One day I hope to see Germans driving British cars, the Japanese using British computers and the French eating British food. Well, that last one might be a bit of stretch! But even if my hopes are a little unrealistic, I think the Budget on 19 March is a chance to get one step closer to this ideal.
Britain used to be known for its great home-grown, UK-owned companies; businesses that inspired me, and thousands of others, to start our own companies. We produced success stories like Cadbury, British Airways and Rolls Royce. These were national treasures we could all be proud of.
Many of these ‘national treasures’ are now largely owned by foreign companies and other governments. Whilst that’s not necessarily a bad thing – times change – we could do with a pool of new British-owned companies to take their place.
Let’s be clear: backing British businesses is not about backing individual companies, it’s about backing competition between them and creating productive jobs. The more businesses we have in fierce competition with each other, the more jobs are created, the higher living standards become and the cheaper and better products become for consumers.
Simplify the tax system right now
If our economy is going to keep on growing in a sustainable way, we need our tax system to be fit for purpose. The British tax system is far too complex. This complexity is precisely why we have so many tax loopholes that can be used by large corporate companies. When we hear that a mega-corporation is paying zero tax it’s generally because they’ve discovered one of these legal loopholes.
When you have such a complex system there are always unintended consequences and strange incentives that big corporations can use to their advantage. Their lawyers, tax accountants and advisors relish the challenge and welcome the fees.
So I very much hope that the Chancellor will continue to work towards simplifying our tax system as part of the long-term economic plan.
National Insurance – A tax on jobs and earnings
We need a simpler, flatter tax system and our first step should be to merge Income Tax and National Insurance. National Insurance is not an insurance scheme. It’s a tax. The rate you pay is determined by what you earn and not some risk premium, and the introduction of the single flat-rate pension and Universal Credit will cut the last links between National Insurance and contributory benefits. It will become what it already effectively is: a second Income Tax charged at a different rate with a different tax threshold.
Let’s remove complexity and create honesty by simply merge these taxes into one payment on people’s payslips. Then you could clearly see what you were paying to the Government. The figure would no longer be ‘hidden’.
Corporation Tax – A tax on business growth
While all businesses must pay their fair share of tax, Corporation Tax can stifle growth and act as a disincentive for companies to set-up shop in Britain. When times are tough, cutting corporation tax is a proven way to boost inward investment, create new jobs and increase wages.
Although the country cannot to afford to cut Corporation Tax radically overnight, the downward trajectory is good and we need to go further by extending the timeline and indicating the goal. An explicit aim to cut Corporation Tax to, say, 15% by 2020 would send the clearest signal to every investor at home and abroad that now is the time to invest your cash in Britain and, better still, locate your HQ here. The OECD found that cutting CT by 1% increased Foreign Direct Investment by 5% – and no one can deny we need that 5%.
Capital Gains Tax – A tax on success
To boost direct equity investment in UK businesses by entrepreneurs, particularly smaller businesses, we must reduce Capital Gains Tax (CGT). CGT is payable when an entrepreneur sells their business, something entrepreneurs need to do when they start a new company. If this tax is too high, entrepreneurs will just stick with their first business – they get “locked in” – and the economy loses out in the long-run.
CGT is, in effect, a tax on their success. It means that in Britain there is a huge disincentive for successful would-be serial entrepreneurs to continue creating new businesses. And that has a knock-on effect for the economy, jobs and taxes collected. Research has found that a 1% cut in the rate can trigger a 10% increase in taxes collected. In the US, every time CGT decreased since 1954, tax revenues have increased.
Even if you don’t agree that a CGT holiday is a good idea, CGT is still too high to incentivise activity and to raise the optimal amount of tax. The ‘most productive’ CGT rate is calculated relative to the Income Tax rate. It is generally agreed that 28% CGT was too high even when the top rate of Income Tax was 50%. Now that Income Tax is 45% (and hopefully 40% soon), CGT really should be reduced to, perhaps, 20% right away.
Business is the key to our future
Before last year’s Budget I called for a number of changes to boost growth. Some of these have been implemented including raising the individual tax allowance and cutting Corporation Tax.
But it’s worth reiterating: the Government has no money. Governments don’t produce profits. High-net-worth individuals, businesses, pension funds and international wealth funds have the cash. We don’t. That’s why we must woo them, welcome them, give them a great reason for coming here and encourage them to invest this money in British businesses right now. Changes in taxes do just this and I would urge the Chancellor to be bold. Let’s get the money flowing in our direction again as part of our long-term economic plan.