No. 1 Barrier To Small Business Success? Not High Taxes, But Excessive Regulation And Licensing

Mark Perry
updated | Author's Website

This week is National Small Business Week, described as a time to celebrate the special impact made by outstanding American entrepreneurs and small business owners, according the event’s sponsor, the Small Business Administration.  So it’s a good time to ask the question, What’s the biggest barrier that small business owners face that prevents them from expanding, investing, hiring more workers, and becoming more successful?  Taxes?

Well, it turns out that small-business owners place relatively little weight on tax issues when surveyed, according to Matt Yglesias in his recent Slate article “Licensed to Decorate.” Here’s an excerpt:
“Small-business owners are much more concerned with something Washington rarely talks about: the country’s spreading thicket of licensing rules.
To be charged a high tax rate on your small-business profits, you need to be turning a tidy profit in the first place. Anyone in that position would surely prefer lower taxes but is fundamentally ahead of the game. The main barrier to entrepreneurship is not that you’ll pay taxes if you succeed—it’s that you might not make any money at all.
Over time, occupational licensing has become much more common. Morris Kleiner of the University of Minnesota and Alan Krueger of Princeton have found that in the early 1950s, less than 5 percent of the population worked in occupations covered by state licensing rules. Today it’s well over 20 percent.

Some of this is surely justified. But a wide range of these rules could be done away with entirely at basically no risk. Regulation is needed when it would make sense for a firm to deliberately engage in malfeasance. Dumping harmful toxins into the air is highly profitable unless it’s prohibited. Financiers can draw huge bonuses by taking on too much risk, only to wreck the economy later. In other occupations, though, shoddy work brings its own punishments. An interior decorator who can’t get recommendations from satisfied customers probably won’t remain an interior decorator for long.

In these cases, licensing rules raise the prices the rest of us pay, make it difficult for successful entrepreneurs to expand their businesses, and are often a major barrier to employment for the most vulnerable populations. New Jersey’s ban on high-school dropouts fixing locks sounds silly, but given the generally bleak prospects facing workers with little education, barring them from whole occupations is a big deal. States should take a good, hard look at their existing codes and ask whether mass unemployment isn’t generally a bigger threat to the public than rogue barbers [MP: Or rogue hairbraiders or eyebrow threaders].”

Related: Today’s WSJ article “The Red Tape Diaries” highlights one small business owner’s struggle against bureaucracy.

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