The Government of Australia

Executive Summary

The government of Australia intends on focusing on long term economic growth specifically in relation to small business. The purpose of this report is to understand and analyses how the 1.5% tax cut on small business actually impacts or will potentially impact (positively or negatively) the economy. In relation to this topic, microeconomic theories have been used to gain an insight. For this purpose, most data have been collected from secondary sources like literature reviews, journal article, government websites, other websites etc.

The limitation of this report is that it is not possible to acquire information on all current and future possible scenarios constraining our scope. It also does not cover the macroeconomic aspect of the research which could potentially uncover greater information on the extent of impact on the GDP and real national income of the country.

Through critical analysis of the extent of impact of government announcement on tax cut, two possible scenarios have been determined. The tax cut on small business has been aimed to drive productivity of firms, after tax profitability and drive labour market. One potential scenario is that it increases after tax profit and drives investment and wage rate and consumer saving to a certain extend while the other is that it all depends upon consumer confidence.

1. Introduction

The government has implemented a tax cut to all small business of 1.5 percent less current 30 percent rate on all taxable income if their annual turnover is less than $2 million (Boothroyd, 2015). Incorporated companies can reap the benefit by paying only 28.5% tax while unincorporated small business get the benefit by a 5% discount on their income capped at $1000 a year. In order to fully comprehend the extend of benefit this has on business, employees, individuals and consumer we need to first understand what encompasses small business.

ABS defines small business as one that employees less than 20 people. Sole proprietorships and partnership, with or without employees and micro business also count as small business. In 2013-2014, small business accounted for 33.1 % of total industry value added in Australian economy.  

Compared to larger business, small business have tax disadvantage because their growth is hundred percent funded by internal sources and also it has no total control over its price and profit. This paper considers the microeconomic approach to analyse the impact of small business tax cut so that we are able to understand how taxes affect the behaviour of individual firms operating in the industry.

Purpose:

In this report we will be analysing how tax cut as a factor impacts individual firms and their decisions concerning production, profit, investment, price and consumption of consumers. Also we will analyse the risk factors involved in making such tax cut decisions

Rational of report:

The main rational for preparation of this report is to understand the true extent of the effect of government intervention by providing 1.5% tax relief to small business and the risk associated with it on market economy and its players. . Reduction in small business tax by 1.5 percent can have positive spill over effect to the rest of the economy. However, the reduced tax rate may also result in inefficiencies if hampers the market and if there exists allocation of resources to less efficient firms rather than efficient firms.