Government really cannot, and should not, care what people do so long as they follow fair and equal rules. (Joe Cobb)
Everybody wishes to live at the expense of the state but they forget that the state lives at the expense of everybody. (Frederick Bastiat)
Starting and small-scale businesses are more and more frequently called “small and medium-size enterprises” (SME), a rather belittling term it seems. There have been innumerable calls for the government to support such businesses with public funds and to grant them all kinds of tax breaks. Every such call and, the more so, decision should be accompanied by an explicit explanation at whose expense these aid programmes and tax breaks are going to be implemented-that is, who is going to pay the taxes necessary to finance these programmes; what public needs are going to be denied public funding; who is going to assume the burden of the tax breaks. If these considerations were not suppressed, the popularity of such programmes would quickly evaporate. On the other hand, despite a whole range of “assistance programmes”, the conditions for starting or running a small-scale business remain fairly unpropitious. Therefore it is well worth looking into the underlying problems, but looking from a new perspective so as to unleash business opportunities.
There are basically two approaches to the improvement of the environment for SME.
One of them consists in identifying and eliminating the origins of SME problems, which usually lie in unfair competition in the form of a mass of restrictions on market entry as well as official and unofficial government support for large-scale, robust companies. A number of problems are attributable to rampant bureaucracy producing deleterious effects on running small-scale businesses and a cumbersome tax burden reflecting the scope of government involvement in economic affairs. Government interference in the capital and money market heavily circumscribes its powers. Little wonder small-scale businesses find it beyond them to compete for resources.
To unchain SME opportunities, it is crucial to eradicate the underlying causes of the problems or alleviate their influence by:
· revising the competition legislation and tightening up on supervision;
· curtailing governmental intervention and thus undermining the causes of corruption and obstacles to market development;
· easing the tax burden by reducing government functions, powers and obligations; and
· humanising the regulatory system.
The other approach to refining the SME environment is predicated on the belief that it is possible to help small- and medium-scale enterprises without challenging the deep-rooted problems. In this case efforts are directed towards providing tax breaks, soft credits, seed capital and other forms of assistance. Leaving aside international aid, the state budget and other redistribution measures are the only sources of such aid.
It is feasible, for instance, to redistribute funds in someone’s favour by means of the banking system. Yet there is always another-to a lesser or greater extent visible-party at whose expense such measures are undertaken. This kind of support inevitably ruins those ineligible for it; it is always available only for selected ones; it is invariably surrounded by corruption. This approach rests on a fallacious principle that if large companies enjoy certain privileges, why not bestow a few on small ones? If the general business climate is unsatisfactory, why not make a few exemptions in favour of small businesses? Why not…?-only please leave the bureaucratic system intact and do not restrain government powers.
This approach to promoting SME results only in augmenting government authority, for the government is given a mandate to expropriate and redistribute more than it used to. Many attempts have been made in Lithuania to improve the conditions for SME in this way. Yet the business climate has hardly improved, and the benefits have always been rather disputable. In fact, so much disputable that they have forced even those swearing by government generosity to reflect on alternatives.
People are beginning to realise that the first approach is this very alternative that should have been called for long ago. It requires that special attention be paid to the concept and principles of fair competition. The existing legal competition infrastructure targets only the activities of businesses violating the principles of fair competition, while actions of government bodies with regard to competition usually fall out of the sphere of supervision. It should be prescribed by law that none of economic entities can violate the principles of fair competition-that is, all of them must operate under equal conditions and must be neither discriminated nor supported by tax breaks or other forms of privilege, for any tax break granted to one entity inevitably implies an increased tax burden for another; any subsidy extended to one entity invariably implies unfair competition with regard to others. As the supervision of competition is in the hands of government institutions, one should not idealise their capacities to monitor the actions of other government institutions and put a stop to their infringements of competition rules. A more reliable measure consists in laying down the principles of fair competition in the Constitution and making it explicit that the aim of the government is to safeguard this competition and in no way violate it by means of its financial, legislative and other powers.
Elaboration of the concept of fair competition would reduce government interference in the economy. Yet a mere definition of general principles is hardly sufficient. It is crucially important to implement these principles, “filtering out” a whole range of legal provisions which do allow government bodies to intervene in economy and infringe the conditions for competition in individual areas. This measure would considerably facilitate entry to and competition on the market for new businesses. It is much sounder too than distributing government aid among small businesses, distributing as if in exchange for the traditional protection of large companies.
The mix of restrictions on market access or, to be more precise, a jumbled mismash of permissions, licences, patents and registration procedures, calls for a fundamental redesign. The widely declared free market cannot and must not be undermined and barricaded from those willing to act independently. Steady trimming and humanising of bureaucratic regulations would in the first place help starting and small-scale businesses that are unable to discharge all legislative requirements and respond to frequent legislative changes; nor can they fulfil countless government instructions to provide information, etc. Convoluted, innumerable procedures for tax compliance turn small enterprises into representative offices of the Tax Inspectorate. It is therefore imperative to dismantle the system forcing private businesses – of which many cannot afford to hire specialists to carry out strategic planning, analysis, etc. of their activities – to maintain a lawyer and one or even several financiers to discharge fiscal functions.
Steady tax cuts-a measure long awaited by both SME and other economic entities-are impossible without cutting down on government functions and redistribution. Therefore specific tax breaks or assistance for SME from the state budget are perilous not only because they impose part of the tax burden onto others or allow receiving individual support from taxes paid by others. They are perilous first and foremost because they multiply government functions, for the government is delegated with the task of looking after and financing one more area-SME. Hopes of a consistent reform of budgetary and taxation policies are thus beginning to fade away.
Once support for SME is put into motion, it inevitably increases and spreads everywhere, for ceasing it is very hard and politically unacceptable. The supply of financial support engenders “greedy” demand. The government will need to raise more and more money so as to continue the SME assistance policy. There are other areas too where political choices are determined by different but, in their essence, very similar circumstances.
Thus, withdrawal-both legal and practical-of government support as a matter of principle would be the first real step towards alleviating the tax burden and improving the general business climate. This step should be taken not only by the government, but also activists of SME and other areas claiming a share of the public pie. Only after they have done so will they have a moral right to speak about trimming other government functions alongside with expenditures and the government’s withdrawal from economic affairs, a withdrawal giving way to those who are supposed to handle economy. Limited government implies a greater number and variety of businesses, and prosperous businesses to boot.