Thursday, 23 February 2012

A Plea For Higher Taxes

‘What we’ll do is create a system under which our most successful and knowledgeable people are highly incentivised to…. err…. quit…’

No, this isn’t another bleating businessman complaining about the 50% tax rate. Quite the opposite in fact. My view is that tax rates are too LOW in one critical area: capital gains tax for entrepreneurs which runs at 10%.

We are frequently told that new businesses are a great source of growth, that they create new jobs and help society. I imagine that’s true at the macro-economic level (although no-one ever seems to mention that new businesses normally expand at the expense of old ones, that a new job at Amazon means less people working at HMV shops – this is the fundamental competitive nature of economic growth).

Having started one company and worked with numerous entrepreneurs I can confirm that creating new businesses requires very considerable skill and effort. Most fail, a number just about get to the level where they break-even for the hard work put in, and a small number really flourish.

This latter group is where the pay-off lies, in terms of jobs and long-term success. Maybe five years down the track the owner, who has probably risked everything financially, worked 60-80 hours a week and not taken more than a week’s holiday a year, is finally seeing a financial return. S/he will probably not get a big salary or bonus, but can start to take out sizeable dividends – maybe £250,000 a year or more.

Then comes the hammer blow. On that £250,000 they’ll pay around 50% tax, maybe more. Fair enough in these straightened times. Or, they could leave the cash in the business, find a buyer and pay 10% tax. Even at a modest price for their business this can have the effect of making a sale of the business the equivalent financially of 10 or more years’ dividend. Why slog on when the tax system basically incentivizes you to sell out?

The result is that up and down the country very capable, hard-working and successful business owners are throwing in the towel. The businesses they run may continue to do well after they sell out, but there is a tremendous loss of knowledge and expertise as the new owners take it on.

Madness really.

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