President Obama has said, "Small businesses are the heart of the American economy," and that "Our recovery in the present, and our prosperity in the future depend upon the success of America's small businesses and entrepreneurs." I agree. But despite this flowery rhetoric, our government is hobbling small businesses through regulations, taxes and other policies that are hindering our economic recovery.
Small businesses, entrepreneurs and innovators are bearing an unfair burden as the government saddles them with mounting regulations and their concomitant compliance costs, which have only grown in the aftermath of the financial crisis.
Don't believe me? My source is the Obama Administration. A 2010 study by President Obama's U.S. Small Business Administration's Office of Advocacy, authored by Lafayette College economists Nicole Crain and Mark Crain, describes the plight of small business. According to the research, small businesses with fewer than 20 employees incur regulatory costs 42 percent greater than firms with between 20 and 499 employees. Furthermore, small businesses pay costs 36 percent greater costs per employee than firms with more than 500 employees. SBA found that the "regulatory cost per employee for small businesses was $10,585, compared to $7,454 for medium firms and $7,755 for large firms."
The SBA further reports that "complying with environmental regulations costs small businesses 364 percent more than it costs larger businesses. The cost of tax compliance is 206 percent higher for small business than larger businesses." These findings should anger us all. Over the past decade small businesses created 70 percent of jobs in this country, and we are looking to them again to help lead us out of the current economic downturn.
Sadly, it is about to get even worse. The administration is on a regulatory tear. All sorts of well-meaning activists populate the highest jobs throughout Washington, and new regulations are coming out at a fast and furious rate. Most are aimed at regulating business, and all sorts of legal battles are about to be unleashed challenging very interventionist regulations. Yes, they are for well-meaning and important purposes like clean air, workplace safety, shipping products and energy efficiency. But the fact is that complying with the rules, especially for the smallest companies, is disproportionately expensive, and the legal costs of battling them are beyond the means of any individual small business. Understand that Washington has one lawyer for every 11 residents, and the DC area is the only area of the country with strong growth by every measure!
Last week, President Obama signed the Small Business Jobs Act, legislation that aims to provide further tax breaks and better access to credit. Although the bill has noble intentions, it makes little mention of measures to help small businesses cope with the cost of regulation. Although it includes a provision to limit penalties exercised on small businesses that show errors in tax reporting, it doesn't take the opportunity to go further.
But this modest tax relief for certain small business investment is meaningless compared to skyrocketing regulatory costs, rising payroll and corporate taxes and a weakened economy. Our businesses, large and small, are in trouble and the anti-business environment, talk about corporate greed and the political left wing demonization of business is chilling investment. The refusal to lower corporate taxes (already the second highest in the developed world) and plan to raise taxes in 2011 has chilled hiring, hurt investment and is directly responsible for a sullen economy and dismal prospects for cutting unemployment.
Those in power point to the stimulus legislation and its large government spending, which theoretically would help small businesses. But this new funding for stimulus requires those selling to the government to pay "the prevailing wage." This is legal speak for mandating use of unionized workers -- thus, small businesses, who rarely are unionized (and justifiably so given the costs and constraints on flexibility), are frozen out of many government contracts.
American businesses of all sizes face challenges, mostly due to well-intentioned government action. While tough economic times should provide the opportunity for new business creation and entrepreneurship (as laid-off workers start new enterprises), this recession is unusual in that the hurdles to begin businesses are so high and our government is so unfriendly to investment.
Legislators cannot view entrepreneurs as the economy's saving grace while shackling them with regulations, and discouraging capital formation and investment. The harsh climate for start-ups and the increasing cost to comply with regulations will only inhibit small businesses ability to help revive America's economy. It's time for the Obama administration and Congress to shift course and approach policy from the view of those looking to start or expand a company.
Gary Shapiro is the president and CEO of the Consumer Electronics Association, which represents more than 2,000 U.S. technology companies, 80 percent of which are small businesses.