Peter Strong: Why Saul Eslake’s paper is “offensive to everyone who works in small business”

Peter Strong budget

Former COSBOA chief Peter Strong. Source: supplied.

Noted economist Saul Eslake recently published a paper on the ANU Press Library site titled The costs and consequences of ‘small business fetishism’. This was highlighted in an article on The Conversation and a review in The Australian Financial Review on December 29.

The Eslake paper is one of those opinions I have seen regularly over the years that try to hide a disdain of small business behind an unemotional façade of statistics and unproven assumptions. The paper is offensive to everyone who works in small business in Australia.

From an economic point of view the paper does not consider the gains for Australia from the public good provided right across our social and economic needs. 

What’s a small business?

Let’s start with the fact the paper fails to disclose the assumptions used in the analysis. Specifically, what assumption was used to define a ‘small business’? Was it the narrow $2 million in turnover used by the ABS? Or was it the $10 million threshold used by the ATO and the Australian Small Business and Family Enterprise Ombudsman? Or was it the 15-employee threshold used under the Fair Work Act (2009)

Judging by the conclusions reached, Eslake has adopted the narrowest definition of a small business to advance a prejudiced position against small business that bears no resemblance to reality. His apparent demarcation between a small business and a ‘new business’ — the vast majority of which are started as small businesses that stay small — is a case in point.

But what this paper shows — and what most economists fail to grasp — is that small businesses are first and foremost run by a human being, or two, who contribute tangibly and intangibly to the society in which we all live. They are not board members remote from the local world. I, and many like me, are passionate about the needs and rights of small business people because we recognise the multiplier effect of human endeavour — a fact economic theory is unable to accommodate.

Eslake’s article effectively applies reductionist thinking to demean the very livelihoods of the 6.5 million Australians who work in small business in Australia. The article adopts a dogmatic and narrow approach to economics — that of the laissez-faire economics — and that is where it fails.

The ‘public good’ of small business

Economists postulate and, for their postulations to be worthwhile, they must be calibrated with the intangibles that typically fall outside their analysis. They like to call these ‘economic externalities’ because they can’t be readily accommodated in their modern economic models, but the rest of us know these intangibles as real life.

Eslake’s article discusses the statistics of the tax gap, for instance, but fails to acknowledge ATO statistics that suggest it is only a very small percentage of small businesses that deliberately scam the tax system. So, if the tax gap for small business is larger than it should be, logically, that means the system is too complicated for the small business community. That system is designed for big businesses with more resources.

It should be noted the quantum of revenue lost pales in comparison with the tax avoidance strategies of big multinationals — think Amazon, Apple and the others. While I agree with Eslake that the ATO is not small business unfriendly, he fails to note the ATO doesn’t design the tax system. The design of the tax system is by Treasury, which is full of laissez-faire economists who have never run a business and cannot quantify the public good benefit of small business in terms of creating vibrant healthy small economies across the country.

The report also skips over the value of volunteerism and sponsorship of community organisations. Community sport runs on support from small business owners and their employees. Small business owners comprise the bulk of sponsors and the presidents and treasurers of clubs are often self-employed business folk. Big businesses support national sports teams and charities (because of the national level exposure), but small businesses quietly support those in their communities.

Eslake’s analysis therefore fails to factor in the ‘public good’ of small business because it cannot be readily accommodated under the theoretical mathematical construct of economic theory.

The engine room

The engine room ‘myth’ is not debunked. The 2.5 million small businesses referred to employ 6.5 million Australians in total, using the ATO definition of $10 million in turnover. Under this definition, small business accounts for just over 50% of the national workforce, compared with big business (32%) and the public sector (18%) making up the rest. 

The nation’s small business folk quietly go about their daily work in the nation’s economic ‘engine room’ as opposed to high-profile big businesses that live in the ‘wheelhouse’ and have traditionally extracted major concessions from governments by fierce lobbying behind closed political doors. If the small business lobby has been successful, it is not because of the enormous resources bought to bear, but because of passion, facts and the political and economic reality.

Eslake also suggests SMEs should not be supported beyond the pandemic. Surely, he is trying to be humorous? Big businesses like Coles and Woolies made a killing during the pandemic as people were locked at home and most had to cook. While some local small businesses did well, many did not — particularly those located in the CBDs of our capital cities and those in industries like hospitality. Now that they can open, those businesses are struggling to find the workers needed to rebuild their business.

Apart from the airlines, which continue to receive support, the small businesses who support domestic and international travel have been decimated. They will continue to need support as the tourism sector recovers.

The reality is small business — indeed small-to-medium enterprises (or SMEs) — are indeed the engine room of the community and a key part of the economy, and only an argument based on skewed economic analysis would ever suggest otherwise. Indeed, any politician believing such nonsense does so at their own peril when election time rolls around.

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Len Wallis
Len Wallis
3 months ago

There is another positive that small business offers the community that is often overlooked. We run a small business and have done so for 40+ years. I work in an industry that I am passionate about, and we employ people to are just as passionate. In turn we have attracted a loyal clientele who share this passion.
Working at this level of intimacy with their clientele is not something that big business can do efficiently or profitably (which undoubtable explains while we are still – proudly – a small business after 40 years).
Every industry has its specialists – and the vast majority of those can be classified as small businesses. It is these businesses that fuel the passions that in turn enrich peoples lives.

Saul Eslake
Saul Eslake
3 months ago

Peter Strong would seem to have a surprisingly thin skin (especially for such a seasoned and effective lobbyist) if he truly believes my questioning of the justification for, and the effectiveness of, the preferential treatment he’s been able to extract for his members from governments over many years is “offensive”.

And he has an odd way of constructing an argument when he begins by asserting that my paper “fails to disclose the assumptions used in the analysis”, despite the fact that (as anyone who follows the hyperlink to the article originally published by the ANU can verify), the very first paragraph of my article states, quite clearly, that the definition of “small businesses” which I use is the long-standing ABS definition, namely, those having fewer than 20 employees.

Contrary to Strong’s unfounded assertion, I did not adopt that definition “to advance a prejudiced position”. I adopted it because it is the definition used by the agency which publishes almost all of the data which I used in the article. If the ABS definition of a small business had been any employing less than 50, or 100, employees, I would have “adopted” it. Maybe Strong likes to make up his own definitions in order to suit whatever case he is pleading, but I don’t.

Likewise, when I cited data produced by the ATO, I used the definition of a “small business” used by the ATO (which is in turned based on legislation passed by Parliament” – not in order to advance a pre-determined argument, but because it is the definition used by the agency which publishes the data.

Similarly contrary to Strong’s unfounded assertion that I’m a stereotypical, ivory-tower-bound, ‘laissez-faire’ economist, I have actually run a small business myself for the past six-and-a-half years. I have an ABN; I collect, and pay, GST; I arrange my own insurances; I do many of the things that other small business proprietors do (albeit, I confess, I don’t sponsor a nearby netball team). However, unlike Strong, I don’t believe that makes me morally superior to people who work for larger businesses, or government agencies: nor do I think it entitles me to pay less tax on a given amount of income than people who work for larger businesses, or government agencies.

Strong makes absolutely no attempt to challenge the data I present in my paper (other than the aforementioned utterly spurious quibbling about definitions). He presents assertions, but no evidence, about the “public good” of small business.

I don’t doubt for a moment that small business proprietors do many “good things” in their communities – whether it’s sponsoring local sports teams or other Good Works. But when they do provide financial support in that way, it’s a tax deduction for them just as it is for larger businesses.

It is of course typical of lobbyists seeking to extract preferential treatment for those who pay their salaries (preferential treatment which is ultimately paid for by those who end up paying higher taxes, or having less public money spent on them, in order to offset the cost of that preferential treatment) to say that the “good” which those whom they are representing do isn’t captured by data – and that anyone who can’t see that is blind, heartless, prejudiced, stupid, or some combination of those and other shortcomings – in the hope that making those assertions will relieve them of the burden of actually having to prove their case.

And often, it works. As it has done for those who have sought preferential treatment for small businesses.

But the real clincher is in Strong’s final sentence – which acknowledges that the main reason for the preferential tax and other treatment which he’s been able to extract from governments over the years is that he’s drawn to politicians’ attention the fact that there are many more people running small businesses than there are running large ones; and that they tend to live in marginal electorates (as opposed to people who run large ones, who tend disproportionately to live in safe Liberal electorates).

That’s much the same reason as to why, for all the crocodile tears that politicians of all political persuasions shed about the difficulties faced by would-be home buyers trying to get on to the first rung of the property market ladder, they never actually do anything to help those would-be home buyer: because they also know that, in any given year, there are only a few hundred thousand of them, as opposed to the 11 million voters who own at least one property (and the 2 million who own two or more), and the last thing those 11 million voters want any government to do is anything that might make housing more affordable (as John Howard more than once candidly acknowledged).

Good politicians know how to count votes. So do good lobbyists.

Nic
Nic
3 months ago

Well put Peter. Then there is the group of people who need to create their own job through their own business, people rejected by corporates for not fitting their mould. I work with a lot of people like this who would otherwise be on a Centrelink benefit. Instead, they are contributing economically and being validated for their skills.

Mark McKenzie
Mark McKenzie
3 months ago

Well put Mr Strong. Interesting comments from Mr Eslake of below, albeit that they seem to be premised in a skewed understanding of the national business landscape and coloured by a degree of political naivety. Of course politicians would take note of the fact that small businesses vote. With around 2.5M small business owners and a further 4M adult voters working in small business (ie 6.5M voters in total) why would anyone ignore this voting cohort? But more importantly, this group accounts for just over 50% of the national workforce.

While small businesses have a lower tax rate than big business, due in large part to your lobbying and that of COSBOA and other small busienss champions, it says more about the lack effectiveness of the big business lobby than any alleged disproportionate influence of small business.

Big business, has not been able to convince politicians (and indeed the general public) of the merits of a lower tax rate in the face of concern about the real tax rate being paid by big businesses as a result of tax avoidance practices.

Also begs the question of who Mr Eslake, a reputable economist, is really working for given his recent attacks in small busienss. Could it be that the big business lobby is funding shadow advocacy?

Last edited 3 months ago by Mark McKenzie
Saul Eslake
Saul Eslake
3 months ago
Reply to  Mark McKenzie

No, Mr McKenzie, my article was not funded by anyone at all. I have done work, in the past, for the Tasmanian Chamber of Commerce and Industry (which is an advocate for small businesses) – as can readily be discerned from my website – but not in the past 12 months. I have never been funded by any ‘big business’ organization to advocate on their behalf. A pity that Mr McKenzie thinks it’s a better use of his time and this space to cast aspersions on my integrity, than to engage with the argument itself – and more than Peter Strong did.

Colin benjamin
Colin benjamin
3 months ago
Reply to  Saul Eslake

It’s time SMEs take responsibility for The benefits that they have from tax write offs organised by Mr Strong by providing work for the hundred of thousands contributing to their survival on welfare payments but no jobs

A small business owner
A small business owner
3 months ago
Reply to  Colin benjamin

We are trying to employ but cannot find the staff. There is a worker shortage. The cafes and restaurants nearby are not opening as they cannot find workers even though they offer really good pay.

Mark McKenzie
Mark McKenzie
3 months ago
Reply to  Saul Eslake

Not casting aspersions Mr Eslake, although I do find it curious that you reacted to a very minor comment rather than addressing my concerns about apparent misuse of the facts.

I welcome open debate and happy to be proved wrong but your comments about Small Biz simply don’t add up from my perspective.

Saul Eslake
Saul Eslake
3 months ago
Reply to  Mark McKenzie

That may well say more about your perspective, Mr McKenzie, than it does about my comments. You were in fact casting aspersions when you suggested, without any evidence whatsoever, that I had some kind of “hidden agenda” or that I was being funded by big business. What else is that, if it’s not “casting aspersions”? FWIW I have always readily acknowledged that the small business lobby has been much more effective in getting what it wants (preferential tax treatment at the expense of others) than big business – which I think was the only substantive point you made.

Peter Strong
Peter Strong
3 months ago
Reply to  Saul Eslake

I know I should just walk the other way.

The fact is that during the company tax debate I stood with the BCA President and CEO and said that big (all) businesses needed the tax cut. That is not seeking preferential treatment for small at the expense of others. It was seeking tax cuts for all business.

Furthermore I spent a lot of time highlighting that the tax cuts didn’t go into any individuals’ pockets. If that happened then the individual (business owner or shareholder) would be taxed at the same rate as anyone else. The cuts were there to be used for business purposes such as investment in the business or employing more workers or even cash flow management. But money paid to individuals as shareholders or stakeholders are taxed at the individual rate. (I repeated this on purpose).

If you deal in facts then get them right. If I was successful as an advocate it was that I dealt in facts or (when unsure) would highlight that I didn’t have the facts yet ‘this is what we are hearing’. Then we would try to work with relevant bodies to get the facts, if they existed.

Mind you I did enjoy preaching at, challenging & ridiculing those who misused the facts. There were plenty of them. Perhaps I enjoyed that too much? Maybe that was a fetish🤔. 😎.

Mark McKenzie
Mark McKenzie
3 months ago
Reply to  Saul Eslake

My my, who has a ‘thin skin’ now? Welcome to the real world of being challenged if someone has a different point of view.

Suffice to say, one commission working for a small busienss organisation (ie Tasmanian Chamber of Commerce) weighed against a lifetime worked for big business, hardly makes you an objective commentator.

I don’t have an issue with you advocating for big business – just as others of us advocate for small.

What I do take issue with is you cloaking openly biased arguments – skewed by highly contestable factoids – as ‘balanced’ or objective opinion.

Gimme a break!

Stuart Carr
Stuart Carr
3 months ago

It demonstrates how little people like Saul Estlake understand about how the real economy works. It is symbiotic relationship between large and small enterprises and neither could exist without the other.

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