Before going to a Thai restaurant near my German apartment, I asked a long-time resident how it is, and she said it’s brand new. It was a Texas barbecue (!!) joint for a few months, and something else before that.
Why the turnover? Of course, being unable to cover variable costs matters generally, as always; but the German government apparently gives a small business an incentive to open up, and an incentive to close quickly if it cannot cover its costs: certain taxes are waived if the business is small, but only for a short period of time; thereafter, the tax break phases out.
Thus the risks of opening a new business are reduced; and, if the business is not very successful, the impending loss of the tax break provides an incentive to close it down within the time period necessary to escape these taxes.
I have grave doubts about this policy and about subsidizing small businesses generally: if there are scale economies naturally, why should the government try to offset them? And it’s hard to imagine that there are too few new small businesses — or that people are so unwilling to take risks that the government should offer subsidies.
I see no good economic rationale for these policies, but they are widespread in Germany — and in the U.S. too.
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As a restaurant owner, in the process of closing down a unit thats been open just a few months, here’s my (slightly biased) perspective on why the law isn’t too bad an idea:
a) Reduces waste of human and financial capital: For eg: I have staff that wait on hardly any customers, stoves and seats that go idle and other fixed costs that provide little or no benefit to the economy other than the fact that they are consumed. Any capital so freed up may be better used in more productive pursuits. So its not offsetting economies of scale really – its more about incentivizing the killing of the inefficient, unproductive business (which mine is!)
b) Puts a timeframe on a difficult decision: There are a mix of emotional and financial decisions that lead up to the closure of a small business. I have delayed the decision for a couple of months, for no real reason, and having a tax break with a time frame on it, would have definetly forced me to close sooner.
Personally, I read this blog to educate myself, and I’m obviously missing something here. I would think that it’s a good thing to ease the burden of starting and closing businesses. I would think that it encourages experimentation, both personally (Can I run a business?) and in terms of business model. (Can I run a business in this new way or sell this new product?) Experimentation is the fuel of progress, right? Where am I incorrect or not understanding?
I think that small business should have an idea of how they will do within the first few weeks of opening. The tax reduction which the German government probably helps small business worry about the success of their business in the small local scale as opposed to being concerned with paying taxes etc. Either way, once they realize (if that is indeed the case) that they will not make it within the first few weeks of operation, then it will not matter if they will have to pay taxes — regardless of taxes success will not be achieved! Which in the end encourages more entrepeneurs with good ideas to come into the market and provide goods & services for the people…
#5 and #10. You’re right, there should be a lower barrier to entry for small businesses, however it should be lowered by reducing all the crazy regulations for everyone rather than adding new ones that help a small subset of small businesses. The main barrier to entry for any small business now is complying with the huge list of government regulations and arcane tax rules. I gave up trying to run my own business as it was just too much too keep track of.
Seems like a good idea to me. As long as there is also some disincentive to producing a string of “unsuccessful” businesses using the same assets but closing, changing name or location, & reopening just to avoid taxes.
Along the lines of #5, I would say the increased desire for small business startups would be innovation. While economies of scale make large companies more efficient, there is an internal side effect of bureaucracy and group think. These side effects make it hard for innovative new ideas to float to the surface as the companies aren’t willing to bet on them. Small business, though, led by brazen innovators, would be more useful in bringing to market these new ideas–and in turns perhaps become bigger and create their own economies of scale.
Of course, if there were a way to get machine-like humans to run companies, we might not have the side effects of bureaucracy and group think. But as we all know, the only place you can find machine-like human decision is in Economics departments.
Ben Wrote: “As long as there is also some disincentive to producing a string of “unsuccessful” businesses using the same assets but closing, changing name or location, & reopening just to avoid taxes. ”
Of course there is a disincentive- if the businesses are unsuccessful, the owner is losing money every time.
I really liked the small cart businesses in malls at first, they gave small businesses a chance to get started. Then they got taken over by the stupid chains and telephone companies and such. I like incentives for new businesses, and like this idea a lot. It gives people a chance to get in, and to get out quickly instead of hanging on if their idea doesn’t make it.
We need more of this, not less.