Regulatory imposition, contrary to popular belief, harms the “little guy”. Small firms have larger compliance costs and more man-hours dedicated to compliance. These market distortions favor larger firms and cripple industries. As a result, the creation of new business has been on the decline and entrenched firms profit from the reduced competition
First, it’s important to understand what type of regulations creates these compliance costs. The majority of regulatory compliance time is spent on the tax code, followed by environmental regulation. On average, this results in additional (total) costs per firm of $28,261 and $17,467, respectively. Yet for both categories, small business incurs a larger total cost.
On an employee basis, the disparity is greater. Firms with less than 50 employees incur $11,724 in regulatory compliance costs per employee, whereas large firms incur only $9,083. This is a distinct and arbitrary competitive edge for larger, entrenched firms.
Bigger companies have the resources to avoid compliance, especially with the complex tax code, as well as reduce their overall regulatory burden. Small business cannot afford those resources and they are stuck with the sticker price.
Not only does it harm smaller firms, industry specific regulations impose greater burden on important industries. For example, average compliance costs per employee in manufacturing are $19,954 – compared to $9,991. For manufacturers with less than 50 employees, compliance is $34,671.
Manufacturing is not the only industry either. In banking, for example, onerous regulations like Dodd-Frank impost heavier costs are smaller firms. According to the Consumer Financial Protection Bureau, smaller banks incur compliance costs equal to 5.6% of retail deposit operating expenses, whereas the largest banks incur only 0.9%.
Of course, accurately estimating the total burden is difficult. Even the government admits their flaws in understanding this burden. The 2014 report on regulatory costs by the Office of Management and Budget, for example, estimates regulatory costs for only 116 different rules – or 0.3% of regulations published during the 10-year study period. In their own words, “the total benefits and costs of all federal rules now in effect are likely to be significantly larger than the sum of the benefits and costs reported”.
When regulations burden small business, it also impedes the creation of new business – which is the protectionist benefit to entrenched, large firms. Today, the rate of firm exit is now greater than firm entry. Be careful when advocating for regulatory largesse as it will often be the most harmful to those you claim to protect.