Regulation stands in the way of entrepreneurship for low-income families
In October 2019, the Pacific Research Institute released findings of a new report, titled Breaking Down Barriers to Opportunity #2 Entrepreneurship as a Pathway to the American Dream. The report, authored by Wayne Winegarden, contends that “overly complex government regulations are a common cause behind the barriers to low-income entrepreneurship.”
Winegarden spoke with St. Pete Catalyst publisher Joe Hamilton regarding the findings of his report and why low-income entrepreneurship is not thriving in the United States.
First, Winegarden explains the problem – the failure to alleviate poverty. “How do we sustainably reduce poverty in this country?” Winegarden asks. “Ever since President Johnson declared war on poverty in 1965, the poverty rate has been hovering around 13 percent. Low during good times, higher during bad times, but we haven’t sustainably brought down the poverty rate.”
Winegarden’s solution? The American Dream. “The traditional American Dream is all about starting business, entrepreneurship, and so we wanted to connect that,” he said. “How can we use entrepreneurship to grow the pie, and grow the pie in a way that everyone is benefitting, particularly low-income families and households.”
Despite good intentions, Winegarden contends that the regulatory burden and tax burden associated with small business makes it particularly difficult for low-income entrepreneurs starting small businesses to succeed. “These burdens have become overwhelming and are stifling the innovation that could help lift families into the middle class or beyond,” he argues.
According to Winegarden’s figures, the cost to start a business is about four times the average net worth of a Latinx household. He sees some of this burden coming from regulatory costs like occupational licensing, which requires state certification. Fields like teaching, land surveying, contracting and cosmetology require such certifications.
In his interview and his report, Winegarden argues for three main policy changes to alleviate burdens on small business:
Raising Thresholds for Small Business Payroll Taxes
Winegarden’s number one concern is increasing the exemption in the tax code for self-employment. “Typically, if you work for someone you have payroll taxes that fund Social Security and Medicare, the employer pays half and the employee pays half,” he explained. “But if you’re self-employed, you’re both. So you have pay both sides – that’s 15.3 percent of your income.” Current tax code allows an exemption for about the first $400, that part of the code has existed since the 1950s.
“To keep the purchasing power of this threshold constant (based on the growth in the consumer price index, CPI), the amount of income exempt from the payroll tax should be raised to the first $3,734 of income,” Winegarden writes. But, according to his research, an even greater increased could be warranted. “If the self-employment threshold grew at the same rate as the value of the standard deduction for married couples since 1970,” he explains, “then the small business tax threshold would exempt the first $8,727 in self-employment income from the payroll tax.”
According to Winegarden, this threshold increase would put nearly $1,400 dollars back in the pocket of an entrepreneur.
Reforming Tax Laws to Lower Small Business Retirement and Health Care Costs
Retirement and health care accounts are extremely beneficial to employees, but can be highly burdensome for small businesses to administer and manage. As Winegarden puts it, “Reforms that simplify and consolidate the number of tax-free accounts can make it easier for low-income entrepreneurs to start and manage their own business.”
Winegarden uses the example of a health reimbursement arrangement (HRA), which allows employers to fund accounts for employees to cover healthcare costs, rather than directly paying for the health insurance themselves. There are a number of restrictions placed on HRAs currently. For example, only employers can contribute to HRAs and they accounts are not transferable to new employers.
“But, what if these restrictions were removed, and the accounts expanded to allow for long-term savings, including saving for retirement?” Winegarden posits. “Ideally, such tax-free accounts would allow both employers and employees to contribute a set amount of money each year. The contribution caps should approximate the total amount of spending on health insurance, health care costs and recommended retirement savings for individuals. All health care expenditures not spent in a given year should roll over to cover either future health care costs or, if never spent, used for retirement. There should also be allowances for individuals to use the assets in these accounts to cover specified family emergencies.”
Regulatory Reforms to Lower Costs for Small Businesses
Winegarden sees both proposals for a $15 minimum wage and “burdensome” regulations like occupational licensing laws as barriers to an efficient economy. He believes that the minimum wage should remain as it is, and that occupational licensing laws should be reformed and in some cases removed.
“All these are doing is creating barriers,” said Winegarden. “If you’re just getting started or you’re an immigrant to this country, now you’re creating all of these barriers that actually prevent someone from getting into the labor market and earning their way to the American Dream. You’re creating obstacles to that. We want to reduce the obstacles, not increase them.”
Winegarden called proposals to raise the minimum wage to $15 an hour “a terrible idea.” He believes that employees who would be lucky enough to keep their job would be better off. But, their benefit would be at the cost of employees who lose their job, or end up unable to find employment. Winegarden argues that if the additional cost of the minimum wage hike wasn’t fully offset by reducing employment, it would be passed along to the consumer or would cut into the profits of the small business. “In effect,” he explained, “any type of spending increase you’re trying to incentivize is going to be netted out.”
The point, he said, “is to level the playing field. Right now it is tilted against small businesses, and is tilted against them because of complexity and additional cost. We don’t want to disadvantage large businesses or impose a cost on them, but we want to remove the cost that’s disadvantaging the small businesses.”