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The first data analysis of what small businesses did with their tax cut in last year’s budget has revealed that half of it was pocketed by the businesses, a quarter invested, a fifth created more jobs and almost none went to wage increases.
Small businesses (less than $2 million turnover) received a tax cut from 30 to 28.5 per cent in the 2015-16 budget, which decreased to 27.5 per cent the following financial year for businesses with revenue up to $10 million.
Economic consultancy AlphaBeta was commissioned by accounting software and online bookkeeping provider Xero to analyse an anonymised database of all the Australian companies who use its services to determine what effect the tax cut had.
AlphaBeta compared the behaviour of firms just under the $2 million threshold, which received the tax cut, with those just over the threshold, which did not.
It then cross-checked this data against some other firms below the $2 million threshold, but which did not get the tax cut because they were not incorporated.
The analysis found that firms which received the tax cut increased their investment by more than companies that did not get a tax rate reduction, indicating that 27 per cent of the tax cut was invested in equipment or buildings.
It also found that companies used 19 per cent of the tax cut to increase employment by more than ineligible firms.
But workers at firms that received the tax cut shared in a pay boost of only $75 a year per firm, or $1.44 a week, just 3 per cent of the tax cut benefit.
AlphaBeta’s Andrew Charlton, a former economic adviser to prime minister Kevin Rudd, told RN Breakfast the difference in wage increases was so small that it was not “statistically significant”, meaning it may have simply been a quirk of the data sample.
That left more than half the benefit of the tax cut – 51 per cent – going to extra cash reserves, paying down debt or increased dividends for the business owners.
Many businesses didn’t know they got a tax cut. However, it appears that one reason why so much of the tax cut benefit was hoarded was that many business owners did not notice they had received it.
“A survey to accompany this analysis received responses from 502 small businesses of which 337 (67 per cent) were eligible for a small business tax cut,” the report observed.
“However only 115 firms (23 per cent) said they received a tax cut in the last two years and 169 firms (34 per cent) said that they do not know whether they received a tax cut.”
Low awareness of the tax cuts could have reduced their impact on employment, wages and investment.
There were other possible reasons why so little of the tax cut found its way to workers in the form of higher wages, according to the report.
AlphaBeta noted that its study only covered the first two years after the tax cut was introduced and theoretical models predicting wages increases from company tax cuts attribute the effect to market forces that may take place over a longer period.
“It could be that wage effects take time to come through and they require labour market adjustment, it could be that actually the impact on wages of company tax cuts isn’t very high,” observed Mr Charlton.
He also cautioned that the study only related to small businesses and may have limited use in predicting how much larger companies would respond to a tax cut.
“The biggest difference with bigger businesses is that many of them are foreign owned, or at least have some foreign ownership,” Mr Charlton said.
“That is important in company tax cuts because the foreign shareholders, when they receive tax cuts; the impact of the tax cuts isn’t reduced by dividend imputation.”
“Whereas for small businesses, the vast majority of small businesses are fully domestically owned, so a tax cut has less of an impact on those owners because they’re going to get part of that benefit back in their income tax through dividend imputation.”
The chief executive of the Business Council of Australia, Jennifer Westacott, told RN Breakfast that many of her members would use part of a tax cut to fund wage rises.
“Our own survey showed that 30 per cent of large corporations would start to pay people more,” she said.
“Now if 30 per cent of Australian companies paid people more that’s actually a lot.” She said the amount of wage increases would rise over time.
“You’ve got to drive the investment signal first, you’ve got to drive the productivity, and the sustained income growth will follow,” she said.
Mr Charlton flagged that his firm may soon be able to release further work examining the effect of the tax cut subsequently extended to firms with a turnover under $10 million.
“This is the type of information that can better inform evidence-based policy going forward,” he said.
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