Friday, January 26, 2018

Small businesses are not that special after all

A thought-provoking article in today's Report On Business dares to question the conventional wisdom that small businesses are somehow "special", particularly in their ability to create jobs, and so should receive special treatment, like the hugely beneficial small business tax rates that are in force. It is something I have often wondered about.
The small business lobby does seem to be influential and powerful beyond its deserts. Government regularly pussyfoot around it, not wanting to be seen to snub the golden goose of small business. It is an article of faith that small businesses need special treatment and deserve to lay less tax than the big players. But are they really the job-creating machine they claim to be?
For a small business in an established industry - take roofing as an example - any job they do takes that job away from another business. After all, there are only a finite number of roofing jobs to go round. So, from the perspective of the economy as a whole, it can be argued that the work of one small roofing company adds nothing to the economy. Even new start-up companies are effectively doing nothing more than shuffling jobs around. It's a compelling argument.
It turns out that the net number of jobs that small businesses generate is actually not that special, especially when we consider that so many small companies go bust. Recent American research concludes that businesses with 20 or fewer employees only created 16% of the new jobs between 1992 and 2010, while companies with 500+ employees created nearly 40% of the new jobs.
What may be more important is the age of the company. Young businesses of any size do tend to produce new jobs, while older, more established companies of any size tend not to. So, maybe that is where our tax-breaks should be directed? Otherwise, we risk handing out special favours to small companies as a reward for staying small, rather than encouraging them to grow and achieve economies of scale. The RIMs and Amazons of the world had no intentions of staying small, and small business taxation did not feature in their planning.
Interestingly, when Britain did away with its small business tax advantage in the early 2010s, the number of small businesses in Britain hit record levels. So, go figure. Is small business specialness an idea whose time has come and gone?

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