To help gauge the impact of any tax cuts in the 8 May federal budget, Xero Small Business Insights and economics consultancy AlphaBeta have teamed up to look at how businesses have historically behaved when their taxes are lowered.
Using anonymised, aggregated data from tens of thousands of Australian subscribers on the Xero platform, AlphaBeta and Xero have measured how small business wages, employment and hiring changed in the wake of the 2015 tax cut.
As a refresher, the 2015 measure cut the tax rate from 30 per cent to 28.5 per cent for companies with a turnover under $2 million. Over 90 per cent of incorporated businesses fell under that turnover threshold.
What stood out:
- Jobs grew significantly, wages not so much: Small businesses that received the 2015 tax cut hired more workers than similar firms that were ineligible for the cut. There was little visible impact on employee wages at businesses whose taxes were lowered.
- Investment went up, though many businesses banked the savings: Small businesses that received the tax cut did increase investment slightly; an accompanying survey of 500 businesses found that around half of the tax cut was retained as earnings.
- Low awareness may have affected how businesses spent it: In the survey that complemented the tax cut analysis, 34 per cent of businesses could not say if they received the cut. Lack of awareness of receiving the cut – which averaged $2900 – may have affected companies’ decisions to hire more people, raise wages or boost investment.
“To date, the benefits of tax cuts have been surmised largely through modeling and speculation, with a lack of confirmed data to support it,” said Dr. Andrew Charlton, Director of AlphaBeta. “In this report we directly observe how Australian businesses reacted to recent corporate tax cuts.
“We found that the cuts increased job creation in the short term, found some weaker evidence that they contributed to investment and little evidence that they contributed to higher wages.”
Trent Innes, Managing Director of Xero Australia, said, “Given that small businesses employ nearly half our workforce and generate a fifth of Australian GDP, supportive policies are crucial for the success of the small business sector, and the economy, as a whole.
“Tax cuts have been an important incentive the federal government has provided small businesses in the budget over the past few years. However, little data and analysis has been available up until this point on if they’ve actually made an impact. We hope better information will support good policy outcomes for Australian small businesses, this year and in years to come,” Innes concluded.
