Rising regulatory costs strangling small business?

In order to comply with federal regulations, the smallest businesses spent over $10,000 per employee in 2008.

Photo illustration / The Godfather / Paramount Pictures / Album / Newscom
The famous strangulation scene from 1972's The Godfather. Are regulatory costs strangling small business, forcing them to spend their resources meeting government requirements instead of growing their workforce?

I give a talk to various business groups titled "The Future of Small Business in America".

When I gave this talk a few years ago it had a very happy ending. I talked about the robust entrepreneurial economy and how bright the future is for young entrepreneurs. It also included some warnings about factors that were inhibiting entrepreneurs and could stifle continued entrepreneurial growth, including our tax policy, our approach to business regulation, and property rights.

Today that talk does not have such a happy ending. Just when we need entrepreneurship the most to help lead us out of the recession, the factors stifling entrepreneurial activity are getting worse. We have already seen increases in taxes and fees that impact small businesses, a growing complexity of the tax code (now over 100,000 pages if you are keeping score at home), and increased tax compliance enforcement by the IRS targeting smaller businesses.

And now the news gets even worse. Just when we should be getting out of the way of entrepreneurs, we are instead witnessing a sharp increase in the cost of regulatory compliance for small businesses.

In the latest report on the cost of regulation, the SBA Office of Advocacy finds that the cost of regulatory compliance for the smallest businesses (under 20 employees) has increased from $7,647 per employee per year in 2005 to $10,585 in 2008. So just as the recession was taking hold, small business had to divert 38% more per employee just to meet the demands of growing regulation. This cost is 36% higher than the same per employee cost facing larger businesses with over 500 employees.

Keep in mind that these figures were calculated before the pro-regulation movement took over in Washington in 2009. The 38% increase in cost happened under the supposedly pro-business Bush administration.

So in 2008, a small business with 20 employees can expect to pay $211,700 just complying with government regulations. I shudder to think what the cost will be by the time we see the next report on regulatory cost on small businesses, which should be assessed sometime around the end of the first term of the current administration.

Imagine the economic growth we could unleash if we allowed these business owners to put most of that money to use to grow their businesses.

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