Assessing the administrative environment of enterprises in the USA

4.4.1. Regulations reducing bureaucracy and their implementation

58SME law: 2004/XXXIV, Paragraph 11.

59On the basis of the law on the chambers of economy, 1999/CXXI, Paragraph 12 (1) a)

60The annual executive report on the community decision of the „European Charter for small enterprises" for the year 2004. The report of the Hungarian government can be downloaded from the following website:

http://ec.europa.eu/enterprise/enterprise_policy/charter/2005_charter_docs/report_hungary_2004_hu.pdf

61[Observer and others 2006]

62„Tuned to business" – A program for making entrepreneural environment more dynamic. This is an interactive website for the collection of regulatory propositions. In 2006-2007 this website is available at the portal: http://www.gkm.gov.hu. The website is divided to the following topics: 1. Simplification of enterprise- and tax administration. 2. Increasing of the legal security of enterprises. 3. Improving the financial conditions of enterprise operation. 4. Assuring fair and transpart competition. 5. Corporate governance. 6. Trade specific suggestions missing from the previous points.

63The expression „deregulation" has recently become also used in the meanings of „liberalisation" and „release".

64On the supervision of the deregulation of legal rules see government decisions 2358/2002 (Nov., 28) and 104ide6/2003 (May, 28).

In the United States , on the basis of the Paperwork Reduction Act accepted in 1980, all federal offices have to ask the Office of Management and Budget (OMB) for permission, in case they intend to collect data from enterprises or households. ⁶⁵ Public agencies obtain such permissions only if it can be justified that the planned data collection is necessary, and those who are affected will not be burdened too much. Based on this rule, during the past 25 years, annual plans have been compiled to restrict the information collecting activity of federal agencies. These bureaucracy reducing plans are based on impact assessments, which estimate the number of hours used for compliance by enterprises or households. Governmental offices are obliged to reduce this index at a rate that is annually defined in advance.

Moreover, it is the responsibility of federal Office of Management and Budget (OMB) to assess bills before they come into force. ⁶⁶ The obligation to perform impact assessment and the range of recommended methods that can be applied for such purposes have been stated in a federal decree. ⁶⁷ This legal rule makes it compulsory for federal offices to perform economic impact analyses not only for assessing the expected impacts of legal rules but also in case of any other significant measure or decision that has been proposed by federal agencies, covering the policy areas of taxation, environment protection, public health, safety, labour or social protection.

The federal rules on impact assessment are complemented by a further act of regulatory policy which concerns the flexibility of regulations. According to this Act regulators must take into consideration the needs and opinions of small enterprises when planning, issuing and implementing measures. ⁶⁸

It is enlightening to analyse the impact assessment methods recommended in the Executive Order 12866 on

„Regulatory Planning and Review". According to this rule, every impact assessment consists of three components:

( A ) The justification of the fact that the proposed measure is necessary. A legal rule is needed only if one of the following causes exists: (1) Failure of market mechanisms. Such a failure can be the effect of a natural monopoly, market predomination, the insufficient information of the customers, or the prevalence of substantial externalities. Externalities are effects of a market transaction on other, external stakeholders or on the environment, irrespectively to whether this effect was intended or not intended by the buyers and the sellers of this market transaction. (2) Even if there are no market failures, a regulative intervention must be justified if it influences prices, production and sales quotas, compulsory qualitative norms and limitations to entry of the market.

( B ) The analysis of alternative regulatory approaches or non-regulatory solutions. Federal regulation is needed only in those cases, when a problem cannot be solved in an alternative way. Examples for alternative approaches are court proceedings or various subventions. In case of health, safety or environmental issues it is strongly recommended to demand the achievement of certain essential requirements or levels of results, while it is not recommended to define prescriptive standards and norms in the medical or technical sense. Moreover, it is strongly recommended to segment the regulation which means, that different requirements should be set up for the different layers of the population or for different entrepreneurial groups.

( C ) The analysis of costs and benefits. In case of all examined alternatives costs and benefits must be compared with a so-called baseline scenario, i.e. with the hypothetical situation that the regulation in question has not been / will not be introduced at all. Whenever possible, all costs and benefits have to be expressed in monetary terms.

If this is not possible, the impact assessor should refrain from applying artificial solutions. Long term effects which can be expressed in financial terms, should be discounted, that is, their present value must be calculated.

The analysis of uncertain outcomes must be accompanied by risk analyses and the level of uncertainty should be clearly stated. Risk should be interpreted as outcomes with known probability distribution, while uncertainty should be interpreted as a situation in which the probability distribution of the possible outcomes is not known.

Uncertainty may be the result of lack of data, lack of scientific knowledge, or may be the result of the fact, that certain phenomena are basically unpredictable. In case of uncertainty the decree recommends to clearly disclose the lack of information concerning risks, benefits and costs.

The decree supports the usage of the following quantitative methods: simulation, sensitivity analysis ⁶⁹, Delphi methods ⁷⁰ and meta analysis. ⁷¹ If an economic analysis relies on hidden assumptions, these assumptions should

65 Paperwork Reduction Act of 1980, Pub. L. No. 96-511, 94 Stat. 2812 (Dec 11 1980).

66 [Lutter 2001]

67 Executive Order 12866 of September 30, 1993, „Regulatory Planning and Review"

68 Regulatory Flexibility Act f 1980, Modified by the „Small Business Regulatory Enforcement Fairness Act" ,accepted in 1996.

69Sensitivity analyses examine whether a method is good or not by systematically changing its input parameters and observing their impact on the output.

be clearly stated. If several alternative starting hypotheses can be assumed, then it is recommended to perform a sensitivity analysis by using the major starting hypotheses as bases of inference. It has been observed that the impacts of a legal rule are not equally distributed among various social layers with different incomes, with regard to race or gender. Analogously, impacts on businesses may differ according to company size or industrial sector. Therefore, impact statements should be segmented as deep as scientifically feasible. The time pattern of impacts also must be clearly stated, since what is good for one generation, can damage the next one.

The evaluation of benefits is especially complex because when the benefits of legal rules concern health and safety, these values cannot be expressed in monetary terms. It is recommended to express the benefits of such rules by computing the average number of annually saved human lives or casualties.

Costs, however, can be expressed with the help of monetary concepts much more easily. Such are, for example, the compliance costs of the private sector and the administrative costs of the government. Each calculated cost item has to be compared with those costs that would arise if the regulation had not been implemented - but all other conditions would be the same. Certain cost items are transferring the burdens from one stakeholder to another one, but do not increase the total social costs. Such are, for example, insurance costs, which do not reduce, in reality, the social costs of an accident, but transfer them on to the insurance companies. Such transfer costs lead to a redistribution of the burdens attributable to the legal rule. Similarly, if the aim of the analysis is to calculate social costs, then the net price of an item that was purchased for complying with a regulation should be taken into consideration: If, for example, as a consequence of a legal rule it becomes unavoidable to buy some sort of appliance, then the value added tax is not to be calculated as social cost, since this is not a cost appearing on the social level, this being only some kind of redistribution between the purchaser and the state.

The provisions contained in the above quoted legal rules can be regarded as the self limitation of the federal state. Several member states of the USA have their own regulatory impact assessment systems. ⁷²

4.4.2. Impact of the federal regulations on small enterprises in the USA

In the USA the quality of legislation is evaluated not only by organisations of the government but also by non-governmental organisations, by advisory firms, universities and by research institutions of public policy, in other words, by „think tanks". The independence think tanks is secured by the fact that they do not rely on any support from governmental bodies. The quality of economic analysis on which impact assessments are based, is improved by the fact that the analytical results of competing organisations are published. In comparison, in Europe the institutional background of impact assessment is relatively weaker.

The United States has established the „Small Business Administration " in 1976 with the aim of institutionalising small enterprise development on the level of the federal government. This government agency has a department called „Office of Advocacy" whose task is to reduce the disadvantageous influences exerted on small enterprises by the measures of the federal legislation and regulation. This department not only performs impact assessment research but additionally runs a counselling section for SMEs and represents the interests of small businesses in the rule making process on the federal level. In 2007 the Small Business Administration had 10 regional centres on the territory of the USA with local representations.

Federal government offices of the US regularly publish reports about the cost effects of regulations on American small enterprises. In 2005 the „Office of Advocacy of the Small Business Administration " implemented a survey among small- and medium size enterprises about the cost effects of federal regulations. ⁷³ In the report small enterprises are defined as enterprises with less than 20 employees. In the United States these make up 90% of all enterprises.

Policy areas . The report divides federal regulations into four main categories: economic regulations affecting home markets and foreign markets, labour regulations, environmental regulations and the administration of tax regulations. Let us have a more detailed look at the fields of regulation as evaluated in the report.

70Delphi method is a special form of expert survey whereby researchers ask a group of experts who have not met each other personally, to answer a question. In the second round the same question is to be answered but the experts already know the summarised results of the first round.

71Meta analysis is a secondary analysis in which the data of several, earlier surveys and studies are summarised for the purpose of the examination of a research hypothesis.

72For example, for the continuous regulatory reform in New York state which has been running since 1995, the following department of the governor’s office is responsible: Governor’s Office of Regulatory Reform (GORR), see http://www.gorr.state.ny.us

73[Crain 2005]

• Economic regulations. These rules limit or stimulate access to the market, the use of certain inputs or production methods, influence the choice of outputs, the definition of prices and participation in international trade or investments. The following regulators belong here: those concerning quotas and customs, the ones putting limitation to competition, those concerning prices, and those limiting production or employment.

• Labour rules. This group contains rules connected with payments, allowances, the safety of labour and labour hygiene, legal rules concerning human rights as effectuated at the places of work. The study assesses the impacts of 25 different legal rules and orders at length, which embrace most of the regulations in effect at workplaces in the USA in the year 2000. Quite importantly for small businesses, 6 out of these 25 important labour statutes make exceptions for enterprises employing less than 20 people. Such is, for example, the „Age Discrimination in Employment Act" prohibiting discrimination depending on age or the „Americans with Disabilities Act" prohibiting discrimination against the disabled: some provisions of these legal rules are not extended to enterprises with less than 20 employees.

• Measures aimed at the protection of the environment. Cost effects of environmental regulation are published in the environmental impact assessment reports of the U.S. Environmental Protection Agency. This government agency has prepared impact assessments to every important environment protection rule issued before 2004.

• Taxation rules. The report does not calculate or evaluate the tax burden on companies. However, it is concerned with calculating compliance costs in terms US dollar values which are due as a consequence of tax administration, i.e. by spending time on filling out the forms issued by the federal tax administration.

Calculating with realistic hourly wages they express, in terms of money, how long the collection of data and the filling of the forms takes for an average enterprise. The above calculations cover the administrative efforts of firms and entrepreneurs devoted to filing profit tax, national insurance and federal personal income taxes.

Sectors. The report divides the American economy into the following five sectors: (a) manufacturing (b) retail and wholesale trade, (c) services, (d) health care, and (e) others.

Cost types. Direct costs attributed to federal legal rules have been divided into two groups: (a) costs to be paid by government agencies and (b) costs to be paid by the enterprises of the private sector. The report deals with the latter only. Let us take, for example, a decree connected to environment protection. In this case the report does not deal with implementation or enforcement costs, that is, with those which increase the expenditures of the executive authority. On the other hand, the report estimates (a) the costs of those additional environmental investments of the enterprise, which were imposed on the enterprise by the legal rule, (b) the costs caused by additional paperwork and (c) the expenses paid out to experts, The report does not touch upon the cost effects of regulations on the level of the member states or settlements. At the same time, it embraces those expenses which have to be paid by consumers as a consequence of enterprises passing on to their customers the extra costs imposed on them by the regulation.

Results. The main numerical result of the research is that compliance costs of SMEs imposed on them by the federal legal rules exceed an annual amount of 1.000 billion dollars, a sum which makes up more than one tenth of the national income.

Table 22. Estimated value of compliance costs caused by federal regulations United States of America, 2004

Field of regulation Estimated annual effect, billion USD

Rules of economical character 591

Labour rules 106

Environmental rules 221

Taxation rules 195

The total of federal regulations 1.113

Source: [Crain 2005]

Compliance cost s per one employee are dependent on the size of the enterprise and here an inverse relation can be observed. For example, in cases of small enterprises in the manufacturing industry, compliance costs per one employee amount to twice as much of the same expenses of those in a medium sized enterprise. On the other hand, economic and labour related regulations affect medium and larger enterprises more. The reason for this is that small enterprises are, in many cases, exempt from a certain part of labour regulations.

4.5. Case Study “Croatian RIA": Introducing EU technical