A giant leap towards mass entrepreneurship

A radical proposal to remove SME responsibilities to administer tax and similar obligations seeks to ignite the spirit of entrepreneurship lacking in the quest for global growth.

It’s blindly obvious that economic growth is the solution to global economic woes. But in all the debate over how to create growth only now are there signs of discussion and experimentation happening around a basic home truth.

Economic growth will most robustly come from mass people movements of entrepreneurial spirit and activity. This is true in every nation no matter what are the politics, history, type of government or cultural. The question is how to achieve mass entrepreneurship.

The London based Adam Smith Institute has leaped into this debate with a ‘radical’ proposal. In a paper released late last year The Growth Agenda: The Self-Employment Option it argues for big changes to regulations small business people face when they employ anyone.

The paper argues that mass entrepreneurship comes from the huge numbers of small business people in societies. In Australia that’s 2.1 million people and predicted to continue to grow.

But given the way developed economies impose huge obligations on small business people, the option of employing anyone has become too difficult. This suppresses economic activity and costs jobs.

The Adam Smith’s solution is to give small business people (in the United Kingdom) the ability to engage people as self-employed contractors. That is, that small business people would not have to administer tax collection and related social ‘obligations’ such as holiday and sick pay arrangements. Such obligations would fall on individual workers administered directly by the taxing and other authorities.

This is truly radical with global implications. It assaults the dominant idea in developed economies that ‘employers’ must be instruments of governments responsible for administering social and financial policy imposed by governments. Of course governments expect this to be done at no cost to them.

The Adam Smith Institute paper says that for small business people this ‘employer’ cost is so high that individuals are reluctant to become employers.

Take an Australian example. Last year the Gillard government created paid parental leave, paid for by the government. But in an act of administrative complexity the government insisted that Centerlink pay the employer who must then pay the parent on leave.

The sensible thing would have been for Centrelink to pay the parent direct, as proposed by the Abbott-led Opposition, a proposal now twice rejected by the government.

Here's an immediately apparent demonstration of a clash of ideas on how to enable mass entrepreneurship. The Gillard government makes noises about how much it loves small business people. But it actions to date are of a government dead weighting small business.

Another demonstration is the new regulations stopping home workers in the textile industry. The numbers of people in the industry is relatively small but they manufacture specialised safety clothing, as just one example. It’s death to entrepreneurship by small cuts.

In addition there are new federal laws imposing
price controls on owner-drivers. The government argues it can make drivers drive safely by controlling the price they charge for their work. But this stops drivers from being business people. Again, entrepreneurship is attacked.

It’s not that the Gillard Labor government is intentionally nasty. It’s just that, like many governments globally, it doesn't understand small business people as the key drivers of economic growth.

That’s why suggestions from the Adam Smith Institute are so refreshing. Yes, shifting tax collection responsibility from ‘employers’ to individuals would challenge the competency of tax authorities. But that shouldn’t stop the quest to enable mass entrepreneurship.

In fact there are practical examples of this type emerging. In New Hampshire, US they’ve just introduced a law enabling certification of ‘independent contractors’. This will clarify that the business is not responsible to administer workers compensation.

In Australia Tony Abbott has taken up as Coalition policy a
suggestion from the Council of Small Business. This would require the tax office to take over from small business people the administration of superannuation payments.

Both these moves are consistent with the Adam Smith Institute proposal. But there’s a long way to go in this debate, with much pushback occurring.

California has just introduced 780 new business regulations. Are they mad? Chief amongst these are heavy fines for ‘misclassifying’ employees as independent contractors. It’s similar to laws being pushed by the Obama administration but not yet passed.

Again, in Australia the pushback is heavy. The union movement is running a high profile marketing campaign attempting to convince Australians that the only legitimate and moral work is full time and permanent. They insist that ‘employers’ must have obligations to withhold and administer workers money for holiday, sick pay, tax and other items. They want work to be dictated by a Monday to Friday, 9-5 pay structure.

The problem is that none of this fits a 24/7 economy. It particularly clashes with the lives of small business people, suppressing their willingness to expand their business or ‘employ’ anyone. Job growth suffers.

Australia once rode on the sheep's back. Now we say we’re tied to our miners. In truth Australians have always been practical, ‘do it’ people, entrepreneurs in every way. That’s our greatest strength. If we’re to build on this it’s essential that government regulations don’t suppress the mass entrepreneurship that’s so much of our potential.

Ken Phillips is executive director of Independent Contractors Australia and author of Independence and the Death of Employment.