How do We Sort Out Business Regulations?

State regulations evolved gradually and unsystematically, creating many collisions and inconsistencies in regulatory ruls and practices. Despite this, if the aim is to deregulate the business environment, it is essential to sort out and classify business regulations in a conherent way. The scheme drawn by LFMI (see below) reflects a cross-section of different forms of economic regulations, such as licensing, taxation, price controls, and employment regulations. To expose the entire scope of regulation, at least a few more dimensions should be applied. They would reflect the input of time and money that go into fulfiling government-imposed requirements. A diagram like this, however, would be difficult to draw and to use, therefore our scheme features only the main forms of regulation.
In the diagram, state regulations are split into two major groups from the point of view of a company’s activity. One of them delineates regulations governing market entry, or business start-up, while the other depicts operational business regulations after a company is established and registered.
Market entry is regulated through statutory requirements, prohibitions, and restrictions. Some businesses are banned altogether in Lithuania (e.g. gambling) or run solely by the state (e.g. printing money and postage stamps).
Before a company is launched, it must satisfy a series of requirements (raise authorised capital, comply with the Classification of Economic Activities, register the company’s name, obtain a permission from the municipality, pay stamp duty, etc). The number of regulations and the costs involved depend on the type of enterprise and planned activity.
Restrictions on market entry comprise licenses and quotas. Licensing regulations are imposed before a company starts to operate and are applicable to owners (e.g. qualifications, professional skills, work experience, no criminal record), staff (e.g. qualifications and work experience), equipment, finances, premises, etc. Quotas restrict businesses by controlling their supply.
Operational business regulations refer to the organisation and rights of companies (e.g. restrictions on borrowing imposed on jointstock companies), employment, taxes, prices, goods and services. In addition, companies must perform government-inflicted functions which are extraneous to business activity. Uneven conditions are created for state-owned companies and private enterprises. Corporate welfare programmes are tailored for selected groups of enterprise or even individual companies.
Taxation is one of the most damaging and costly forms of regulation. Almost all taxes are used for regulatory purposes. Regulations are imposed through tax rates, which vary across different types of companies and income, tax favours for specific categories of enterprise, differentiated penalties depending on the size of business, and other. Municipalities use very vague and equivocal criteria to determine eligibility for tax relief. These criteria may refer to the ownership of a company, the “utility” of business activity for the municipality, and a family’s social status in case of land and inheritance taxes. Regulations are hidden in the entrails of tax rules, e.g., concerning cost recognition, taxable objects, tax accounting, and tax compliance.
Equally, if not more, restrictive are employment regulations. The state regulates the forms of employment, working hours, wages and salaries, professional duties, employees’ age, and office equipment. It curbs employment opportunities pursued by foreigners. Employers are required to secure compliance with labour safety rules, fire prevention regulations, and the like.
The quality of goods and services is regulated through certification, price controls plus health care and hygiene requirements. In addition to that, the government regulates the ways in which goods are transported, stored, advertised, sold, paid for, and serviced after sale.
The state fixes prices for certain types of goods and services (e.g. energy resources, agricultural products, medical and taxi services). It defines the nomenclature of imported pharmaceuticals. Quotas, for example, apply to imported tax-exempt sugar and imported malt. Prices are influenced through anti-trust regulations (prohibition of price agreements), customs and excise duties, and public tenders (e.g. public funds can be used to purchase domestic products only).
Enterprises are charged with extraneous, non-business functions which would never be performed at will. The imposition of such functions is prompted by the state’s administrative needs or inability to cope with assumed obligations. Companies are saddled with loads of bureaucratic paperwork in addition to all regular reporting. They are required to provide statistical reports to the Department of Statistics, to file tax returns (separately for each tax) with the Tax Inspectorate, and to notify the State Social Insurance Fund about hired and fired employees. They must submit customs declarations, issue bills of lading, adopt measures for money laundering prevention, store mandatory state reserves of fuel, food, etc. The worst of it is, businesses must do all this at their own expense.
In addition to being a rulemaker and regulator, the state is also an active player in the economy. It takes loans and gives loan guarantees to individual market agents. It runs large, and often monopolistic, companies. It provides subsidies and offers corporate welfare programmes.
As was said earlier, state regulation is manifold. It entails not only explicit regulatory mandates but also implicit costs businesses incur to do the government’s bidding. The scheme we have presented here offers a structured approach to a more comprehensive analysis of state regulation and a solid basis for deregulation initiatives.