How regulations crush small businesses and the poor

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Today, the Senate Committee on Small Business & Entrepreneurship is holding a field hearing in Iowa on the topic of “One Size Does Not Fit All: Understanding the Importance of Rightsizing Regulations for Small Businesses.” I was honored to submit a written statement for the hearing, outlining a number of important points regarding how federal regulations redistribute wealth regressively and impose a disproportionate burden on small businesses.

Regulations act as a hidden tax that tends to be regressive, meaning the costs fall more heavily on lower income groups and small businesses while benefits tend to be redistributed upwards. Regulations require certain expenditures by businesses regardless of their revenue or output level. Small firms with lower output have a harder time absorbing these fixed compliance costs compared to large corporations with armies of lawyers and accountants at their disposal.

Additionally, costs passed on to consumers and workers through higher prices and lower wages tend to consume a larger share of lower income budgets. Meanwhile, affluent individuals tend to benefit more from regulations, as these people exhibit a higher willingness to pay for outcomes they prefer like safety, carbon reduction, and consumer protections. This dynamic redistributes wealth regressively from poor to rich.

There is also a redistributive effect across time stemming from regulations. Empirical evidence suggests that the total cost burden from federal regulation is enormous, in the trillions of dollars per year according to the best available estimates. This stifles economic growth substantially. One study found regulations have lowered U.S. GDP by 25% compared to what it otherwise would have been in 2012—a $4 trillion loss. Another estimated total regulatory costs at around $1.9 trillion annually.

Costs disproportionately hit small firms, which face around $9,000 in regulatory costs per employee versus just $5,000 for large firms. Overregulation is often a top concern of business leaders in surveys.

Compounding matters, federal agencies rarely conduct distributional analysis of regulatory impacts, despite numerous executive orders requiring they do so. Even when such analysis is done, benefits often receive more attention than costs, leading small businesses to be forgotten. Under the Regulatory Flexibility Act (RFA), agencies must certify regulations do not significantly impact small entities or else conduct further analysis. However, certifications are notoriously unreliable.

Recent Biden administration proposals aim to focus more on distributional analysis, but these are unlikely to yield meaningful improvements without Congressional action given agencies’ poor track record in this area.

The current regulatory regime represents an inverted system of redistribution and injustice. Regulations impose regressive costs on lower income groups to serve the policy preferences of the affluent. The future is plundered through slower growth to indulge present political whims.

Small businesses face the dual harm of shouldering higher costs today even while opportunities diminish for future entrepreneurs. Reforms, such as more stringent distributional analysis of regulatory costs and strengthening the certification process under the Regulatory Flexibility Act, could alleviate some of the disproportionate weight regulations place on those who can least afford it.

To learn more, read my written statement to the committee.