Sunday, 25 October 2009

Tories fail the tax test


Prem Sikka

What is the Conservatives’ big idea on job creation? Make public sector workers redundant and reduce people’s welfare rights through cuts. However, they have captured press headlines. Shadow Chancellor George Osborne told the Conservative Party conference that, if elected, the Tories would offer tax breaks to new businesses for the first two years of their life by waiving National Insurance contributions on the first 10 people employed in any new business and create 60,000 new jobs. Conservative leader David Cameron has described the policy as the “biggest, boldest programme to get people working”. Predictably, the Confederation of British Industry agrees.

Does the policy make any sense? The Conservatives have not explained what exactly a “new business” is. Without details, tax policies cannot achieve their assumed goals.

We have all heard of fly-by-night operators who close one shady business and start another. The Conservative Party’s announcement must be music to their ears. They can all close one business and start another the next day to claim exemptions from employer National Insurance contributions regardless of their profits. Perfectly respectable businesses can also indulge in the same creativity by hiving off marketing, public relations and other activities to new subsidiaries – all to claim exemptions from national insurance contributions. Hairdressers, greengrocers, estate agents and corner shops can all do the same, too – without creating a single new job. The only people making any money will be accountants showing them how to lay the old business to rest and start the new one.

Every time any government or political party announces any special tax concessions to one section of business, they set off the avoidance industry in motion. In trade, these are called loopholes and are exploited by accountants and lawyers. The Tory proposal will do the same. They seem to have learnt nothing from past mistakes. Small businesses cannot create jobs on the back of a National Insurance holiday. Businesses need sustainable revenues and no one is going to take on an employee if trade is depressed. The idea that the Conservative plans will result in the creation of some 60,000 jobs is pie-in-the sky and simply unachievable. The Conservative Party has failed the first test of tax policy – that is, to design a policy that cannot easily be abused. They are planning to create another loophole.

Governments should stimulate the economy through more efficient and sustainable means. They can reduce business rates for small businesses. They can extend 100 per cent first year capital allowances, depreciation allowed for tax purposes, to all qualifying investment in plant and machinery. Currently, 100 per cent relief is available on capital expenditure on all plant and machinery (apart from cars) up to £50,000 a year only. The cost of extending the 100 per cent allowances for 2009-2010 would be around £5 billion. Her Majesty’s Revenue and Customs already has a well-established way of policing it. So there will be no new bureaucracy. The proposal would help to retool businesses and create jobs. It can result in orders for the dwindling manufacturing sector and build capacity.

The public sector is targeted by both Labour and Conservatives, but the private sector has singularly failed to create new jobs. Sacking people neither creates jobs nor provides the spending stimulus which our high streets need. Most of the additional jobs since 1997, nearly one million, have been created in the public sector and 75 per cent of these are held by women, mainly outside London. So any cull in the public sector will hurt women disproportionately and also blight the regions. Hardly any questions have been asked about the failure of the private sector to create jobs, even though it depends on the public sector for contracts in healthcare, education and many other areas

A key requirement for sustainable jobs is that people have spending power and that can only be achieved through progressive taxation that redistributes wealth. Ordinary people spend the largest part of their money on food, clothes, shoes and travel in British shops. This has a greater multiplier effect than billions thrown at rich bankers and others. Their speculation on the stock market and housing creates bubbles. At best, they might create some extra business activity for estate agents, accountants and lawyers, but the multiplier effect of their wealth is minimal.

Instead of public expenditure cuts that penalise teachers, nurses, cooks, care workers and security staff who have not caused the economic crisis or gained very much from the boom years, the Government should look at reforming the tax system. In 2007/8, pension contributions relief added up to £37.6 billion. 60 per cent of it went to those on higher rates of income tax and £10 billion went to just 1 per cent of the taxpayers earning more than £150,000 a year. By confining pension contributions tax relief to the basic rate of income tax, the government can release up to £22 billion a year.

Removing the artificial upper ceiling on National Insurance contributions can raise £5 billion. Currently, no National Insurance is paid on incomes above £844 a week.

Even the Conservatives know that speculators cause harm. Yet neither they nor Labour have enacted a Tobin tax on currency transactions. A modest Tobin tax at 0.005 per cent could yield up to $33 billion (more than £20.60 billion). To prevent leakage, this could be co-ordinated within the European Union and raise nearly $17 billion (in excess of £10.6 billion) or more, if higher rates are levied.

Derivatives, the complex financial bets on the movement of interest rates, commodity prices and exchange rates turned out to be the weapons of mass destruction. The global GDP is around $55 trillion, but the face value of derivatives at December 2007 was $1,148 trillion. A simple 1 per cent tax on these could raise more than $11 trillion and a significant proportion of that would accrue to Britain, Tobacco, alcohol and gambling are taxed because they are considered to be harmful. The same principle should apply to financial instruments, as there is now plenty of evidence that this form of reckless gambling has caused havoc.

These are just some of the ways in which revenue could be raised to reflate the economy and especially help the less well-off. A 10 per cent increase in income tax personal allowances would cost about £4.5 billion. A 10 per cent increase in the state pension may be another £10 billion. Money would be available to waive university fees, prescription and dental charges.

Resources could also be used to build a greener economy and a more balanced and diversified economy that favours manufacturing, science, technology and lifelong learning. But instead we now have the obsession with cuts and gimmicks such creating jobs through National Insurance contribution holidays.

*Prem Sikka is professor of accounting at Essex University. This article first appeared in Tribune

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