A new report from the Taxpayers’ Alliance finds that the “50p rate will mean fewer entrepreneurs and fewer jobs”, as Matthew Sinclair, makes clear:
Tax and Entrepreneurship looks at the relationship between the tax system and people’s decision to start a new firm. It points out that in order for the risks association with starting a new firm to be financially worthwhile, there need to be rich rewards if things go well. Often, those rewards will go beyond someone’s immediate needs and be saved and then passed on to children, it’s no accident that Theo Paphitis on Dragon’s Den refers to the money he invests as “my children’s inheritance.”
Unfortunately, that gets taxed heavily and repeatedly. The money is taxed when it is earned, when it is saved and invested in a company and then again when it is passed on to children – even before it is spent. That adds up to a total top marginal tax rate of 90% even with the current income tax regime and a top rate of 40p. Throw the new 50p top rate into the mix and you’re talking about a top marginal tax rate of a massive 92%. 20% of the amount people are left with right now will be taken away with the introduction of the new top rate. That is a massive burden and will reduce the incentives to start a new firm.
That means that the 50p rate shouldn’t just concern the rich. The vast majority of new jobs are created by new firms, particularly the high growth “gazelles”. If we see fewer of those firms thanks to the new 50p rate then more people losing their jobs now thanks to the recession will have to wait longer to find work again.
Once again, the Government’s policies hurt potential entrepreneurs and, therefore, people who they would have employed.
Labour has migrated far from its socialist roots. In attempting to outflank and wrongfoot the Tories on the 50p tax, Labour has damaged the prospects of entrepreneurs starting new firms that create jobs, which provide people with gainful employment – whatever their social background, whether working-class or middle-class, and whatever their status, whether currently employed or unemployed.
The fact is that there is nothing “progressive” about Labour’s empty rhetoric and its failure to deliver on policies, such as promoting entrepreneurship, reducing child poverty, and dealing with unemployment and worklessness – when its policies have actually exacerbated each of these indicators of prosperity and quality of life.
The lessons of Lehman
As Lehman Brothers becomes the biggest business failure in the US, one must remember that entrepreneurship is about risk and reward.
Reward: The employees of Lehman have collectively made hundreds of millions in bonus, and now they’re out on the street looking for new jobs (that includes £4,500 in the UK, ominously). It’s a pity that their bonuses – their rewards for failure, if you like – cannot be clawed bank and handed back to the creditors of Lehman. But such bonuses are cunningly used as an accounting measure to reduce profits and, therefore, corporation tax paid.
Risk: They got it wrong and now they are paying big time for their failure. John McCain is right to describe the financial services sector in the US (AKA Wall Street) as a ‘casino’ – well, the same is true of the City of London’s investment banks. And entrepreneurship can be very much a ‘casino’ if people take extraordinary risks. Or are extraordinarily stupid, as was the case with Lehman.
What does this mean for tax cuts?
I argued on this blog about a year ago that the Taxpayers’ Alliance (TPA), with its brilliant team including Matthew Elliott, Matthew Sinclair and Tim Aker amongst others, has won the argument on tax. Since then,
- Labour made a hamfisted attempt to reduce a tax that it raised in the first place (10p).
- The Conservatives, on the other hand, have about two tax reducing commitments: first, to increase the stamp duty threshold for homeowners from £175k to £250k; and secondly, to increase the inheritance tax threshold to £1m or £2m for married couples. The first favours ordinary people and first-time buyers, and the second largely favours the relatively wealthy (although, as Ian Hislop pointed out on Have I Got News For You, it’s so popular with a large section of the electorate “because they’re going to get the house”).
- The Lib Dems are now the only party that offers tax cuts for the lower paid and middle-income people who are most devastated by the credit crunch. It would have been better had ‘Ozzy’ Osborne ( our next Chancellor of the Exchequer, at only 13 🙂 ) had used those billions to help the poorer and middling sections of society, the true coping classes. This is the obvious next step for the Tories if they are to hold any hope of gaining Lib Dem held seats. While Eastleigh, Solihull and others are in the bag, the Conservatives can forget Nick Clegg’s Sheffield Hallam or Vince Cable’s Twickenham (unless the latter retires as an MP) – people there can vote with their social conscience for the ‘nice liberals’ AND vote for tax cuts.
Tim Aker of TPA points out that:
The Lib Dems have already made a bold stand in putting the case for lower government spending, a move that even outflanks the Conservative message of higher public spending as all part of the ‘sharing’ deal between the government and taxpayer. But the silver bullet in twenty-first-century British politics is staring the Liberal Democrats in the face. In presenting the case for lower taxes on the lowest paid, they should embrace the call to take those in poverty out of income tax by significantly increasing the income tax threshold to the government’s valued level below which poverty begins. Whereas Lady Thatcher locked in the support of the C2 and D voting classes when the government allowed council tenants to buy their own council houses, the same opportunity is there for any party to take the next logical step and to take the poorest out of income tax.
Absolutely spot on, of course, so it is time for the Tories to sit up and listen. It’s all very well being 20 points ahead, but the Lib Dems are still an electoral threat in many places.
Not just that, but it is also morally right to cut taxes on the poorer and middling sections of society who are being skewered by Brownite economic policy and the credit crunch – mortgages, petrol prices, food prices, etc. It is they who elected one of the Tories’ best and most compassionate MPs, Edward Timpson, in Crewe & Nantwich. He is someone whose parents fostered over 30 children and Timpsons is one of the best employers around.
It is time for some compassion on tax too. Now. Or, if not, at least in time for the next general election, which may be sooner than many people expect.
What has this to do with Lehman? Simple. We’re in this mess largely because of the Wall St and City of London ‘casino’, and the Brownian policy vacuum that doesn’t know how to deal with the credit crunch. Ordinary people are suffering – we need to stimulate the economy to ease their financial (and thus emotional) strain, as well as making entrepreneurship attractive, and reviving the housing market. Tax cuts are a good way to start this process.
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