Zero Tax on Small Businesses to Boost the Economy - A Crazy Idea?
Small businesses are the "engines of the economy" yet they are often severely disadvantaged.
Introduction
Small businesses are often described as the "engines" of the economy.
They employ large numbers of people and they often come up with the kind of ideas that can change paradigms and create entirely new markets.
Despite this they face many hurdles and the regulatory landscape in most economies is set up in a way that makes life very difficult for them.
Most western countries seem to almost be designed to favour the incumbent large companies and corporations and I believe that this is actually bad for all of us.
We lose out on new products and services that may be life changing.
We also lose out on potential revenue that might be there if more small businesses succeeded.
Most Small Businesses Don't last Five Years
According to information from 2014 more than half of new businesses don't survive beyond five years in the UK.
This is due to multiple reasons but according to this Telegraph article some of the biggest factors for the failure (in the UK) are:
The UK tax system.
Lack of bank lending (a big problem for small businesses which are seen as high risk).
The high relative cost of running a new business (versus an established one).
One can sum up these problems as resulting in a lack of cash flow - something which is vital to the day to day running of a business.
I also suspect that these main issues are replicated in the US and many other western economies.
The combination of uncertainty from this latest UK election and the issues with Brexit mean we need to focus on stabilising our economy as much as possible.
I believe that one simple measure may help to energise the small business sector.
The Idea - Zero Business Tax for the First 10 Years
So the idea would be to have a zero percent rate of business tax on all new businesses for 10 years. It could also be combined with a zeroing of other taxes or refunds (e.g. for VAT).
After this period the tax rate would gradually be adjusted up to the regular rate over 5-10 years.
The exact way of doing this would need to be kept as simple as possible to avoid creating an extra administrative burden which small businesses are often least well placed to deal with.
Obviously this would reduce tax revenues in the short term, but I believe this could ultimately benefit the economy and eventually result in greater tax revenue in the longer term by:
Increasing the proportion of small businesses that succeed.
Increasing the success of new products, ideas and business models.
Creating more new jobs with greater security (hence greater income tax revenue).
Increasing spending, both directly between businesses and also via the people they employ.
Increased sales tax revenues (like VAT) as a result .
The Big Problem With This - Data
The biggest problem with anything like this is that it is hard to know the exact effects before you do it.
Governments want hard data and numbers before they try anything and this relates to one of the major issues of economics and behavioural economics in particular.
Even if we change a single economic element like this there are so many variables that interact in hard to predict ways that any form of modelling is likely to be subject to a significant degree of error.
It could be so far off as to be completely meaningless.
Indeed the only way of knowing for sure would be to actually try it. The thing is most governments don't like cutting taxes - it is a very scary thing for them.
One option would be to trial this - pilot this measure in selected areas for the purpose of data collection.
Whilst not perfect this would allow some information to make an informed decision.
Conclusion
I'm not an economist although it is something that is coming to fascinate me more and more.
These kind of issues are important examples of the interaction between monetary models (numbers) and human psychology.
It would be a very brave government that would even consider doing something like this - even in a pilot study.
For one thing it would not be popular with those with left wing leanings who do not seem to understand the importance of businesses for the success of any economy.
Personally I think that as growth slows down in most western countries we need to try more creative solutions to ensure that we don't get left behind compared to emerging economies.
I will apologise in advance if there is some obvious reason why this isn't viable or why it is an idiotic idea. Like I said I am not an economist - I am just someone who is interested in this matter.
I think it is good topic to have a discussion about though.
Let me know what you think in the comments.
Thank you for reading
As a bootstrapped startup owner who had to completely review his business' organization after the first year of taxes, I completely approve that suggestion!
That first year almost killed us. We knew it was coming but new companies are so unstable that we couldn't ready ourselves fast enough.
Thank you for sharing your experience - this is the kind of information I was after!
There are already a lot of tax schemes to encourage investment in the UK in small businesses such as 'SEIS' and 'EIS'.
In practice in the UK, if you're starting a small business and register as an LTD company the first £680 of profit a month is basically tax free (a tax-deductable salary to yourself that you don't pay income tax or national insurance on). That's assuming the business is your only job/ source of income. If you run a low cost business, like a consultancy, you also have things like flat rate VAT refunds that increase your turnover.
Beyond that, corporation tax is not that bad, one of the lowest rates in Europe. This is speaking as a small business owner who is happy with the status quo.
Yet it still seems to be cited as a major reason for small business failure. I think the only way to know for sure is to trial it and get some pilot data.
Definitely! I can only speak from my experience with a more tech focused business. I imagine someone with a more traditional business employing many workers may have a completely different experience.
Right. Thanks.
zero tax on start ups - ambitious but tempting
I often watch the Dragon's Den seems that aside from the tax (dont really know anything about UK's case) most start up owners don't do their homework and lack the right business mindset - except for not all of them go to the Dragons to borrow moneyyy.
As for zero tax for start ups yes please - all over the world
See why can't any party come up with a plan like this? I mean zero tax would be amazing to start a business up but not even that. If they did a plan where corporation tax was 5% for the first 5 years I think they would see a growth spurt.
Then again, how many people would start to close their businesses up and start again when the 5 years is approaching :). They would certainly need to think it through.
This is the problem that any government faces trying to juggle things around to see what suits. We are just guinea pigs being tested on really to see what works best. Its also a bit of rob peter to pay paul type of scenario. But something must be done to help small businesses because when we started off it was the hardest thing I've ever done.
Yes it would need to be checked for loopholes and people gaming it. A pilot could help to test different methods out.
The little guys are push out often before they have the chance to fall out. Less is more when it comes to regulation for small businesses.
Best,
Isaac
Being a two time business owner and two time business loser in the US. I agree these are issues that I faced. Cash flow was king. It's rough out there right now. I see small business in my area closing left and right. Nice post as it rung a bell with me. Later dude.
Thanks mate. I have heard similar things from friends who have tried to start a small business. Everything seems to be set up to favour the big companies and disincentive new companies that are starting out.
Like in another point you had. It was really hard to get funding for my second business. After 2008 all the banks really tightened up their lending practices. That was four years ago so, I am not sure what is going on today. Seems like the banks may have let loose again. Back then, I got approved for an SBA loan and they require lots of liability insurance for startups. My business was working with kids so I was hampered with lots of other startup costs and quarterly insurance fees. I even had to pay for flooding insurance because my shop was located near a water estuary. They don't seem to tell you all this until after you sign off on the loan. Hey I just followed you on twitter. My goofy VR channel name is @RealityMixed See ya man.
Yes I have heard that. I think it depends on the country - I have friends here in England that are still having difficulty getting loans for their businesses.
On Twitter? I will take a look.
I feel like if a small business made you tax exempt, it may be too ripe for abuse from regular people. I even think I would be too tempted to start deducting everything I do as a "business expense". I definitely pay a ton in taxes! We all do!
Very good point and this would need to be taken into account.
You make a good point. Additionally, you should see a huge incentive for companies to ditch employment arrangements for contractor arrangements (e.g., independent contractors in the US) because they could sell it to employees as a tax savings. That would result in even fewer taxes, so the revenue hit to the State would be even larger.
I don't know about every country, but the US treats LLCs (Limited Liability Companies). There is no corporate tax; profits are passed through to each member (the LLC equivalent of a shareholder) [source: http://www.nolo.com/legal-encyclopedia/how-llcs-are-taxed-29675.html]. The passed-through profits are treated as self-employed income and taxed as such.
Great idea if you ask me. I run a small company (15 employees) and the tax can be crippling (From NL)
Thanks - I would be interested to hear more on how it creates problems for you.
Thanks for pointing that out! I'll put it on my shortlist to write a post about! Thanks for the inspiration @thecryptofiend and have a great weekend!
You too enjoy your weekend. I am rapidly trying to learn more about such issues because I would like to someday have my own business (focussed on medical research) but I am still completely clueless when it comes to things like tax! Hence the rather crazy question. Let me know when you post it should be helpful for people like me.
The government will never do that because they got used screwing the small guy so they could be sponsored to sit on fat chairs from the big guys.
is that simple really.
Very true. I am curious to see if it would actually help in practice or just have a negligible effect if somehow it could be done. There seems to be a perception that taxes are a big problem for small businesses in particular.
My sister is an economist. She looks at local and British data a lot. She tells me that only 3 out of 100 small business make it after 10 years. Capital is the no.1 problem for these guys. The second one is competition. Small stores clump up in small areas and they all share the "pool" of customers, leaving them with almost nothing. Add to that the burden of tax and everything comes down quite fast.
Right. You should ask her to join Steemit!
I will
It's not crazy.. it's fk genius ;)
:)
In Canada there is something called the small business deduction. This is a reduction in corporate taxes for Canadian controlled private corporations, or CCPCs. The reduced rate of tax is available on active business income up to the corporation's business limit for the year. The limit in 2017 is $500,000. With that being said, unless you are earning passive income - IE rental income, interest income, many small businesses in Canada that are just starting off pay little to no taxes as is.
Interesting. So perhaps the problem in Canada would be for more mid-sized businesses that fall outside of that threshold? Is the 500K on all income or only on profits? I think it varies depending on the nation.
It is on all "Active" income. However it is a one time use tax credit. Once it has been used up IE: your corporation has earned more than $500,000 in net income in one of its fascial years, you no longer have access to it.
In my opinion if the Canada Revenue Agency really wants to help the medium sized corporations in Canada, they have to amend what is considered passive income. For the last 10 years I have operated a number of self storage businesses in Canada. I had 7 employees and two locations. However considering that CRA saw storage as a passive income, I was always forced to pay 50% tax. This seemed highly unfair because the income was not passive. There was much more effort involved in collecting rents and keeping my facilities in tip top shape than there was in collecting a interest payment
That sounds pretty ridiculous! One would think it obvious that storage facilities need constant work and maintenance.
There is more to the CRA's methodology of what is considered passive. You need at least 8 employees for it to be considered an active business. None of those 8 employees can be family members. This was really hard because most of the people who worked at the business were family members. I guess in essence the CRA just makes it really hard on family businesses for some reason
Perhaps they are worried about people abusing the system and so their remedy has ended up being overly harsh. It is not uncommon for that to happen when it comes to rules and regulations.
Pretty much, leave it up to a few bad apple to ruin in for the rest of us. I guess phantom employees in family businesses and corporations in general are a real problem in Canada, so I guess this is a great way to weed them out.