If you look at the world today there is still a big gap between the rich and the poor.
But how can we help fix this?
- Do we raise taxes on high-income earners?
- Do we redistribute income directly to poorer households?
- Maybe we need to expand social services?
Or do we encourage countries to promote fairness by preventing businesses from shirking tax rules and by coordinating related tax collection efforts?
All of these might help reduce inequality in consumption but do little to solve the underlying problem of the lack of economic inclusion
Fortunately, recent evidence suggests that targeting regulatory reforms can promote entrepreneurship, without the need to raise taxes or increase public expenditures.
There is a relationship between income inequality and the amount of red tape that an aspiring entrepreneur in 115 countries goes through.
Many countries see startup regulations like applications, permits, licenses, and fees which all add to the barrier of entry. These regulations make it very difficult or even nearly impossible for entrepreneurs will a small number of resources to legally get into a market or start a profession.
If you look at places like Colombia, in 2004 it took on average 43 days to start a business legally. Which required applicants to finish 19 separate steps and spend 28% of their annual income towards starting that business. All these steps did, was suppress the aspiring entrepreneur and associated economic mobility.
What seems to be a common denominator with all these countries is where there are a greater number of entry regulations, there is also a higher rate of income inequality.
So with this in mind, if reducing startup regulations may be an effective strategy to reduce income inequality, without the need to raise taxes, increase deficit spending, or place additional stresses on already limited public finances.
Why are more countries not adopting this?
It’s been shown that reducing startup regulations promotes entrepreneurship and job formation in small firms.
For example, if you look at Portugal, in 2005 they aggressively reduced startup regulations. This was the most complete and thorough deregulation effort of any country in Western Europe. Cause them to move them up 80 places in the World Bank’s Doing Business index and winning international accolades for the government in the process.
This increased the rate of business formation by 17 percent and the rate of job formation by 22 percent, in Portugal
It allowed for the less educated and less experienced entrepreneurs to open up a larger share of firms, providing more evidence that these changes boosted economic inclusion.
In the end, it is up to regulators to loosen the reigns on new entry regulations who can then better support entrepreneurship as a means of decreasing income inequality.