business owners are much more concerned with something Washington rarely talks about: the country’s spreading thicket of licensing rules.

To be charged a high tax rate on your small-business profits, you need to be turning a tidy profit in the first place. Anyone in that position would surely prefer lower taxes but is fundamentally ahead of the game. The main barrier to entrepreneurship is not that you’ll pay taxes if you succeed—it’s that you might not make any money at all.

Over time, occupational licensing has become much more common. Morris Kleiner of the University of Minnesota and Alan Krueger of Princeton have found that in the early 1950s, less than 5 percent of the population worked in occupations covered by state licensing rules. Today it’s well over 20 percent.

Some of this is surely justified. But a wide range of these rules could be done away with entirely at basically no risk. Regulation is needed when it would make sense for a firm to deliberately engage in malfeasance. Dumping harmful toxins into the air is highly profitable unless it’s prohibited. Financiers can draw huge bonuses by taking on too much risk, only to wreck the economy later. In other occupations, though, shoddy work brings its own punishments. An interior decorator who can’t get recommendations from satisfied customers probably won’t remain an interior decorator for long.

In these cases, licensing rules raise the prices the rest of us pay, make it difficult for successful entrepreneurs to expand their businesses, and are often a major barrier to employment for the most vulnerable populations. New Jersey’s ban on high-school dropouts fixing locks sounds silly, but given the generally bleak prospects facing workers with little education, barring them from whole occupations is a big deal. States should take a good, hard look at their existing codes and ask whether mass unemployment isn’t generally a bigger threat to the public than rogue barbers [MP: Or rogue hairbraiders or eyebrow threaders]."

Related: Today's WSJ article "The Red Tape Diaries" highlights one small business owner's struggle against bureaucracy.

14 Comments:

At 5/22/2012 1:32 PM, Blogger morganovich said...

a friend of mine write a column for forbes.

http://www.forbes.com/sites/warrenmeyer/2012/05/10/when-julia-tried-to-start-a-business/

this is about what it takes to start a campground. (warren manages state and federal campgrounds for profit)

 
At 5/22/2012 1:58 PM, Blogger Jon Murphy said...

Morganovich-

That is pretty awesome you're friends with Warren Mayer. Next time you talk to him, will you please pass along my compliments? I always look forward to reading his column.

The regulatory burden is pretty amazing. My father is a tobacco and liquor wholesaler in Massachusetts. During the regular health inspection, Dad was told he needs to put the crates he stores the merchandise in at least 6 inches above the ground to prevent water damage. This meant redoing his entire storeroom (granted, it's a small store room, only about 100 sq feet).

He was then told that, since he sells liquor, he'd have to go to a TIPS class to learn how to spot drunks and shut them off. When Dad protested, saying he is only a wholesaler and never has direct contact with the drunks, I mean customers, the city told him it didn't matter.

Then, he was told, a new Mass law required all businesses to give health insurance to their employees. The employees are my dad and uncle, both of whom had private insurance since it was much cheaper. Again, Dad protested, but was told it didn't matter.

For those of you who do not know, Wholesalers have almost no profit margin. Most of them make a dollar for every $100 they sell. The new regulations cut Dad's even further. On some of his merchandise, he was lucky to make a quarter off of every $100 he sold.

Moral of the story: regulation turned a business that put 3 kids through college and was mildly successful into a bankrupt enterprise.

 
At 5/22/2012 2:04 PM, Blogger Ken said...

morganovich,

All I could think of when watching this was that Sabina, as a black woman, almost surely votes for tighter regulations, eating up the class warfare rhetoric of Obama/Ried/Pelosi. I wonder if she understands that she is the obstacle in her own life.

I have little sympathy for Julia's plight, including her inability to start a business. She, from her own voting record, prevented herself from starting a business.

 
At 5/22/2012 2:12 PM, Blogger Tom said...

The annual cost of all regulations (federal, state, local) is in the trillions. It is a mostly-hidden debilitating condition, something we could rather easily reduce and thus give our economy a huge boost - 5-10%. Federal tax compliance alone costs $300+ billion annually. The only studies I've seen which attempt to quantify federal regulation costs were done by the SBA by Crain and Crain, the latest in 2010. It put the annual cost of federal regulations at $1.75 trillion for the year 2008.

BTW the "Julia" story above is excellent. It appears to be by the author of great Coyote Blog.

 
At 5/22/2012 2:50 PM, Blogger Larry G said...

oh geeze. there are THOUSANDS of for-profit, successful private campgrounds across the USA.

so how horrible can it be? We have a KOA locally and they do a bang-up business... keeps three generations of a family busy and profitable.

The KOA Buffalo Chip Campground up in Sturgis, ND handles thousands of campers every year and there are about 30 other campgrounds that area to handle the load.

http://www.buffalochip.com/

their cheapest week price for tents is $225 and their deluxe RV package is $350 and up.

In fact, that oil rich area of North Dakota that says they need 5000 houses could likely handle much of the load with some campgrounds - a lot quicker and easier than trying to build houses.

Most full service campgrounds charge $50-100 a day for the big rigs...

Some campgrounds have monthly rates... $200-400... all you need is a a suitable camper ... and you're in business.

Campgrounds in the right location now days are lucrative businesses - regulations and all...

 
At 5/22/2012 3:02 PM, Blogger Jon Murphy said...

You are absolutely correct, Larry. There are thousands of successful establishments in all fields, regulations and all. No one is arguing that point.

But, how much more successful could they be if regulations were trimmed? How much more of their money could be reinvested in the company (adding workers, expanding output, etc)? How much more of their time could there be devoted to producing a better good/service?

I understand your point, and it is legitimate. But don't you agree there are some regulations that are just silly/unnecessary? Think of how much money the government could save if it stopped enforcing some of these.

 
At 5/22/2012 3:14 PM, Blogger Larry G said...

I must say Jon, your challenges are much more polite than typical here in CD. I think you're one of the few that does not start their response with "moron" or "clueless idiot" or whatever.

Yes.. we could do better with less regulations ... I agree.

but the whole issue is one in which you could make that case in almost any country at almost any level of govt, Fed, State and local and the obvious unanswered question is how much is too much and how much is too little and how much is just right?

the average anti-govt type has one answer these days.

they essentially see any/all govt regulation as wrong, unfair, job killing, yadda, yadda, yadda.

I never hear any of them say how much is justified or needed.. just that any/all is unjustified.

One example. What is a public water supply? Is it the job of govt to ensure that a facility that serves the public has a safe water supply?

yes or no?

most folks WANT a regulation that requires a safe water supply rather than have their kid die or become a vegetable and then try to sue. They prefer the proactive regulation to the idea that they can sue later.

that's what drives much regulation.

then the article said this:

" Before she could even think about hiring employees, she had to get a federal tax ID number, or FEIN, for her company. This identification number allows her to collect and pay her employee’s Social Security and Medicare taxes, as well as withhold and submit the Federal income tax obligations of her employees. In addition to these reports, she also learned that she had to file a separate report each quarter on her employee’s earnings in order to file and pay Federal unemployment taxes."

I mean WTF. Isn't this something EVERY business large and small, campground or not has to do ?

What's the purpose of this paragraph?

to argue against any/all payroll taxes as unfair to small business campgrounds or... something else?

these kinds of articles often start out as "poor Julie" and end up as anti-govt rants....

boring....and predictable...

 
At 5/22/2012 3:31 PM, Blogger Jon Murphy said...

I must say Jon, your challenges are much more polite than typical here in CD. I think you're one of the few that does not start their response with "moron" or "clueless idiot" or whatever.


Thank you very much, Larry. I respect you very much, and I always enjoy reading your comments. Although I may not always agree, I can at least see the logic of where you are coming from.

What's the purpose of this paragraph?

I believe the purpose of the entire article is about the time required to comply with different regulations, justified or not.

Think about it like this: about how long do you spend on your taxes each year? I spend about an hour doing mine. Granted, my taxes are simple: do not own a home, I do not have dependents, I do not own a business, etc. I'm sure someone more established spends more time. But the point is, you have to spend time. If there was a way to streamline the tax procedure, then time could be shaved off, on both sides (filling out the paperwork and processing it). Time saved is money saved.

I agree with you that people do want regulations. You and I could debate about what regs are useful and which are not, but that will be a discussion best had over a pitcher of beer and a plate of wings. One of the luxuries that is afforded to us is we can argue for higher prices to get us better quality things.

Does the article make the point in rather a dramatic fashion? Of course. I use the same rhetorical strategy when making my points. But if we look past that and look at the actual point (is all this work truly necessary), I think we'll get to a better argument.

I think the argument tends to get framed "regulations everywhere vs. regulations nowhere." But that's not the right question. What the debate should be is "how can we structure our regulations to make them most efficient and least intrusive?"

 
At 5/22/2012 3:35 PM, Blogger morganovich said...

jon-

do you read his blog?

http://www.coyoteblog.com/

it's great.

 
At 5/22/2012 3:54 PM, Blogger Larry G said...

" how can we structure our regulations to make them most efficient and least intrusive?"

no argument there at all.

that sentiment acknowledges some need but along with it the reality than any regs at all..no matter how justified are killers of productivity and .. making the person who is working ..work harder and longer for money for someone else... sometimes with no sense at all in terms of need and efficiency.

I totally agree.

but I can tell you that...for instance, if a campground is required to post a sign that says "water is not potable" - that one regulation crystallizes the pro/con of the need / argument against that reg.

The anti-reg people will say that the govt has no business requiring that the water be potable nor that they have any business that they require telling the public and the other side of the argument is what happens when someone gets deathly ill or dies.. and the recommended "solution" is to sue the campground which promptly declares bankruptcy and the owners leave for parts unknown.

this is how regulation comes about and I'd be the very first one to admit that a lot of dumb, useless, wrong, regulations get enacted as a result.

but classifying payroll and withholding taxes in the same article with all manner of other regulations (which I agree seem like way too many) .. basically degenerates into a de-facto anti-govt rant...

 
At 5/22/2012 4:15 PM, Blogger Jon Murphy said...

Thank you, Morganovich. I did not know he had a blog. I'll add it to my morning blog crawl.


Larry-

I'm not sure I completely follow your point about a de facto anti-gov't rant. I don't see it. Of course, I am sympathetic to his argument, so I may be blinded by my own prejudices. Do you think you could maybe elaborate a little bit, please?

 
At 5/22/2012 4:22 PM, Blogger Larry G said...

I liked the Coyote Blog also.. and registered to it RSS...

re: anti-govt rants.

well.. for me..any narrative that starts off railing about regulations in general and ends up also railing against payroll and withholding taxes starts to sound anti-govt to me.

Most all major industrialized countries in the world have...regulations and taxes...

I don't know too many that don't.

When someone shows a Nation that has no regulations and taxes and a world-class economy - I'll take notice.

 
At 5/22/2012 4:27 PM, Blogger VangelV said...

Small-business owners are much more concerned with something Washington rarely talks about: the country’s spreading thicket of licensing rules.

What is missed is the fact that Washington was never given the power to regulate most businesses. The commerce clause was written to deal with trade, not general business.

As long as Americans continue to stay on the sideline and accept the burdens placed on the economy by the government they will continue to get the government that they ask for and deserve. If they want changes they might try the ballot box rather than idiotic violent protests or whining.

 
At 5/23/2012 5:36 AM, Blogger Larry G said...

most of the regs cited are local.

and one would think that of the spectrum of regs that the local ones could be most amenable to repeal/reform at elections...

we have a deal going on right now - at the local level - where the State allows the locality to regulate Pawn Shops.

Local Law Enforcement is convinced that Pawn Shops cause increased crime so that want to limit the number of Pawn Shops and force each one to photograph each seller and each of the items pawned.

The newly-elected commissioners are not totally buying it....

good for them... but the Sheriff and the County Attorney are pretty insistent that Pawn Shops need to be heavily regulated - they say more than 40% of stolen items are recovered at Pawn Shops.

The point here.. is where the regulation comes from - and the fact that it is local and, in theory, could be totally removed if local voters wanted it done away with.

so this is not a Washington "problem".

It's clearly a local option and the local elected could easily trash it but there is strong local support to have the regulation....

It's "easy" to blame remote faceless bureaucrats or even elected State and Federal "libtards" but a lot of regulation is ....LOCAL... and is precisely the smaller - more accountable govt that many speak of as "better" but at the end of the day, local regulation is often what local people do want.

 

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