Saturday, May 30, 2015

Skewed policy ensures size matters in small business sector

Criticism of corporate welfare shouldn't be reserved for recipients from the big end of town, but should extend to small businesses thriving on government largesse.

As illustrated by the glitzy website accompanying the 2015-16 federal budget, a showcase of the fiscal plan delivered by Treasurer Joe Hockey was a new package of small business tax and spending measures.

These include an immediate tax deduction for low-value asset purchases until June 2017, estimated to cost $1.8 billion over the next four years, a lower company tax rate for small companies and a tax discount for unincorporated small businesses costing another $3.3 billion over four years.

These explicitly neo-Keynesian measures, designed to stimulate small business to "have a go" at producing and hiring more, already follows estimated total federal budgetary assistance to the small business sector in the order of $1 billion in 2012-13.

The budget proposals providing explicit tax benefits to small businesses have not gone entirely unchallenged.

Critics have pointed to the obvious fiscal discrimination opened up by reintroducing company tax progressivity, and that the proposals needlessly bolster smaller businesses when firms with lower turnover pay less tax, in any case, under the arrangements which presently stand.

It is well known that vested interests acting on behalf of certain small businesses have long succeeded in wrangling regulatory concessions from the government, effectively shielding them from competitive forces.

For many decades newsagencies benefited from closed-shop regulations affording them exclusivity in the distribution and sale of newspapers and magazines to other retailers and households.

It took deregulatory reforms to belatedly abolish anti-competitive authorisation for newsagents to exclusively distribute periodicals, and the fruits of those changes can be seen today with newspapers and magazines, not to mention books, gifts, and stationery, readily sold by grocers, petrol stations, and others.

The retailing of pharmaceuticals is another notorious area in which small businesses have effectively organised in a contrivance to suppress competition and raise prices at the expense of the general public.

To this day, only registered pharmacists are permitted to own, establish and operate chemist outlets.

These arrangements, and the Byzantine restrictions on where chemists may be located, have prevented supermarkets and other retailers to take advantage of their economies of scale to provide Australians with cheaper prescription drugs and medicines.

While small businesses are often lauded as a highly dynamic segment of the Australian economy, and whose participants are resilient in the face of structural change, there are several high-profile policy flashpoints which appear to contravene such claims.

Representatives of small business, especially bricks-and-mortar retailers, continue to campaign against the corroding effects of online shopping upon their profit margins.

This is reflected, for example, in the praise from the small business community in response to Treasurer Hockey's war on downloads, in the form of the recent announcement to extend the GST on imported digital goods and services.

Even within the Australian bricks-and-mortar retailing set there are intense policy battles being waged between large supermarkets and the small business sector.

With new, low-cost outlets such as Aldi and Costco entering the Australian market and threatening present market positions, it is most ironic that independent stores and small retailers keep crying foul over alleged abuses of market power by the likes of Coles and Woolworths.

As my 2013 research had noted, Australians are among the most price-sensitive retail consumers in the world, with nearly 60 per cent of customers prepared to change grocery retailers on account of a 5 per cent reduction in offered prices.

The extraordinary reach of the small business sector into the Australian political realm does not end with the procession of subsidies, tax breaks and regulatory favours, with small business even having its own government ministers at federal and state levels.

There is clearly much political effort expended, by both major parties, in attempting to appease small business owners and their representative industry organisations, but sound economic rationales for privileging small businesses in a policy context over other firms are lacking.

A longstanding political argument for assistance to small business is that they find it more difficult to access finance.  However, this is not in itself proof that capital markets are failing, since the degree of risk attached to each proposed venture will necessarily differ and this will be duly reflected in varying borrowing costs.

In any case, small businesses tend to be prone to relatively higher rates of business failures, especially early in their lives, even in the presence of corporate welfare and other government preferment.

It may be so that small businesses are, in the aggregate, major employers of labour in Australia, but if policymakers are interested in job creation they should wish to promote a better all-round business climate to encourage employment right across the board.

It is also desirable to be mindful of the adverse economic consequences of small business corporate welfare, including the fact that assistance to one sector of the economy increases costs for others, and some managers might deliberately restructure their firm's affairs to attain specific benefits directed to small businesses.

None of the preceding discussion should be taken to imply there are no legitimate problems facing small business, and indeed many of these problems result from government interventions themselves.

To take one example, heavily regulated labour markets have inflated the costs of employing staff, particularly on weekends and public holidays, ironically countering the effects of trading hours liberalisation, as small business owners feel compelled to shut their doors to remain viable.

However, it would be a mistake to conceive that the problems afflicting the small business community can be effectively addressed through a further entrenchment of the economic roles of government.

The best way for governments to assist business, great or small, is to do away with the political fetishism over business size, and respect the most fundamental rule against doling out corporate welfare and other specific advantages in the first place.

And that rule is that if a business cannot stand on its own two feet economically, attaining profits through exemplary service to customers, it is pointless for the taxpayer to keep the concern afloat.


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