Business tax rises will 'push up' unemployment

The government has been urged not to impose additional taxes on smaller businesses.

Doing so would, the Federation of Small Businesses (FSB) argued, cost many thousands of jobs.

The FSB pointed to the findings of a study carried out on its behalf by leading think-tank, the Centre for Economic and Business Research (CEBR).

According to the study, adding to the tax burden of small firms, which comprise the vast majority of UK businesses, would serve only to plunge the economy further into debt and to sweep many more jobs out of the labour market.

The CEBR report calculated that the 0.5 per cent increase in National Insurance contributions, planned for April 2011, will result in so many job losses among SMEs that the corresponding rise in the tax take would make only the smallest dent in the current public finance deficit.

With some 57,000 jobs at risk, the CEBR said, the cost to the Treasury would be in the region of £900 million in jobseekers allowances and other benefits.

Ahead of his pre-Budget Report, the Chancellor was also warned of the consequences of raising corporation tax for small firms.

Figures from the CEBR research claimed that, were the small business corporation tax rate equalised with that of larger companies and increased from its current 21 per cent to 26 per cent, another 100,000 jobs could go and output would be cut by £4.3 billion.

The benefit to public finances, on the other hand, would amount only to £1.6 billion over ten years.

As a result, the FSB is urging Alistair Darling to keep employers' NICs on hold, so giving SMEs the chance to create additional jobs.

This, the FSB said, would represent a vital step towards making it easier for the UK's 4.8 million small businesses to employ staff and to drive the economy out of recession.

The business group backed up its arguments by citing the views of its members who have already identified cutting payroll taxes as the most important change the government could make to encourage them to take on another member of staff.

A reduction in corporation tax would also add to the incentives for taking on more employees.

John Walker, the FSB's national policy chairman, commented: "This research by the CEBR shows that taxing small businesses to help reduce the public sector deficit is a dead-end that will instead cost us dearly in jobs and economic growth.

"The FSB is calling for a freeze in employers' National Insurance contributions as the most constructive way of tackling the challenge of rising unemployment and continuing to put small businesses in the best possible position to draw the economy out of recession."

Ben Read, managing economist at CEBR, cast doubt on the wisdom of business tax hikes, saying that the potential benefits to the public purse are at best minimal and, in the long term, may actually damage public finances.

Mr Read concluded: "Moreover, almost all empirical evidence shows that increasing business taxation provides disincentives for small businesses to engage in activities that they have particular strengths in: entrepreneurial activity, investment and innovation, and employment.

"In short, taxing economically beneficial activity is inconsistent with encouraging a strong recovery, and would damage growth and employment prospects."