Why a Tax Rate Cut for Small Businesses Reeks of Government Favouritism

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The government is up to its old tricks again. They’re hell-bent on creating a two-tiered business tax system.

The real winners will be small businesses. They’re in line to get a 1.5% cut in their tax rate. Under the new proposal slated for July, that would leave them with a 28.5% tax rate.  The losers will be big businesses. Their contribution to the economy doesn’t count for as much it seems.

Big business employs millions of Aussie workers, and swells government coffers. But they won’t be getting any help. Their tax rate will remain at 30%. But if the government is serious about preventing a recession, then the tax cut should apply for all businesses.

Why the government wants to cut taxes for small businesses only

The government is singling out small businesses because it serves their self-interests.

The federal government receives 70% of its revenues from income tax. Big businesses make up a significant chunk of that. There is little appetite to ease the pressure on struggling commodity exporters. But they’re not going to kill the golden goose are they? It fits in line with punishing those that contribute the most to government revenues.

The government also want to improve business confidence. That’s the only commendable thing about this proposal. Higher unemployment still remains the biggest risk to consumer confidence. The government is hoping smaller businesses will start investing and hiring again.

The good news is that unemployment actually fell by 0.1% in March, and is now sitting at 6.1%. My colleague Greg Canavan has an interesting take on the unemployment rate. He says lower unemployment gives the Reserve Bank an excuse to keep interest rates on hold for now, but the Reserve Bank will likely revert back to lowering interest rates soon. What happens when they can lower no more? The news is less positive. I urge you to read Greg’s take on it here.

Big business deserves equal treatment in any tax reform

Wesfarmers [ASX:WES] chief executive Richard Goyder has spoken out against the government’s plan. He wants to see big businesses treated as equals.

‘I think anything that treats businesses differently will have flaws. Even if [Wesfarmers] is the largest private sector employer in the country, [a new Wesfarmers employee is] just as valuable as a new employee in any business’.

He has a point. That’s not to say that the government is wrong to cut taxes for smaller businesses. There are almost 2 million small businesses across Australia. That makes them vital to the economy.

But it’s unfair on the big businesses that contribute so much to the health of the economy. Big business has the capacity to invest in new projects that benefit everyone. Major developments and expansion create real jobs. So why doesn’t that qualify them for a tax cut? We know why. Their tax is too important for the government.

The government should either cut the tax rate for every business, or keep things as they are. Anything else just reeks of discrimination.

Greg doesn’t think anything they do will be enough to prevent the economy sliding into recession. That’s why he’s written a free report, ‘Australian Recession 2015: Unavoidable’. In it, he shows how government debt is at a crushing AU$300 billion — and why recession is imminent. He’ll reveal how you can protect your wealth from the fallout. To find out how to download his free report right now, click here.

Mat Spasic,
Contributor,
The Daily Reckoning

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The Daily Reckoning offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, The Daily Reckoning delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors. Founded in 1999, The Daily Reckoning is published in 7 countries with a worldwide readership of almost 1 million people.
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