President Obama’s efforts on behalf of small business are like Dennis the Menace’s friendly overtures to the leery Mr. Wilson: well intentioned, but often resulting in physical injury. The more Obama pushes measures aimed at providing small businesses with tax credits, expanded credit or lower health care costs, the deeper this sector sinks into unproductive gloom. Last month’s tally of small business optimism dropped more than 3 points from the May to June. The National Federation of Independent Business (NFIB), a lobbying group that collects the data, said “the persistence of index readings below 90 is unprecedented in our survey’s history.” Given the importance of small businesses to job creation and to the economy, this is a serious problem.
Why the disconnect? After all, Obama can argue that he has tackled the most pressing problem facing small companies — the cost of health care insurance. The NFIB reported in 2009 that “health insurance costs have risen 129 percent since 1999, 84 percent since 2001.” For over 20 years, thousands of small business owners have cited this as their biggest concern, and now, finally, the government has addressed it. Why then, is the NFIB joining the 20 states suing to get Obamacare overturned?
Dan Danner, CEO of the NFIB, explained this seemingly mulish response in an op-ed in The Wall Street Journal, describing the new health care legislation as “death by a thousand cuts for small business owners … [who] will have to deal with an onslaught of new taxes and burdensome paperwork.” As for the much-vaunted “small business tax credit”, Mr. Danner complains that the credit is temporary, and only available to a small group who survive a series of complicated qualifying hurdles. He says “fewer than one-third of small businesses even pass the first three [of four] tests.”
Mr. Danner also objects to the imposition of an $8 billion “so-called health insurance fee” that will escalate to $14.3 billion by 2018 and will be paid almost entirely by small businesses, since the self-insured plans favored by larger firms will be exempt. And then there are the infamous IRS 1099K forms, which under Obamacare companies must now file for every business-to-business transaction exceeding $600, requiring mountains of unnecessary paperwork. How did that sneak into a health care bill?
Whether it is new environmental laws, work rules, safety issues or immigration regulations — all of which are flowing from the Obama administration as swiftly as water down a chute — small businesses take the fall.
Overall, according to Mr. Danner, small business owners do not view the health care act as likely to reduce insurance costs, but rather an extravaganza of extra taxes and regulations designed to fund expanded coverage in the U.S. He suggests the resulting compliance burden — an onerous outlay of money and time — falls squarely on his organization’s members. This is not a shocking claim. Small business owners generally consider themselves disproportionately harmed by regulations. Whether it is new environmental laws, work rules, safety issues or immigration regulations — all of which are flowing from the Obama administration as swiftly as water down a chute — small businesses take the fall.
There is academic support for this view. Professor W. Mark Crain of Lafayette College produced a paper in 2005 for the Small Business Administration arguing that the cost of regulation — estimated at more than $1.1 trillion in 2004 -- harms small businesses more than large ones. He concluded that regulatory costs were 45 percent higher for companies with fewer than 500 workers. The compliance tab per employee was $7,647 for firms with fewer than 20 employees, compared to $5,282 for those with over 500 employees. The practical reason for the discrepancy is that big companies have squads of lawyers and accountants who can decipher the latest maze of rules and requirements imposed by the government; small firms do not. Mr. Crain reports via email that he will soon release an updated study, which will do nothing to allay entrepreneurial anxieties. The new figures will put the cost of regulations today close to the total cited by Dan Fisher in a recent Forbes piece — roughly $2.1 trillion — fully 15 percent of GDP.
Governmental exuberance is also shown to be damaging in a study from Silvia Ardagna of Harvard and Annamaria Lusardi of Dartmouth. Their work examined the relationship between regulation and entrepreneurship across a number of countries. They report that “we always find a detrimental effect of regulation on entrepreneurship.” Regulation of, for example, product entry or of labor markets, dampens the impulse to start a new business, and increases the fear of failure.
“…the federal government alone proposes approximately 150 new rules every year that cost business owners over $100 million per rule in compliance costs.”
In 2008, the NFIB noted that “the federal government alone proposes approximately 150 new rules every year that cost business owners over $100 million per rule in compliance costs. Adding state and county laws that sometimes duplicate federal laws merely raise the cost and frustration level.” And that was during the Bush administration, which is now considered to have been excessively laissez-faire.
Under President Obama, we have seen a bewildering parade of new laws and rules, which have business owners in all sectors scurrying to keep up. The financial services overhaul is just the latest giant reordering of a large sector of the economy. The complexity of the financial services bill — with its 355 potential new rules, mandated 47 studies and 74 reports, increases the likelihood of ugly surprises like the required 1099K filings buried in the health care bill. If the Obama administration really wants to help small businesses, it could approach regulation the way the country hopes it will address the budget — by cutting out the waste and redundancy. Even Mr. Wilson would welcome that approach.