NCPA - National Center for Policy Analysis

The Regulation Tax Keeps Growing

October 5, 2010

One out of every three dollars earned in the United States goes to pay for or comply with federal laws and regulations, say Nicole V. Crain and W. Mark Crain, economics professors at Lafayette College.

Crain and Crain find that small businesses bear a disproportionately large share of regulatory costs.

  • The portion that falls initially on businesses overall was $8,086 per employee in 2008.
  • But these costs are not borne equally by businesses of all sizes -- larger firms benefit from economies of scale in compliance.
  • As a consequence, small businesses -- those with fewer than 20 employees -- incur regulatory costs 42 percent greater than firms with between 20 employees and 499 employees, and 36 percent greater than firms with more than 500 employees.
  • The regulatory cost per employee for small businesses was $10,585, compared to $7,454 for medium firms and $7,755 for large firms.

In no category do small businesses pay less in regulatory costs than both medium and large businesses, say Crain and Crain.

  • In retail and wholesale trade, small businesses pay 13 percent less than medium firms but 15 percent more than large firms.
  • In services, small businesses pay 13 percent more than medium firms but 9 percent less than large firms.
  • In health care and "other" (the biggest components of which are utilities and construction), small businesses pay 45 percent and 70 percent more than medium firms, and 28 percent and 83 percent more than large firms.

This distribution of regulatory costs places small firms at a substantial competitive disadvantage.

Source: Nicole V. Crain and W. Mark Crain, "The Regulation Tax Keeps Growing," Wall Street Journal, September 27, 2010.

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