NCPA - National Center for Policy Analysis

Small Businesses and Big Unintended Consequences

January 18, 2011

The 1099 provision of the Patient Protection and Affordable Care Act (PPACA) requires that businesses issue 1099 forms to all vendors paid more than $600 per year.  This has angered many in business.  They see it as an example of how the law of unintended consequences leads unrelated federal regulations to impose heavy compliance burdens on small business owners, says Scott Shane, professor of entrepreneurial studies at Case Western Reserve University. 

Consider also the Dodd-Frank Wall Street Reform and Consumer Protection Act:

  • When debating the financial reform legislation, no one in Congress believed that we needed a law to reduce the number of accredited investors permitted to finance new and small companies.
  • The new law, however, allows the Securities and Exchange Commission (SEC) to dramatically reduce the number of accredited investors available to finance private companies simply by indexing for inflation the financial limits for being an accredited investor.
  • By allowing the SEC to adjust these figures for inflation, Congress gave the regulatory agency the ability to dramatically reduce the number of accredited investors, says Shane.

Another example of the law of unintended consequences is the Sarbanes-Oxley Act of 2002:

  • Passed in response to the accounting scandals in the early 2000s, this law requires that public companies put in place costly internal financial controls, and that the chief executive and chief financial officers of public companies personally attest to the veracity of their companies' financial statements.
  • Because the law raises the cost of running a public company and makes senior management legally liable for the accuracy of the financial information it provides, fewer companies have an incentive to be public.
  • While the law was designed to deal with financial fraud experienced at companies like Enron and Worldcom, it has had the unintended consequence of casting a pall over the venture capital industry.

Source: Scott Shane, "Small Businesses and Big Unintended Consequences," The American, January 12, 2011.

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