Tax incentives for small and medium-sized enterprises - a misguided policy approach?

Recently, public discussions on tax policy have mainly centered around profit shifting activities by large, multinational firms. The majority of businesses, however, is made up of small and medium-sized enterprises (SMEs) and they are widely perceived to be the engine of growth and innovation for the economy. The creation of a "world-class environment for SMEs" has thus become a major goal of the European Commission. While the need of an attractive business environment for SMEs is widely agreed up-on, it is less apparent how to create it. SMEs face disadvantages with regard to financing, competition failures and disproportionate regulatory burdens compared to large enterprises. An attractive business environment minimizes the impact of these obstacles and aims at providing a level playing field for firms of all sizes, industries and legal forms. Taxation is an important component of the regulatory framework in which businesses operate. It constitutes a major, inevitable cost factor for all businesses. For policy-makers, taxation is a particularly interesting feature of the business environment as it can be directly influenced and controlled through legislation. Occasionally, however, tax legislation is excessively and inappropriately utilized to compensate for problems not related to taxation and the creation of a neutral and efficient tax system takes a back seat. The use of tax incentives specifically targeted at SMEs is one of these occasions. SMEs as a whole do not show the desirable traits policy-makers across Europe often assume them to have and incentives for them are therefore mostly ineffective and inefficient. Exceptions, however, exist, e.g. with regard to simplified taxation procedures and venture capital investments