We’re almost exactly 90 days away from electing the next President of the United States, and both sides of the political spectrum are turning up the heat. Earlier this week, Republican nominee Donald Trump directed his attention towards the state of the U.S. economy, and the plight of small business in particular.
According to Mr. Trump, “You cannot ever start a small business under the regulatory burden you have today.” I was a bit perplexed when I heard this comment while watching the speech he delivered to the Detroit Economic Club. At BodeTree, we work with tens of thousands of small businesses each and every day. I’ve yet to come across anyone who found today’s level of regulation impossible to manage.
The thing about Trump, and politicians in general is that there’s always a kernel of truth buried deep (and sometimes very deep) beneath the layers of hyperbole. I decided to do a bit of digging and see just how bad the regulatory environment is for small business in modern America. Here’s what I found.
Starting a business isn’t that hard
According to doingbusiness.org, a research site developed by The World Bank Group, the U.S. ranks 49th out of 189 countries regarding how easy it is to start a new business. At first, I was surprised that the U.S. had such a low ranking; I’ve always thought of our country as a place where the entrepreneurial spirit runs strong.
Upon digging deeper, however, I found that the differences between the top-ranked country (New Zealand) and the U.S. were relatively slim. New Zealand has a one-step process for forming a new company that lasts one day. In contrast, the U.S. has a six-step process that takes a total of four days. Cost-wise, New Zealand runs about 160 NZD, while the U.S. ranges from about $35 to $600, based on where you live.
All in all, it’s pretty easy to form a company in the U.S. Could we make it easier? I suppose so, but we’re far from the scenario described by Mr. Trump.
Let’s look at the numbers
According to the Bureau of Labor Statistics, the U.S. has added over 600,000 new businesses since 2010, an increase of about 21%. When it comes to the number of people who self-identify as entrepreneurs in a given month, the data is just as positive.
In Kauffman Foundation’s latest Index of Startup Activity, “In 2015, an average of 0.33 percent of the adult population, or 330 out of 100,000 adults, created new businesses each month. This business-creation rate translates into more than 550,000 adults switching into self-employed business ownership in each month during the year.”
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The latest report from Kauffman goes on to note that this trend has increased in 2014 and 2015 after suffering a dip during the years immediately following the recession. I dug a bit deeper into the Kauffman Foundation report and found that over the past 20 years, the percentage of people creating small businesses each month bounced around, but only varied from a low of .28% to a high of .34%. While that represents a significant swing, it by no means indicates that people are abandoning entrepreneurship in droves.
Room for improvement
It seems that we’re operating in an environment that isn’t killing the entrepreneurial spirit, as Mr. Trump describes. However, there is most definitely room for improvement. There are three key areas that we should focus on to make things easier for over 30 million small business owners in the U.S.
- Help with regulatory compliance issues: I did a Google search for “U.S. small business regulatory environment” and quickly went cross-eyed. There are a tremendous number of regulations in place, almost all of which are designed with good intentions. The problem is that they’re incredibly difficult to track. I’d venture to guess that when businesses fall out of compliance, it’s almost entirely due to honest mistakes. I believe that more resources should be directed towards helping small businesses maintain compliance.
- Reduce fines and penalties for honest mistakes: If a small business owner makes an honest mistake when it comes to regulations, we shouldn’t be too severe in the punishments and penalties. Instead, fines for honest mistakes (paperwork errors, etc.) should be greatly reduced or eliminated altogether.
- Simplify taxes: Taxes are incredibly confusing for entrepreneurs. Between corporate tax, payroll taxes, state filings, federal filings, and self-employment tax, it’s hard for entrepreneurs to ensure that they’re doing everything correctly. We need to dramatically simplify the tax situation to make compliance easier, reduce the cost to prepare, and enable entrepreneurs to reinvest that money in their businesses.
I agree with the sentiments expressed by former Secretary of Defense Donald Rumsfeld in his annual letter to the IRS, “"I remain mystified as to whether our tax returns and tax payments estimates are accurate. The possession of a college degree, retention of an experienced tax accounting firm and earnest application have failed to provide confidence that my returns and payments are properly completed." Things are definitely too complicated, and we need to do something about it.
It’s simply disingenuous to say that “you cannot ever start a business” in this environment. The entrepreneurial spirit runs strong in the U.S., and the numbers show that people aren’t being deterred from starting businesses. We shouldn’t accept Trump’s hyperbole at face value.
Still, we must remain vigilant and work to find common-sense solutions to the challenges that do exist for small business owners. There is always room for improvement, and we should be taking steps to simplify things and make it easier for people to do the right thing.
