According to the U.S. Small Business Administration, small businesses are the backbone of the U.S. economy, generating 44 percent of all business activity. Take them out of the equation, and the economy collapses. But that is exactly what’s happening. The cards are stacked against small business in America today, and nowhere is it worse than in the State of California. The rules are rigged to make it harder for small, independent contractors and independent businesspeople to survive, much less thrive. Excessive regulations invariably favor large companies, because the cost of complying is far easier for a company with a billion dollars in annual revenue than it is for a company with a million dollars in annual revenue.
This obvious fact is well understood by corporate monopolists whose rollup and consolidation of industry after industry in America is only accelerated in recent years. This excerpt from a January 2023 report by S&P Global, sums up the trend: “In 91 of 157 primary industries, the five largest U.S. companies by revenue combine for at least 80% of total revenue.”
The report goes on to explain how monopoly power is a double-edged sword. On one hand, “growing monopoly power stifles competition and productivity in the U.S. economy.” The counter-argument is that “very, very productive firms end up dominating the industry.” From the perspective of the ordinary American worker, either as an employee of a monopolistic corporation, or as an independent proprietor trying to compete in markets getting swallowed up by the giants, both of these arguments are true, and both are bad news.
The fact that regulations actually benefit the largest corporations clearly doesn’t translate to a recognition by progressive voters that deregulation – or at the very least, a more judicious application of regulatory oversight – might help small business survive and might help consumers avoid new rounds of price gouging when entire markets are captured by a few giant companies. And California is ground zero for this cognitive dissonance.
A more subtle impact of excessive regulations is how it redirects productivity, rendering the value of enhanced productivity far more ambivalent than one might suppose. In California, for example, with costs for land, energy, and raw materials driven artificially high due to regulations, gains in productivity are offset by higher costs for these inputs and by higher costs to comply with regulations. Apart from wiping out the smaller competition which is good for the monopolies, where is the benefit?
The Punishing Middle Class Tax Burden
If a sole proprietor aspires to upward mobility by working harder, the cards are particularly stacked. The following chart shows just how demotivating current tax laws are on people with taxable income between $90,000 and $160,000, particularly in California where state taxes are particularly onerous.
The first thing to consider when reviewing this chart is that in California, depending on where you’re living, it is difficult if not impossible to support a family on $90,000 per year. That income is the entry level to the middle class. For the same reasons, in California, a taxable household income of $160,000 per year is by no means upper middle class. In many parts of the state, it still spells tight budgets and tough spending decisions for families.
But where is the incentive to work harder, beyond the pure necessity to survive? If a person is making $90,000 per year as an independent contractor (married filing jointly), and they forfeit nights or weekends to take on extra work, they will give 43 percent of their income to the government. That is, for every $100 they earn, they’ll only keep $57. If they are set to make $132,000 per year and they take on an extra job, they’ll pay 47 percent of their earnings to the government. Forty-seven percent tax.
This is an appalling abuse of some of the hardest working citizens in America. People who are barely able to make ends meet, who need to supplement their income by sacrificing whatever time they can spare after fulfilling their obligations to their family and to their primary clients, are forced to give nearly half of every dollar they earn to the government. And in a bizarre twist of logic, white collar law partners and consultants, who collect higher compensation as hired clerisy for monopolists and billionaires, end up paying less marginal taxes. As soon as their taxable income exceeds $160,000 per year, their 12.4 percent Social Security assessment goes away, and their marginal tax burden drops from 47 percent down to 34 percent. In America’s supposedly progressive tax environment, a 47 percent marginal tax burden is not reached again until income exceeds $400,000 per year.
Interesting, isn’t it? A guy who takes on extra work to pay rent for his home and tuition for his kids and scrapes together $130,000 per year is paying more taxes on that last dollar than a corporate litigator whose last billable hour topped out at $390,000 per year. Some might say there is a distinction between Social Security taxes and “taxes.” But when your biggest concern is having enough money left to cover your monthly bills, that’s mumbo jumbo. Money for the government is money for the government. It doesn’t matter where it’s going or what you call it.
The Cost-of-Living Burden
It’s not easy to draw the line between what regulations facilitate authentic capitalism, where companies have to use their productivity innovations in order to sell competitive products at competitive prices to customers with options, versus regulations that empower monopolies and throw up impassable barriers to smaller emerging would-be competitors. In California’s case, nobody has even tried to thread that needle. Instead, the state legislature has never considered a regulation they didn’t like. With accelerating frequency and intensity, and specifically with respect to “saving the planet,” California’s regulatory state has made it impossible to live a middle class lifestyle.
Thanks to environmentalists pressuring the state into imposing ridiculous “net zero” building codes, along with cordoning off cities to prevent the far less expensive option of building on open land, the average home in California costs over $728,000. That’s actually slightly down compared to a year ago, but payments are still way up. With a 30 year fixed mortgage now up to 7 percent, the average home in California will set you back $4,844 per month. But that’s not all: California’s much vaunted low property taxes, at 1 percent, still pack a wallop on such a huge base. Add at least another $1,200 per month for the 1 percent property tax, the various local “fees” that get around the 1 percent cap, plus mortgage insurance and homeowners insurance.
How far is that $90,000 per year going, now that you’ve spent $72,000 just to get your family under the average roof? Add to that the most expensive total costs for natural gas, electricity, gasoline, and water in the United States, and you’ll be lucky to have a dime left over for clothing, groceries, or health care. Want to keep your kids out of the public schools? Good luck. On average that will cost another $16,000 per year in California, per child. And it is not tax deductible.
All of these costs are elevated either indirectly or explicitly thanks to environmentalist regulatory excess. The state has plenty of land for homes, trees for lumber, abundant reserves of gas and oil, and amazingly productive farmland. But in every one of these areas, the foundations of prosperity, environmentalist inspired rules have restricted supply and raised costs. The only economic interests that have benefit are monopolists.
What Kind of Government is This?
One must ask how it came to this. Californians pay ridiculously high taxes. If they are within that middle class band of income between $90,000 and $160,000 per year, their marginal tax rate is more than people earning up to $400,000 per year. And for what? A government that passes regulations that have made the state unaffordable. California’s government has declared war on its hardest working citizens. It is literally engaging in economic expulsion of its middle class citizens.
For California’s low income communities, the situation is no better. How does it serve social justice to make the most basic necessities of life unaffordable? How does it serve environmental justice to cram millions of people into already crowded cities because a “greenbelt” has been stretched around every urbanized region of this vast, underpopulated state? How does it foster upward mobility for low income families when the only thing achieving middle class economic status brings is no more government subsidies and instead, brand new, crippling rates of taxation?
And then there’s the entire spectrum of failed state phenomena – rampant drug addiction, decriminalized crime, a completely unregulated homeless population, and public schools where children are taught identity politics and climate crisis indoctrination, filling their head with resentment and terror, instead of grammar and multiplication tables. Why should anyone work anymore? Why try? The government schools teach values that nurture irresponsibility – blame systemic racism and corporate greed for anything missing in your life, at the same time as government regulations have created an economy where in any case, even a hard working and responsible person cannot afford to live.
California’s only hope is for its voters to recognize what has happened and in a multiethnic, nonpartisan seismic wave of populist rage replace every one of their dysfunctional, wholly owned legislators. California’s voters must demand politicians and policies that strike a reasonable balance between the needs of the environment and the needs of civilization, to once again enable an economy where small companies can compete with large companies, where consumers have choices, and a low cost-of-living appropriately reflects California’s abundant resources and innovative people.
This article originally appeared in American Greatness.
Edward Ring is a contributing editor and senior fellow with the California Policy Center, which he co-founded in 2013 and served as its first president. He is also a senior fellow with the Center for American Greatness, and a regular contributor to the California Globe. His work has appeared in the Los Angeles Times, the Wall Street Journal, the Economist, Forbes, and other media outlets.
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