The small business furphy

March 15, 2012
The Age

It says a lot about Canberra in general and the Greens in particular that annual turnover of $2 million is considered the cut-off point between small and large business, but the latest round of political brinkmanship and confusion masks a bigger economic problem in governments playing favourites.

The first report on the tax shaving for small versus “large” business I saw mentioned the Greens definition of “large” being revenue of $2 million a year. “How embarrassing, the reporter must be confused about the difference between sales and profits,” I thought.

But then it turned up again and again in coverage of the political fiddling. Annual turnover of $2,000,001 is only large if your concept of enterprise is based on trading spare possum skins from a subsistence farm somewhere in the Tasmanian wilderness.

I’m guessing a corner store with turnover of $2 million and employing a two or three people so that the proprietor doesn’t have to work 20-hour days (18 to keep the shop open, the extra two for paperwork and sundry servicing of bureaucracies) would result in said proprietor enjoying a net income after rent and the rest of somewhat less than the average wage. The promised shaving of the company tax rate in such a circumstance would cost the government two per cent of stuff all.

Basically, the $2 million cut off point is a crock – an insult to those in business and a pathetic attempt at being seen to “do something” for small business. As for the number of businesses that bother to incorporate at that level, well, let’s just keep and smoke and mirrors coming and pretend the elephants don’t exist.

The bigger issue is whether there is a case for discriminating in favour of small businesses. There’s a good chance such politically attractive action doesn’t do us any good and may in fact cause harm.

Last week’s Economist magazine carried a leader that effectively challenges the “small business good, big business bad” mentality implicit in Canberra’s actions. In part it argues:

“It is shrewd politics to champion the little guy. But the popular fetish for small business is at odds with economic reality. Big firms are generally more productive, offer higher wages and pay more taxes than small ones. Economies dominated by small firms are often sluggish.

“Consider the southern periphery of the euro area. Countries such as Greece, Italy and Portugal have lots of small firms which, thanks to cumbersome regulations, have failed lamentably to grow. Firms with at least 250 workers account for less than half the share of manufacturing jobs in these countries than they do in Germany, the euro zone’s strongest economy. A shortfall of big firms is linked to the sluggish productivity and loss of competitiveness that is the deeper cause of the euro-zone crisis. For all the boosterism around small business, it is economies with lots of biggish companies that have been able to sustain the highest living standards.”

The greater evil is that giving small business special breaks encourages them to stay small instead of growing. Exempt small business from unfair dismissal requirements and there’s a big incentive not to employ one person above the cut off number. Give a meaningful tax cut under some random number and take away an incentive to grow beyond that number.

The bottom line recommendation is not to give small businesses special treatment, but to give all businesses the best treatment. There is an implicit admission of policy failure is admitting that small businesses need dispensation from the myriad government interferences – but facing up to that would require more courage and less politics.
Michael Pascoe is a BusinessDay contributing editor.

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