Dear Lord above

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.

27 thoughts on “Dear Lord above”

  1. I’ve left the following comment, we’ll see what occurs:

    “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.”

    However in the comments on this blog you agreed with the broad premise of Kevin Farnsworth’s work on corporate welfare, a large proportion of which he identified as capital allowances for investment, and you agreed such allowances were a ‘tax subsidy’ to large corporations.

    So by your own words, you now propose to increase corporate tax subsidies?

  2. With the 30% tax rate, I think the point is simply that if companies have more cash then taxing them means government gets to spend it directly, rather than having to encourage the company to spend it. It’s a blatant “give me that, I know how to use it” 🙂

    Either that or he is confusing cash and profit, but that would be a rookie mistake.

    The reduced rate for dividends is odd, and I’m not sure what he means. At a guess: at present you get no tax relief for dividends, so 20% tax would mean that you’d essentially have to take the dividends as a deduction against the 30% rate, and then tax them at 20%. Basically, this is bringing back ACT but allowing dividends as a deduction against profit rather than allowing a credit for the ACT paid – in fact it’s more generous to the company than ACT was back in ’95.

    We’d need to go back to the 20% tax credit for dividends, which would mean re-writing income tax on dividends again. And corporation tax – will we have group income elections again?

    CGT on shares: I have no idea how the liability of a shareholder is meant to change the behavior of a company, which (or so Murphy asserted a little while ago) is a completely separate entity with no responsibility to the shareholder. Does he just mean that no-one will buy shares if the tax goes up?

    Capital allowances: where to start?

    – Murphy frequently says that allowances for capex are a giveaway that businesses have no right to expect, but here he is saying they should get more of them

    – We already have 100% allowances. How high does he want them? OK, that’s only really useful for SMEs, but this is symptomatic of the way that this all seems to be aimed at large companies with no thought for how it would affect SMEs

    – Increasing tax rates and increasing CAs is simply a reversal of the recent trend. Is he just wanting to go back to 1995, as with the ACT proposal?

  3. i also don’t really understand how not paying dividends and then not investing the cash not paid in dividends can increase share prices

  4. First, these companies could distribute a lot more of their profits to their members.

    Isn’t this what Facebook did last month? Which Murphy et all had an embolism about? OK, they paid it to staff, not ‘members’, but the difference is…what?

  5. Dick appears to have followed the Lord Mayor’s Show this year and converted his collection into policy.

    Pellinor has covered it all in his usual immaculate style, but this really sets a new standard in Murphy Muck.

    Weapons Grade gibberish.

  6. I’m picturing the scene in Seven where the cops discover the thousands of notebooks.

    The Seven Deadly Sins:

    1. Neoliberalism
    2. Tax avoidance
    3. Neoliberalism
    4. Neoliberalism
    5. Neoliberalism
    6. Tax avoidance
    7. Neoliberalism

  7. ‘First, these companies could distribute a lot more of their profits to their members.’

    This some kind of British colloquism? Companies have “members?”

  8. Someone pointed out on his blog that the UK is slipping into deflation and, since tax is merely a tool for controlling the level of inflation in an economy – his words – shouldn’t he be proposing tax cuts? Of course Murph is constitutionally incapable of countenancing tax cuts so he proposed reductions in VAT and NIC, but coupled with increased corporation tax. He and Maugham seem to fixate on corporation tax in a pathological way. It’s an obsession for them. Is it because it is such an innately absurd tax? Is it because it is so ridiculously complex?

  9. Gamecock, Murph has to use the term “members” because last week he proved that companies don’t have owners. And yes it is a legal term used in the Companies Act.

  10. @Gamecock

    Members is a company law term. Shareholders are members.

    However, Murphy is a little shaky on company law. Recently he bellowed that members can NEVER vote dividends and when it was pointed out to him that under the suggested model company Articles available at Companies House it is ONLY members that can vote final dividends, he claimed he was still right as it needed a majority. Meaning, I suppose, that by the same definition MPs can NEVER pass laws.

  11. ‘Companies have “members?”’ Only big firms do.

    Anyway, this is just Murphy launching a trial balloon to see if he can find new classes of people to bedazzle with economic nonsense so he can extract money from them in yet another con.

    I should very much like to meet Murphy in person to see his personal style. Many years ago when I was a practicing lawyer I met many con-men and each based his cons to a large extent on his personal style.

  12. Richard calls himself a Director of TRUK, even though he’s actually a partner in an LLP so don’t expect him to know too much.

  13. Murphy should know all about members. He’s got a bespectacled male member protruding above his fvcking neck.

    But he’s still a cvnt.

  14. So Murph appears to be claiming 2 things:

    1/ that companies should be paying out higher dividends
    2/ that companies are sitting on huge cash-piles which is not being invested productively.

    We all know that Murph is in the habit of just making things up but is there any actual evidence that UK companies are sitting on huge cash-piles and that dividend payouts are low? I have tried to locate some statistics but haven’t found anything comprehensive yet. My ad hoc queries into FTSE company accounts over the last month suggest that neither statement is true but I have no intention of going through the whole index.

  15. Sounds like ACT and 100% Capital Allowances in the 1970s. Remind me how that went.

    Particularly funny is his idea of higher Capital Allowances in view of the fact that the Labour Government reduced them severely and pretty much killed the tax based finance leasing industry that had been supporting/financing large scale capital investment by large businesses, particularly inbound multinationals who tend not to be current tax payers when first investing.

  16. @Alex

    A monstrously complex system designed by people who not only think they should have as much of your money as possible but also know the best way for you to spend what they have left you.

    Fuck off the lot of them.

  17. Thanks Ken. As ever, Murph seems to glide over the complexity of the analysis – it is a lot more complex than he seems to think. From the BoE article, it looks as if companies are actually holding less cash now than they were doing 10 years ago but that they have made significantly more loans. Presumably these are loans to related companies either domestic or foreign. Which raises a stack of questions. The database of 3600 companies they use obviously includes a load of companies that are not in the FTSE100 or Allshare indices. From my ad hoc reviews of FTSE100 companies, the cash is generally swamped by the level of borrowings. Which suggests that the converse must be true in the unlisted companies. So these companies, which will generally but not always be smaller, with fewer shareholders, are choosing to stockpile cash. I wonder if this is related to the way that banks basically stopped lending to businesses 10 years ago.

    From the article “our results for UK companies show that cash holdings are positively related to R&D expenditure (as a ratio of sales), which has risen over the past two decades, particularly for the largest companies”. So contrary to Murph, there has been investment even as the cash has piled up. It might even reflect the way that corporate loans have grown.

    A further thought, depending on the share ownership patterns, there might be little or no appetite for increased dividends versus retgaining the money in the business. Listed companies have different drivers, particularly when it comes to pleasing income funds.

  18. Maybe his plan is to return to a set of rules that he knows so he doesn’t have to get up to date if he wants to practice as a tax adviser again

  19. Does anyone recall how much surplus ACT had to be written off when Gordy changed the rules? All those companies with foreign earnings massively in excess of their UK profits…was it around £6bn or so?

  20. Availability of capital is but one of many considerations in investment.

    Greater/cheaper availability could affect project decisions, but it can’t create projects.

  21. My take is that there is a research project in there to look at the different companies in the 3600 and see if there are different drivers. My initial feeling is that listed companies do have very different drivers from th rest. And the companies driven by private equity are probably another subset.

  22. @Diogenes “My initial feeling is that listed companies do have very different drivers from th rest. And the companies driven by private equity are probably another subset”

    Which is Murphy’s point. All false drivers of behaviour are to be discouraged and all correct drivers encouraged. Murphy decides which are correct and which not. All which serve the state are correct. All that serve the individual are not correct.

    Who was it who said… “It is thus necessary that the individual should finally come to realize that his own ego is of no importance in comparison with the existence of the nation, that the position of the individual is conditioned solely by the interests of the nation as a whole”? Oh, yes, it was that Mr Hitler bloke.

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