Despite the recent improvement in our nation’s economic outlook, small businesses and entrepreneurs face significant challenges from today’s burdensome regulatory framework. While the unemployment rate has dropped to 5.5 percent, these numbers don’t tell the whole story. The labor force participation rate—which excludes people who are no longer actively searching for work (and hence serves as a better metric)—is at the lowest point in U.S. history, and the percentage of long-term unemployed is still much higher than before the recession. Perhaps most troubling is the fact that the number of business deaths each year recently exceeded the number of business births.
Entrepreneurship is the lifeblood of our economy. Small businesses, comprising over 99.7 percent of all employer firms in the U.S., account for 55.2 percent of private-sector jobs in the economy (according to 2011 Census data) and have generated over 65 percent of the net new jobs since 1995. Start-ups drive the innovative process, spurring changes in technology and productivity that ultimately lead to higher real incomes and improved living standards. Facilitating entrepreneurship is critical to the long-term health of our economy.
The House Committee on Small Business held a hearing last week to discuss the state of small business and address some of these concerns. Heritage Foundation Senior Fellow David Burton testified before the committee, offering a comprehensive and insightful analysis of how lawmakers might ease the various burdens entrepreneurs currently face. Burton identified challenges in eight key areas:
- Poor tax policy. Poor tax policies raise the cost of capital, impose high taxes on risk-taking, and impede economic growth. Moreover, the tax system is monstrously complex, imposing inordinately high compliance costs on small and start-up firms.
- Inadequate access to capital. Securities laws and, to a lesser extent, banking laws and practices, restrict entrepreneurs’ access to the capital needed to launch or grow their businesses. After all, without capital to launch a business, other impediments to entrepreneurial success are moot.
- Expensive health care. The U.S. health care system is the most costly in the world, and the Affordable Care Act (Obamacare) imposes high costs on firms with 50 or more employees.
- Burdensome energy and environment laws. Environmental and energy regulations raise the cost of energy and limit development of energy resources.
- High and growing regulatory costs. The cost of complying with increasingly burdensome and complex regulations continues to grow rapidly. These rules have a disproportionately adverse impact on small and start-up companies that can ill afford to use scarce resources on regulatory compliance rather than growing their business.
- Onerous labor and employment laws. Increasingly complex and opaque labor and employment laws raise the cost and risk of employing people. They reduce wages and cost jobs.
- Bad immigration rules. The U.S. immigration system makes it difficult for firms to gain access to talented foreign workers and for immigrant-entrepreneurs to enter the United States to start a business.
- Costly legal system. The U.S. legal system is the most costly in the world, imposing high and potentially ruinous costs on small firms.
Burton subsequently offered 97 concrete policy initiatives that would help alleviate these burdens. His full testimony can be accessed here. The broad scope of Burton’s recommendations illustrates an important point about the necessary changes: They must be comprehensive. It is not a few major obstacles that are hindering entrepreneurs, but rather the combined weight of many smaller rules.
Small businesses do not have the same bargaining power in Congress as big businesses, and as a result, their needs are too often overlooked. Despite some economic gains, entrepreneurs are still struggling due to an oppressive regulatory environment. It is time for officials to bolster small businesses, and our economy overall, by embracing Mr. Burton’s reforms.
