Post-pandemic, ‘small business fetishism’ could cost us jobs, wages

The small business is “Australia’s engine room“,” The backbone of our economy “,” hope on the side “.

These are the words used by then Treasurer and now Prime Minister Scott Morrison to justify special treatment for small business, an approach shared by leaders of all political parties, from Labor to One Nation to the Australian Greens.

It is a belief that underlies a wide range of grants and subsidies, free counseling programs and preferential tax treatments, including

  • social security tax exemptions

  • a reduced corporate tax rate

  • personal income tax reductions if unincorporated

  • exemptions in prescribed circumstances from capital gains tax

  • initial tax deductibility of capital investments

  • less onerous methods of remitting the goods and services tax.

What is extraordinary about the “engine room of economics” doctrine is the complete lack of supporting evidence.

Advocates point to the large number of people who work for small businesses.

According to the latest Bureau of Statistics count (in which small businesses are defined as those with fewer than 20 employees), they employed 4.67 million people at the end of June 2020. This equates to 37.7% of employment. total.

The “engine room” which cuts jobs

What is less often pointed out is that this number – 4.67 million – is smaller than it has been in the past 13 years, except for four. At no time in the past 13 years have there been more Australians employed in small businesses than in June 2007.

Rather than being the engine room of job creation, small businesses have presided over job destruction, creating not a single net new job in total in 13 years.

Employment in small businesses fell 6.3% in 13 years, while employment in medium-sized businesses increased by 46.4% and employment in large businesses increased by 48.4 %.

Small business employment as a percentage of total employment

“Small businesses” are those with fewer than 20 employees.
ABS Australian Industry 2019-20

The “instant asset write-off” advanced to small businesses in Budget 2015-16 also did nothing to increase small business capital spending.

Small business gross fixed capital spending fell 16.1% between 2014-15 (the year before the instantaneous write-off of assets) and 2018-19 (the year before the pandemic) – a much larger drop than that of capital expenditure by medium-sized enterprises (2.7%) and large enterprises (6%).

Another common myth is that small businesses are more innovative.

Less productive, less innovative

While some small firms are unmistakably innovative, ABS surveys of innovation activity have consistently shown that small firms are less likely to engage in some form of innovative activity than medium or large firms.

Productivity is lower in small businesses than in larger ones.

The ABS puts the gross value added per person employed in small businesses at AU $ 24,000, which is 21% below the average for all businesses in 2019-2020. Gross value added per person in large firms was almost $ 41,000, 36% more than the average.

Lower productivity could be one of the reasons why, in 2019-2020, small businesses paid their employees 35% less than the average salary paid by all businesses. Mid-sized companies paid on average about 12% more and large companies paid almost 34% more.

Apparent average annual salary or salary depending on the size of the company

The average annual salary or salary is obtained by dividing the total salaries and wages paid by each category of business in 2019-2020 by the average number of employees as of June 30, 2019 and June 30, 2020. In the absence of data relevant, no adjustment is made. differences in the proportion of full-time and part-time jobs between businesses of different sizes.
Australian industry ABS 2019-20, and author’s calculations

The obvious conclusion described in more detail in my new article in the Australian National University journal Agenda is that the widely held belief that small businesses are the ‘engine room of the economy’ is simply wrong – as is the As a corollary, increased aid to businesses simply because they are small is a good way to stimulate employment, investment, innovation and economic growth.

Less inclined to pay taxes

One thing small businesses aren’t particularly good at is paying the required tax.

The Australian Taxation Office Tax Gap program reveals that small businesses (which it defines as those with revenues of up to $ 10 million per year) have voluntarily paid only 86.3% of personal income tax and the companies they would have had to pay if they had fully complied with its interpretation. of the 2018-19 tax law.

This amount is greater than all tax differences calculated by the ATO.

The ATO finds that high wealth voluntarily paid 91.4% of what should have been paid if they had fully complied. Large companies paid 91.7%.

Read more: Are Small Businesses Really the Engine Room of Australia’s Economy?

Figures from the tax office suggest that small businesses accounted for 49% of what it defines as uncollected money. Large corporations and high net worth individuals accounted for only 10% and 3%.

Again, this flies in the face of the popular perception that small businesses are unfairly persecuted by the ATO and that all of Australia’s tax problems would go away if only ‘the top of town’ paid their fair share. tax.

During the pandemic, small businesses needed support

That’s not to say that the substantial help provided to small businesses during COVID-19 was unwarranted. Small businesses represent a disproportionate share of most sectors that have been hit hardest by restrictions imposed to remove COVID-19, including hospitality.

If governments had not provided the tremendous support they have given to small businesses, it is highly likely that the economy would have contracted further and the unemployment rate would have risen further in the middle of last year.

However, it will be important to ensure that this support does not take hold.

Policies that serve to prolong the existence of small firms – which, as noted, have lower productivity levels on average than large firms – will slow the rate at which factors of production can shift to more productive uses within industries and the economy as a whole.

After the pandemic, new businesses will matter most

Ideally, existing preferential tax treatment regimes and other forms of assistance to small businesses, just because they are small, should be eliminated entirely and replaced with preferential tax treatment for New companies.

There are at least five reasons for this:

  • First, new businesses are more likely to be created in sectors of the economy with more sustainable economic prospects – whereas small businesses are generally in the sector in which they started.

  • second, new businesses are much more likely to create jobs than small businesses – a recent study found that businesses less than two years old created 1.44 million full-time equivalent jobs in Australia between 2006 and 2011, while companies three years or more have shed around 400,000 jobs

  • third, new businesses are much more likely to innovate than small ones – indeed, the desire to introduce a new product or service, or to produce an existing product or service in a new way, is one of the main reasons for starting a new business

  • fourth, since there is no way for a new business to prevent itself from aging, aid cannot be played by new businesses that remain new in the same way that it can be played by new businesses. small businesses that stay small

  • Fifth, since almost all new businesses are inevitably small, and most small businesses are not new, the fiscal cost of measures designed to help new businesses will be much less than the cost of measures designed to help small ones. businesses, leaving more room to help all businesses.

The Reserve Bank has repeatedly stressed the importance of accelerating wage growth. In last year’s intergenerational report, the government stressed the importance of increasing productivity growth.

We will come out badly from COVID if we do not take the opportunity to realign our programs with reality so that they do the best they can.

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