Why Taxing the Micro-business is not simple - A Cautionary Tale from the Old World

This article tells a cautionary tale of the pitfalls surrounding small business tax policy, illustrated with some examples from the United Kingdom. The heterogeneous nature of the small business sector makes it unlikely that tax reliefs and incentives based purely on size will be well targeted. Many small firms are not entrepreneurial and do not wish to grow but it is nonetheless predictable and rational for them to seek to take advantage of any tax incentives made available on the basis of size or legal organisational form. In addition, tax policy that concentrates on the provision of incentives for small firms is likely to result in complexity, the proliferation of thresholds and frequency of change, the costs of which may well outweigh any advantages to the smallest firms. The compliance costs resulting from taxation are regressive, but so too are the costs of dealing with special reliefs. A central problem relates to the drawing of a line between income from capital and income from labour for tax purposes. In seeking to do this, the tax system needs to have regard to legal as well as economic realities. Small business tax policy needs to be based on a better understanding of the way in which businesses form and develop and their motivations and difficulties. Stability and predictability may be more important than special reliefs