IAN McAULEY. What’s so sacred about small business?

Jun 5, 2018

Flowing from the Financial Services Royal Commission is a stream of stories about the bad behaviour of big business, but is that distracting our attention from the shortcomings of small business?

There is something sacred about small business. While Labor, the Greens and a changing cast of senators are blocking Morrison’s tax cut for big business, cuts for businesses with turnover less than $50 million were easily waved through Parliament. The Government has re-named the Department of Employment as the “Department of Jobs and Small Business”. Politicians’ speechwriters on both sides of the fence seem to be under instructions to mention “small business” whenever they can. “Labor has got the plan to help our small businesses move forward” said Shorten in a recent doorstop interview.

Yet it is hard to find any explanation why “small business” is more worthy than “big business”. There is a legitimate case perhaps for some regulatory breaks for very small businesses – the self-employed and other sole traders, small partnerships, family farms and others who don’t have specialised accounting and legal staff – but that doesn’t apply to businesses generously covered by the $50 million cap.

“Small business” covers a host of activities – the café on the local shopping centre, the high-tech startup that will either go bust or make it to the ASX 200, the car dealer sitting securely on a franchise from a large German or Japanese firm, the bookshop that operates on a slim margin but has enlivened the local community, the “adult” shop on Victoria Street or Hindley Street, the farmer experimenting with cutting-edge technology and employing young agricultural scientists, the farmer clearing trees, stealing water and underpaying young foreigners.

The term “small business” carries little meaning: it’s merely a statistical classification. The Bureau of Statistics classifies businesses with fewer than 20 employees as “small”, businesses with 20 to 200 employees as “medium” and firms with more employees as “large”.

There are well-behaved and badly-behaved businesses throughout the economy, regardless of size. Size may count in terms of how businesses evade tax, mistreat employees, swindle customers and creditors, and pollute the environment, but size is hardly an indicator of whether businesses will engage in such transgressions.

Unlike large corporations, not many small businesses have foreign branches that can be used for profit-shifting to evade tax, but they have their own means, some generously sanctioned by government, others illegal but laxly policed.

For example it is common for small businesses to use family trusts to split incomes. Business loans within the extended family is the small-business equivalent of high-interest loans from foreign subsidiaries used by big business. There are the generous fringe-benefit-tax concessions for motor vehicles, used disproportionately by small business: it’s hard to imagine BHP or Wesfarmers offering all their employees and all their employees’ family members concessionally taxed or untaxed fringe benefits.

Then there are illegal but widespread practices, such as personal expenses classified as business costs and use of unrecorded cash transactions: it’s hard to imagine Telstra or Coles offering a discount for an unreceipted cash payment.

Big business is not renowned for generous treatment of employees, but large corporations generally have procedures to ensure compliance with awards and to enforce standards of behaviour, such as rules relating to sexual harassment. Underpayment of wages, a failure to pay superannuation, sexual harassment and other forms of bullying are disproportionately found in sectors dominated by small business, including restaurants and tourism. This is not to let big business of the hook, because in a number of cases involving franchising and sub-contracting it has become evident that big business sub-contracts bad labour practices to small business, but such practices indicate that small business can get away with behaviour that would be unacceptable in large corporations

Then there is the treatment of suppliers and customers. In the building and construction industries it is common to find firms going broke to avoid contractual liabilities to customers and suppliers – often other small businesses further down the food chain. Volkswagen and Takata may not be enthusiastic about having to recompense customers for faulty car components, but they’re still around to meet their liabilities.

Big business is renowned for using various stratagems to get around environmental regulations and, as the coal industry demonstrates, in using its lobbying clout to thwart policies aimed at reducing greenhouse gases. Small business, however, has its own transgressions, such as illegal dumping of waste, and much of the visual tackiness of our built environment can be sheeted home to small business.

As for the notion that small business is the economy’s “engine room” (Coalition) or its “backbone” (Labor) where jobs are generated, evidence just doesn’t support the proposition, as Saul Eslake pointed out before the Budget. Most of the employment growth over the two years to 2016-17 has been in medium-sized business (as defined by the ABS), followed by big business. Also, the better-paid jobs are in medium and large businesses: in 2016-17 the average wages and salaries per worker were $70 000 in “large” businesses, while they were only $32 000 in “small” businesses.

This low growth in employment is probably because while there are inevitably some startups among small businesses, for the most part small businesses are stable enterprises, whose owners sensibly have no intention or desire to expand or to take on new staff. They include professional practices, small shops, franchisees and self-employed tradespeople.

If the government wants to encourage startups and other innovative small businesses, tax breaks are not the way to go about it. Eslake includes tax breaks for small business – the lower corporate tax rate and the Entrepreneurs’ Tax Offset – as two of the twelve entries on his “list of the dumbest tax policy decisions of the last 10, 15, or 20 years”.

Anyone who has been involved in a startup knows that the day the new business gets a tax assessment is generally a day of celebration, because it means it has actually made a profit – enough profit to offset losses in earlier years, when its tax losses were unusable book entries. Concessional tax rates for small business may be welcomed by well-established businesses – the local dentist, the real-estate agent or the Toyota dealer – but they won’t do anything for startups, or for that matter, firms that are incurring book losses because of rapid expansion.

Support for startups should be in the early high-risk phase, when there is no prospect of a taxable profit. One way is to help develop venture capital institutions that can invest risk capital in startups: removing incentives for investors to put their funds into “investment” properties would be a useful first step towards freeing up funds to give entrepreneurs a break.. Also a proper “social wage” with publicly-provided health, education and unemployment benefits provides a safety net for those who fail in their business ventures; without such a backstop a fear of the consequences failure will discourage people from going into high-risk ventures. “Small government” policies that cut the social wage amplify the risk people face in setting out on entrepreneurial ventures.

Beyond support for startups perhaps the best thing governments can do for small business is to make sure that those ethical businesspeople who are paying their share of tax, who are paying proper wages and superannuation, who are treating their suppliers and customers fairly, and who respect the natural environment, are not put at a competitive disadvantage or are made to feel a need to behave unethically themselves in the face of unethical behaviour by their competitors. Most of the industries served by small business are highly competitive and any advantage enjoyed by unethical players inevitably comes through in the form of lower prices and therefore lower profits or losses by ethical suppliers.

A decent social wage and proper resources to regulatory agencies should be central planks for a government that claims to be “business friendly”. Impoverished public services and lax enforcement of laws, in the name of “small government” and “deregulation”, are supportive not of business, but of a brutal form of anarchic capitalism, in which entrepreneurship, risk-taking and ethical behaviour have little chance of thriving.


Ian McAuley is an Adjunct Lecturer in Public Sector Finance at the University of Canberra and a Fellow at the Centre for Policy Development.








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