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The cabinet is helping businessmen affected by the crown crisis with state-guaranteed loans, but that is burdening companies with debt.
A smarter way to provide help is to reduce taxes once. For example, companies do not have to make refunds, which means that the cash flow remains at the required level.
Then companies can recover when the crisis ends.
A tax cut doesn’t have to be more expensive for the government. As companies recover faster and survive the crisis longer, tax revenues increase.
ANALYSIS – The economy is blocked. Companies produce less or nothing, because the coronavirus must be controlled.
When you suffer damage, there is support. For businesses, this refers to state-guaranteed loans that must be repaid. Therefore, the damage to companies is not compensated, but the financial consequences are postponed.
Also, state aid is distributed through banks, which is slow. Companies don’t have time to wait in the event of a drastic loss of turnover.
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Providing help through tax refunds can be more effective and is unlikely to cost the state extra money.
Which are the
effects of current support measures through banks?
- The main point of support measures is that they are loans and not grants in the form of capital. So instead of income, companies receive loans. Loans have the effect that the damage does not come all at once, but in more manageable parts.
- The downside to loan repayments is that they tax cash flow and therefore less money is available for investments. These are postponed so that investment goods providers only start making sales later. The recovery of the economic cycle is slowing down and that is what we do not want.
- Banks make loans guaranteed by the state. This puts banks to waste, because the loss of their clients’ income increases their risk. Government-guaranteed loans provide the necessary liquidity, but this worsens the debt-equity ratio, which is an important criterion for banks.
- Each bank is reevaluated by its bank, and that takes too long for entrepreneurs who suddenly run out of billing overnight.
- The government asks banks to keep companies alive during the shutdown with guaranteed loans. And that’s different from what a bank normally does: make loans for investment and growth. What the state is now requesting requires a different attitude from the bank.
Tax relief allows you to provide liquidity and capital to companies more quickly.
In fact, the solution is much simpler than the measures that have been taken now: provide one-off support through a tax cut for the last fiscal year (2018 or 2019), the assessment of which has been determined. Pay this refund immediately or possibly at the moment.
The amount of the reduction can be determined based on the estimate of the duration of the measurements. You can correct this later. The advantages are:
- In reality, it compensates for losses and fills a gap created by turnover loss not with debt, but with equity.
- With this form of compensation, the relationship between capital and debt does not deteriorate.
- Equity is the economic immune system and the key to recovery.
- There are no lengthy risk assessment processes, only those for tax filing. And they can take place later. A large number has already been implemented.
- There are no loans, including repayments, so future cash flow is available for investment. Businesses can quickly resume business. This is an economic recovery.
Tax cuts should go beyond offsetting loss of operating profit
The amount of that tax cut can still be calculated in more detail, because simply offsetting the loss of earnings will not be enough. After all, fixed costs still have to be paid. Fixed costs are independent of rotation and, in principle, continue.
Part of these costs are personnel costs, which are reduced through the NOW scheme. Regarding depreciation costs, I have already suggested in a previous article that the term can be extended or stopped depreciation during the closing period. This reduces costs, but only to a limited extent.
There are other fixed costs, such as property rental and car leasing. If you search by company, it is advisable to save on these costs. But that is not easy in the short term, because there are agreements about it. You also want companies to reopen as soon as possible. Therefore, they must be on hold and not closed, so that the business cycle can start again quickly.
It is
Tax reduction for the state is a more expensive alternative than
state guaranteed loans?
A one-time tax cut is a gift and that money disappears from the treasury. The purpose of a loan is to repay it and the money is returned to the state treasury. So it seems that the loans are less expensive for the state. But the following should be kept in mind.
With a gift instead of a loan, there is more cash flow available for investment after closing. The business cycle is recovering faster. The effect of this is that more companies make more profit in less time. As a result, tax revenues are higher faster.
Fewer companies are also failing due to lower taxes, so more are paying taxes. There are also less bad debts.
Providing support through a tax cut is not necessarily more expensive for the state than providing guaranteed loans, if you consider the speed at which it has achieved economic recovery.
The banking crisis has recovered for about eight years and has not yet reached its pre-crisis level. All the more reason to deal with this crisis in a different way, so that the damage to all parties in the labor and business process remains as limited as possible.
Ronald van Tol wrote the book Digging Bites About Reading Financial States and Understanding a Company. He is an independent organizational advisor under the name Living Figures. He previously worked at Capgemini Management Consultants and was a credit analyst at ABN Amro and Rabobank.
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