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Jobs For All

Jeremy Hetherington-Gore Unleashed
07 March, 2010

All net new jobs are created by small businesses. This is a mantra which is regularly intoned by economists of all stripes, and it is backed up by shoals of economic studies. Even politicians know it to be true. The problem then is, how do you construct policies that will help small business to continue this miracle of conjuring work from air? But even asking the question is wrong, and that's where it all goes pear-shaped.

Keynes, the famous Keynes, talked about animal spirits, although not in this context, and believe me, an illegal immigrant in Wolverhampton, Albuquerque or Paris struggling to feed his wife and three children by selling Italian-produced Chinese shoes in street markets does not want or need any help from the State, he just wants it to get out of the way. Of course he doesn't pay taxes, have a bank account, or create any other trace which could lead 'them' to find him. He relies upon the support network of his fellows. But oh boy, does he create jobs! And he consumes, and saves, and educates his children for all he is worth.

Unfortunately politicians, and even many economists, think they have to interfere in the small business sector to make it work better, partly out of genuine concern and partly - especially before elections - out of self-interest. So they exempt new hires from payroll tax (the US, last week, but the worker must have been unemployed for at least 60 days), or they offer loans to cash-strapped small businesses (Spain, last week, but it's just a proposal which might be agreed in principle by May, and will be operated through the Official Credit Institute), or they offer tax deductions for capital expenditure (almost all countries). All such schemes are highly bureaucratic and involve the small business concerned in a clammy embrace with government which distracts it from its real job of making profit and leads to a long tail of paperwork, inspections and accounting costs. These schemes also carry a big load of moral hazard: if the government will pay you for spending money on buying laboratory equipment, you will classify everything under the sun in that way, so that an inspector has to crawl all over your accounts to check that you are not cheating. And one can say, cruelly, that if a small business needs to borrow money from the government then it is best off bankrupt, so that the owner can dust herself off and start again.

What is really needed by small businesses in such times, apart from the best ones, which government will never see, can be divined from the pleas of small business support organizations. The UK's Federation of Small Businesses is begging government not to apply its new social security tax hike to its members, accurately calling it a 'tax on jobs'. The Irish Irish Small and Medium Enterprises Association says that labour costs in a multinational represent 8% of total expenses, while in a small business the figure is 48%.

As a generalization, it is the bloated state of the public sector which crucifies small businesses, both directly through legalistic and bureaucratic interference, which costs time and imposes pettifogging rules (your illegal immigrant laughs at the idea of an 8-hour day and maternity leave), and indirectly through the need to pay for the hordes of useless civil servants via income tax and social security charges.

What then can be done, with the confines of a legitimate and caring society, to help small business? Turn a blind eye to the immigrants, even encourage them, and take the resulting social problems on the chin; they are probably the single most helpful prop to the forward growth of the economy if they are allowed to work in sufficient numbers. They will soon emerge into the light and become upstanding tax-payers, if you give them a chance. Create highly tax-privileged regimes for small business by taxing turnover at a low, set rate, and abandoning the whole paraphernalia of VAT, sales taxes, income tax, social taxes, property tax and the rest, until the firm in question reaches a critical size at which it can afford to join the standard tax regime. This is done quite successfully in many Eastern European countries; but the EU doesn't like it, being against competition. The EU is also against free zones, which is just dotty. Exporting is widely acknowledged to be just about the the most beneficial economic activity there is: what is wrong with creating free zones near airports, ports and major motorways where no-tax or low-tax regimes could be offered to small companies? And finally, or perhaps first, de-bureaucratize the whole process of starting and running a small business. Employees of small businesses should be allowed to make their own tax returns, which will do more than anything to provide cash flow to businesses; OK, some of them will be feckless or will cheat, but so what? Eventually it will catch up with them.

Of course there are entrenched vested interests which will prevent any of this from happening; that's why China grows at 8% and Europe managed 0.1% at the end of 2009. And so it will continue; just thought you'd like to know why! But humans and their animal spirits are the same everywhere; only give them a chance, and you'll be amazed at what they accomplish.


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Jeremy Hetherington-Gore Unleashed

Jeremy tackles the difficult issues head on!

 

 

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