Federal Regulations: An “Opportunity Cost” for American Small Business

Karen R. Harned

More than five years after the end of the “Great Recession,” only 21 percent of small businesses [1] say they have fully recovered.[2] During the recession, lack of sales ranked as the top problem small business faced. Taxes placed second, and “government regulations and red tape” placed third.[3] And since 2012 at least one in five small-business owners identify government regulations as their most important problem.[4]

The reason for this is simple — small-business owners directly feel the impact of federal regulation in the daily life of their business. The small-business owner is often the main person in a business who bears the burden of complying with regulations and paperwork requirements. According to a 2010 study, small businesses spend $10,585 per employee on regulation, which amounts to 36 percent more per employee than larger companies spend.[5]

With that as a backdrop, it is easy to see how small-business owners continue to wonder why Washington just does not get it when it comes to regulation. For decades, Congress has sought to solve societal problems through mandates on business. Too many Americans without health insurance? Congress tries to solve that by requiring businesses to provide health insurance to their employees (regardless of whether or not they can afford it) or pay hefty penalties. Too many Americans unable to care for a sick relative? Congress seeks to address that by mandating a business keep a position open three months out of every year for qualified employees, using a cumbersome reporting system.

Always entrepreneurial, with a keen focus on the bottom line, the American small-business owner looks for ways to minimize the time and money spent on things other than running his or her business. Since many of these regulations wisely exempt the smallest of small businesses, some employers purposefully do not increase hiring because they do not want to have to comply with the regulatory regimes that await businesses that expand to 10, 15, and 50 or more employees.

America’s small-business owners go into business with an idea to offer a product or service about which they are passionate. They start with the dream that they have the freedom to run their business their way. Then they find that the task of learning and complying with federal regulations soaks up more and more of the time and resources they need to invest for their business to thrive. For the American small-business owner, the opportunity costs of federal regulation are all too often crowding out investment and hiring.

Karen R. Harned is the Executive Director of the National Federation of Independent Business Small Business Legal Center.

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Economic Freedom

Additional Resources

Red Tape Rising: Six Years of Escalating Regulation Under Obama http://www.heritage.org/research/reports/2015/05/red-tape-rising-six-years-of-escalating-regulation-under-obama


  1. Depending on the industry, a small business is generally defined as an employer with 500 or fewer employees.
  2. Bank of America, “Small Business Owner Report, Spring 2015,” http://newsroom.bankofamerica.com/sites/bankofamerica.newshq.businesswire.com/files/press_kit/additional/Spring_2015_Small_Business_Owner_Report.pdf (accessed June 16, 2015).
  3. William C. Dunkelberg and Holly Wade, Small Business Economic Trends, June 2009, NFIB Research Foundation, http://www.nfib.com/Portals/0/PDF/sbet/sbet200906.pdf (accessed June 18, 2015).
  4. See, NFIB Research Foundation, Small Business Economic Trends, at http://www.nfib.com/foundations/research-foundation/monthly-reports/sbet/ (accessed June 18, 2015).
  5. Nicole V. Crain and Mark W. Crain, The Impact of Regulatory Costs on Small Firms, 2010, https://www.sba.gov/advocacy/impact-regulatory-costs-small-firms (accessed June 17, 2015).

© 2015 by The Heritage Foundation. All Rights Reserved.

2015 Index of Culture and Opportunity

The Social and Economic Trends that Shape America

Heritage Foundation

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A think tank devoted to the principles of free enterprise, limited government, individual freedom, traditional American values, and a strong national defense.

2015 Index of Culture and Opportunity

The Social and Economic Trends that Shape America

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