The View

Slash red tape to really help startups and small businesses; taxes don’t cut it

There’s no evidence in Hong Kong, or even in the US, to prove that tax cuts will help startups or SMEs. What’s really helpful is cutting red tape.

PUBLISHED : Wednesday, 16 August, 2017, 1:28pm
UPDATED : Wednesday, 16 August, 2017, 11:03pm

So, the government thinks that a massive corporate tax cut down to 10 per cent from the current 16.5 per cent will benefit startups, as well as small and medium sized companies, or SMEs, and encourage them to do more business and stimulate the economy.

There is zero evidence for assertions of this kind, even though they are stock in trade for politicians

bereft of better ideas, while free market ideologues are obsessed with tax cutting.

However, down at the grubby end of the food chain, where I operate companies, I can say without a scintilla of doubt that thoughts about taxation figure not one dot in investment plans, nor do they really affect decisions about expansion.

People who actually get their hands dirty doing business, rather than talking about it, are motivated by creating products and services that customers want to buy.

If we are successful, taxes have to be paid on the profits that accrue, in other words taxes are indeed a levy on success. I can assure you that reasonable people do not resent paying taxes on the fruits of a successful enterprise.

Startups, which are supposed to benefit from this plan for tax relief for profits below HK$2 million (US$255,700), will be unaffected, because very few startups make money in the early stages and taxation is the least of their problems.

More mature businesses would, of course, welcome paying less tax; anyone in their right mind would be happy to pay less. But where is the evidence that lower taxes lead to greater investment, greater productivity or even better payment for employees? The answer is that this evidence is singularly missing.

However, there is some evidence to the contrary. Small businesses generally use tax savings to pay bigger dividends to owners and shareholders, this is particularly so in Hong Kong, where dividends are not taxed.

Ask around if you don’t believe me, but there is also more empirical evidence at hand, like the paper prepared last year for the US Federal Reserve, which reached this unambiguous conclusion: “Increases in corporate tax rates are uniformly harmful for workers while corporate tax cuts are ineffectual in boosting economic activity unless implemented during recessions.”

In other words, don’t mess around with the tax system, either in an upward or downward direction.

Yet governments love to meddle with tax regimes, never more so than to suit the interests of large multinational corporations who tout around their desire for low tax havens. They will not be affected by these SME proposals, but are busy lobbying away to make sure that really big companies pay less tax.

However, disillusion often sets in after rejoicing fades over having lured big multinationals to the shores of jurisdictions dangling the low-tax bait. They then discover that more paperwork than jobs are moved to the new location.

Meanwhile, it is far from the case that government is powerless to assist SMEs, but the will is lacking. One obvious and pressing way of doing this is to reduce the amount of red tape generated by government departments, who are busy covering their own backsides mindless of the immense amount of work imposed on hard-pressed SMEs.

Secondly, public bodies could be compelled to settle accounts with third parties within 30 days. My experience is that the public sector has by the far worst record for payment, effectively forcing SMEs to provide interest-free loans. As matters stand, smaller suppliers almost always go to the back of the queue when it comes to waiting for payment.

Thirdly, there is the pressing matter of rent. More companies are forced out of business because of the rent burden than for any other single reason.

In a free market economy, you can expect market forces to do their job. But in Hong Kong’s so-called free market economy, the property market is effectively controlled by cartels who are aided and abetted by the government’s land auction regime, and by planning regulations that keep prices high.

Along the way, there are many other modest but effective ways of assisting SMEs, assuming that you believe SMEs have a right to be assisted.

This a moot point, but at the very least, the government could take measures to ensure that SMEs can operate on a level playing field, not be obstructed by bureaucrats and, if we are really lucky, left to get on with business.

Cutting corporate taxes is very low on the list of ways to help the economy.

Oh, and by the way, governments that fiddle with tax systems can rarely be trusted not to fiddle elsewhere.