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The first data analysis of what small businesses did with their tax cut has revealed 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.
It did this by comparing 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 also 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 said 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.
"These results provide some evidence that company tax cuts provided to Australian small businesses in 2015 increased job creation in the short term, some weaker evidence that they contributed to investment and little evidence that they contributed to higher wages," the report concluded.
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 a couple of 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 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.
"One obvious difference is that the share of foreign ownership is higher among larger businesses," the report noted.
"The ultimate impact of company tax cuts on domestic shareholders is mitigated by dividend imputation, so the effect of tax cuts may be more significant for larger businesses if their share of foreign ownership is higher."
Topics: tax, small-business, business-economics-and-finance, federal-government, australia
First posted