| 07 March 2010
All net new jobs are created by small businesses. This is a mantra which is
regularly intoned by economists of all stripes, and it is backed up by shoals
of economic studies. Even politicians know it to be true. The problem then is,
how do you construct policies that will help small business to continue this
miracle of conjuring work from air? But even asking the question is wrong, and
that's where it all goes pear-shaped.
Keynes, the famous Keynes, talked about animal spirits, although not in this
context, and believe me, an illegal immigrant in Wolverhampton, Albuquerque
or Paris struggling to feed his wife and three children by selling Italian-produced
Chinese shoes in street markets does not want or need any help from the State,
he just wants it to get out of the way. Of course he doesn't pay taxes, have
a bank account, or create any other trace which could lead 'them' to find him.
He relies upon the support network of his fellows. But oh boy, does he create
jobs! And he consumes, and saves, and educates his children for all he is worth.
Unfortunately politicians, and even many economists, think they have to interfere
in the small business sector to make it work better, partly out of genuine concern
and partly - especially before elections - out of self-interest. So they exempt
new hires from payroll tax (the US, last week, but the worker must have been
unemployed for at least 60 days), or they offer loans to cash-strapped small
businesses (Spain, last week, but it's just a proposal which might be agreed
in principle by May, and will be operated through the Official Credit Institute),
or they offer tax deductions for capital expenditure (almost all countries).
All such schemes are highly bureaucratic and involve the small business concerned
in a clammy embrace with government which distracts it from its real job of
making profit and leads to a long tail of paperwork, inspections and accounting
costs. These schemes also carry a big load of moral hazard: if the government
will pay you for spending money on buying laboratory equipment, you will classify
everything under the sun in that way, so that an inspector has to crawl all
over your accounts to check that you are not cheating. And one can say, cruelly,
that if a small business needs to borrow money from the government then it is
best off bankrupt, so that the owner can dust herself off and start again.
What is really needed by small businesses in such times, apart from the best
ones, which government will never see, can be divined from the pleas of small
business support organizations. The UK's Federation of Small Businesses is begging
government not to apply its new social security tax hike to its members, accurately
calling it a 'tax on jobs'. The Irish Irish Small and Medium Enterprises Association
says that labour costs in a multinational represent 8% of total expenses, while
in a small business the figure is 48%.
As a generalization, it is the bloated state of the public sector which crucifies
small businesses, both directly through legalistic and bureaucratic interference,
which costs time and imposes pettifogging rules (your illegal immigrant laughs
at the idea of an 8-hour day and maternity leave), and indirectly through the
need to pay for the hordes of useless civil servants via income tax and social
security charges.
What then can be done, with the confines of a legitimate and caring society,
to help small business? Turn a blind eye to the immigrants, even encourage them,
and take the resulting social problems on the chin; they are probably the single
most helpful prop to the forward growth of the economy if they are allowed to
work in sufficient numbers. They will soon emerge into the light and become
upstanding tax-payers, if you give them a chance. Create highly tax-privileged
regimes for small business by taxing turnover at a low, set rate, and abandoning
the whole paraphernalia of VAT, sales taxes, income tax, social taxes, property
tax and the rest, until the firm in question reaches a critical size at which
it can afford to join the standard tax regime. This is done quite successfully
in many Eastern European countries; but the EU doesn't like it, being against
competition. The EU is also against free zones, which is just dotty. Exporting
is widely acknowledged to be just about the the most beneficial economic activity
there is: what is wrong with creating free zones near airports, ports and major
motorways where no-tax or low-tax regimes could be offered to small companies?
And finally, or perhaps first, de-bureaucratize the whole process of starting
and running a small business. Employees of small businesses should be allowed
to make their own tax returns, which will do more than anything to provide cash
flow to businesses; OK, some of them will be feckless or will cheat, but so
what? Eventually it will catch up with them.
Of course there are entrenched vested interests which will prevent any of this
from happening; that's why China grows at 8% and Europe managed 0.1% at the
end of 2009. And so it will continue; just thought you'd like to know why! But
humans and their animal spirits are the same everywhere; only give them a chance, and you'll be amazed at what they accomplish.
You have been reading an entry on the following blog:
Jeremy Hetherington-Gore Unleashed
Jeremy tackles the difficult issues head on!
Contact: jeremy@lowtax.net
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