Scott Morrison is surely on a winner with his decision to step up pursuit of jobs and growth by bringing forward the time when small and medium businesses have their company tax rate cut to 25 per cent.
Certainly, it’s likely to be a popular decision, not just with the owners of the more than 3 million businesses who’ll be paying a bit less tax, but also with a lot of ordinary voters.
After all, as everyone knows, small business is the backbone of the economy and its engine room. It’s where most of the economy’s jobs are.
How does everyone know it? Because that’s what politicians – and the small business lobby – keep telling us.
This is why Morrison is so confident of getting the bring-forward passed by the Senate.
Cutting the smaller-business company tax rate to 25 per cent by 2021-22 rather than 2026-27 will have an additional cost to revenue of $3.2 billion over four years.
Only about $1.3 billion of this would be offset by the government’s abandonment of its plan to cut the tax rate for bigger businesses. The rest would be covered by repaying government debt more slowly than previously projected.
There’s likely to be enough cross-benchers keen to push the fast-tracking through – big business may not be judged worthy of a tax cut, but smaller business is - even if Labor isn’t playing ball.
But it seems Labor will be. Why? Because it, too, professes to believe small business is what the economy revolves around.
According to its official policy: “Small businesses make a huge contribution to national prosperity and supporting Australian jobs. Small businesses play a central role in the economy.”
There’s just one problem with all this stuff. It ain’t true.
When you study the facts and figures, there’s no reason to believe small business has any economic virtue not possessed by businesses of any other size. If anything, the reverse.
I’ve spent my whole career as an economic journalist refuting the delusional claims of this or that part of the private sector to be more worthy than the rest of it.
If it’s not small business claiming to be the economy’s engine room, it’s farmers claiming to be the bedrock on which the rest of the economy is built, or manufacturing claiming that making things is more virtuous than doing things (providing services).
There are all those ads telling us it’s mining the country most depends on. (They’re trying to draw attention away from the truth that mining is hugely profitable, about 80 per cent foreign owned, avoids as much tax as possible and employs surprisingly few workers.)
Then there are the exporters claiming that producing things for sale to foreigners is more important than producing things for sale to locals.
Plus, of course, the common delusion that the private sector is “productive” whereas the public sector is unproductive and even parasitic. Do you really think curing the sick or teaching the young – or even directing the traffic – is unproductive? That people in the private sector pay taxes, but workers in the public sector don’t?
It’s all economically illiterate hype. And it’s used to try to justify demands that the government give my bit of the economy a special deal not available to other bits. Economists’ name for it is “rent-seeking”. (Though, as recent events remind us, no one does rent-seeking better than the Catholic schools.)
But back to measuring against the facts the claims that small business has a special sauce when it comes to jobs. It’s complicated by the fact that the usual way of measuring the size of businesses is according to the number of their employees, whereas eligibility for the lower company tax rate is determine by the size of a business’s turnover (sales, not profits).
Morrison says there are more than 3 million businesses with turnover of less than $50 million a year, employing “nearly 7 million Australians”.
If so, that’s more than half of our total “employed persons” of 12.6 million. But about a third of those 7 million would be in medium-size businesses, not small.
According to the latest figures from the Australian Bureau of Statistics, for 2016-17, small business (defined as firms with fewer than 20 employees) has 4.8 million workers, medium-size business (20 to 199 employees) has 2.6 million workers and large business (200 plus) has 3.5 million.
That means small business employs just 44 per cent of the private sector workforce and about 40 per cent of the total workforce.
But just because a sector employs a lot of workers, that doesn’t necessarily mean it's creating jobs faster than other sectors.
Over the two years to June 2017, small business may have had 44 per cent of the existing private sector jobs, but it accounted for only 18 per cent of the growth in jobs.
Overall, private sector employment grew by 2.3 per cent, but small business employment grew by just 0.9 per cent. Combine small and medium and they grew by 2.3 per cent, about the same rate large-business employment growth.
And this during a period when smaller businesses were paying a lower rate of tax, supposedly to encourage them to create more jobs.
Actually, the lack of apparent response shouldn’t be a surprise. The typical tax saving is small. Morrison himself says that an independent supermarket or a pub that makes a $500,000 annual profit would save $12,500 in 2021-22 “to invest back into the business or staff, or help to manage cash flow”.
That doesn’t buy many jobs, nor many pay rises. And since businesses are free to use their tax saving however they see fit, there’s no reason to think they’ll favour more jobs or higher wages. No more than big businesses would.
If Morrison’s on a winner, it’s a political winner, not an economic one.
But if there’s nothing special about small business, why do politicians on both sides keep spreading the sector’s propaganda that it is special?
Because the many more owners of small businesses have far more votes than the relatively few bosses of big businesses do. It's politics, not economics.
