Fact, Fiction or Half Truth: Can a tax reduction for business give an incentive to employ more?


While 25% of large businesses don't pay any tax and thus cannot gain any financial incentive for lower tax rates, we can ask what about the rest? Where can it apply, or does it?

If tax is reduced for a business this could mean more profits as the taxation money literally becomes money in the business to pay out shareholders or alike. Speculatively some could suggest that higher dividend pay out would produce an increase in investment into businesses that may in turn stimulate higher investment in jobs. Now it should be noted that scaling of share prices to a new dividend level can only happen once as the stock seeks an equilibrium with the dividend. Growth in this period could be misleading if one assumes the incentive can work as a constant grower of stock values rather than a one time card to play.

However this neglects that a business profit already will be reduced by any wages paid. This means that if a new employee would be profitable to a large scale business, they could pay the extra money without investment already to grow and receive benefit. So basically, if they had a gain from employing someone already, then they would do it in spite of a tax reduction. Large businesses have easier access to loans, and they use them. Having a track record of growth, more capital with an established major company with specialists applying for loans and grants generally means along with many other factors they have a raft of options small and sometimes medium businesses do not have.

But what about small businesses!? Well small businesses naturally function on a smaller profit margin and tend to have owners living off the wage, rather than a shareholder. These businesses also struggle a lot more to have capital for growth. So in contrast a small business increase in profits from a tax cut CAN allow investment into expanding and taking more employees. Why? Because if they have more capital excess to put back into the business beyond their living wage, they may choose to do so, and unlike large businesses the other sources of these funds are lessor or non existent.

So why is this different from a big business? Well various reasons as noted already, but also including that financial security and loans are significantly easier to gain for a older and larger business to grow. Further a large business can justify spending on growth to shareholders if they already have a profit margin, while a lone business owner needs to pay their personal bills and deal with the stress of it daily. Loans and the ability to apply for government grants, and sustain during the period of uncertainty diverges significantly with business size.

Yes shareholders pay bills too, but the vast majority of shares are held with excess funds, most note able is that Superannuation is estimated to hold well over 15% of the ASX. This long term investment also contributes with the regulation of our stock market to ensuring significantly lower dips in financial crisis as super funds tend to stay invested for the long run.

So that new innovation sadly could be eaten up by the large company applying second for the grant because they can put a year into writing the grant, have a track record with a professional grant writer while the small challenger has no capital, track record and more finite time to seek this kind of funding.

So to conclude, there is a part truth in the words that a tax reduction can give an incentive for a business to employ more. However the incentive is mostly for small businesses in this case that lack capital to invest and require a living wage before they can reinvest in growth of their business. Meanwhile large businesses which have easier access to funding and often pay no tax already, are more likely to pocket the money for a CEO or a shareholder payout for a one time boost in stock as they can already employ more if it made financial sense. There is the potential for medium sized companies to be stimulated for more investment by higher payouts and shares being purchased, but that is a one time gain and likely only applies to those small medium businesses.

While this isn't saying it would happen, it is purely speculation on if it CAN happen and a few drivers stemming from taxation.

#Shares #Businesstax #SmallBusinesstax #Employment

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The Great Bean Counters are Registered Tax Accountants offering accounting services to Brisbane’s Western Suburbs including but not limited to: Moggill, Chapel HillKenmore, Fig Tree Pocket, Indooroopilly, Upper Brookfield, Brookfield, Pullenvale, Pinjarra Hills, Bellbowrie, Anstead, Mount Crosby, Kholo, Kenmore HillsKarana Downs, Indooroopilly, Taringa and Toowong.

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