There are two ways in which they could do this. First, these companies could distribute a lot more of their profits to their members. I think there are strong economic arguments for them being expected to do so: it is only perverse tax incentives that have created low tax rates in companies coupled with low capital gains tax rates on the holding of shares that have encouraged this savings glut. The overall tax rate of those saving has been reduced by tacit agreement that the companies should retain their profits with the underlying increase in net asset value being reflected in increased share prices which are then taxed at lower rates as capital gains than would be the case if dividends were paid. This is the first problem to be tackled.
The second is the fact that businesses are simply not investing anything like enough. When business investment is of enormous significance to growth and the overall rate of investment by business in the UK has fallen from about 14% of GDP in 1998 ( which rate was, it must be said, exceptional) to less than 10% now this is macro-economically important. The simple fact is that we invest too little and save too much: no wonder we are in the economic doldrums.
So, we must get business to invest more!
(Leave aside his ignorance of the point of the small business and start up sector. He leaps from “large business not investing enough” to sectoral balances which talk about “all business”.)
How are we going to do this?
Tax is a mechanism to change this, although I have to say that, as is quite common when it comes to tax, Martin Wolf gets much of his prescription wrong. The answers are, in truth, fourfold.
First, the standard rate of corporation tax has to be increased significantly in the case of larger companies. I am quite happy to consider rates of 30%, or even more.
Business will invest more if business is taxed more.
If you tax something you get less of it. Tax smoking and there’s less smoking. Tax high frequency trading and there’s less HFT. Tax the returns from investment more and there will be less investment.
Where in buggery is this man getting his economics from?
Second, when dividends are paid reduced rates of tax should be applied to the part of profit used to settle these payments. The obvious rate to apply is the basic rate of income tax at the time of payment, or 20% at present. This then gives the business an incentive to pay and this tax charge then settles the basic rate tax liability arising on the shareholder.
Doesn’t the UK tax system currently do something like this? And the US one is halfway there, with the lower dividend income tax rate.
Third, capital gains tax rates on shares need to increase: there is no reason at present to use the tax system to encourage corporate saving when we need the opposite behaviour in the economy. Low capital gains tax rates encourage that saving and so they should be changed.
Has someone shipped some particularly good drugs into Downham Market or summat?
Fourth, we need to encourage more corporate investment. If higher capital allowance rates were given (especially in non-financial companies) on investment then, in combination with the higher rate of corporation tax on non-distributed profits, there would be a significant cash flow advantage for companies that invest.
This is from the Murphaloon who signs up to the £93 billion of corporate tax giveaways, right? He want’s to increase Farnsworth’s subsidies to companies?
Put these factors together, in combination, and you have a policy that firstly might raise more revenue, secondly encourages appropriate behaviour and thirdly delivers the investment we need whilst fourthly reducing corporate saving which, fifthly, is a precondition of the government reducing its deficit. That is joined up thinking. But I don’t expect to see it in the Spending Review.
Well, it’s something and it might even be joined up but hard to describe it as thinking.