More than 38 million Americans are living in poverty, according to the latest U.S. Census data. That’s just under 12% of the population.
Not exactly what President Lyndon Johnson had in mind when he declared war on poverty in 1964, more than a half-century ago. Since then, the U.S. poverty rate has averaged about 13%. It’s declined slightly during economic booms and ticked up during recessions.
In other words, the War on Poverty has been fought to a draw, despite trillions of dollars in federal spending. Yet more spending is exactly what the leading contenders for the Democratic presidential nomination are calling for as part of their effort to alleviate poverty.
There’s a better way to help people climb the economic ladder. And that’s by making it easier to be an entrepreneur.
Entrepreneurship is one of the surest ways for those with low incomes to beat a path into the middle class and beyond. A study from the Small Business Administration found that “self-employed workers who own incorporated businesses have much higher earnings than all other worker groups in low-income areas.”
Entrepreneurship is also a pivotal way for immigrants, many of whom arrive without intimate knowledge of or connections to American society, to secure the better life they sought by coming here. Nearly 30% of all new entrepreneurs are immigrants.
But as a new report on the state of entrepreneurship from the Pacific Research Institute shows, government has erected barriers that make it difficult for low-income entrepreneurs to get their businesses off the ground, hire more workers, and work their way out of poverty.
These barriers include costly business taxes, fees, and permits; a complicated tax code that requires significant out-of-pocket expense for compliance; nonsensical occupational licensing laws that impede a person’s right to work; and exceedingly high minimum wage laws that make it difficult for entrepreneurs to create jobs.
All told, small businesses with fewer than 50 employees face nearly $12,000 in costs per worker just to comply with government regulations. Adhering to the tax code costs very small businesses — those with one to five employees — about $4,300 per employee.
There are several market reforms that policy makers can deploy to reverse this trend. In light of these unconscionable tax and regulatory costs, policy makers should cut bureaucratic red tape, simplify the tax code, and jettison ill-considered new regulations such as a $15 minimum wage.
Reforms should also focus on improving low-income entrepreneur’s access to capital, which is perhaps the biggest hurdle aspiring businesses must overcome.
Starting a business takes an estimated 4.4 times the median net worth of an African American household. It takes four times the median net worth of the average Latino family.
The Federal Reserve’s annual Small Business Credit Survey notes that firms seeking between $100,000 and $250,000 have the most difficult time securing financing. These are the micro-businesses that low-income entrepreneurs are building from the ground up.
Community banks are the traditional providers of credit for these firms. But they’ve been stymied by overly burdensome federal regulations. Reforms enacted in 2018 exempted small banks from some of the Dodd-Frank Act’s most onerous regulations; that should help improve small businesses’ ability to access credit in the future.
Micro-lenders are beginning to enter the market as well. They’re well-positioned to serve the typical credit needs of small entrepreneurial firms. The best way to further encourage the growth of micro-lenders is by streamlining rules and assigning oversight to one national regulator.
Starting a new business has always been a piece of the American dream, especially for immigrants and those starting at the bottom of the economic ladder. Unfortunately, too many government-created obstacles stand in the way of entrepreneurs toiling to produce better lives for their families. Removing these obstacles is essential to helping those struggling the most — and ultimately winning the War on Poverty.
Wayne Winegarden is a senior fellow in business and economics at the Pacific Research Institute. Download a copy of his study “Entrepreneurship as a Pathway to the American Dream” at www.pacificresearch.org. Courtesy of the San Francisco Chronicle.