Matthew Sinclair is a senior consultant at Europe Economics.
The Centre for Policy Studies (CPS) deserves enormous credit for bringing together a fantastic set of conservative speakers for the Margaret Thatcher Conference on Liberty. Our admiration for that wonderful event should not, however, cause us to forgive the enormous failings of their centrepiece policy proposal.
They start out from an overly simplistic understanding of the problem. In his speech, Lord Saatchi presented a naive view in which we can see the cartelisation of the economy in just the high market shares of the top five firms in a range of sectors: from search engines to energy. Market share was equated to market power, with no analysis of how high barriers to entry might be; how fierce competition might be between those big players. or how much the cast of big players might have changed in the past or might change in the future.
They assume that a small business is always a heroic competitor and a large business is always a cosy monopolist. The reality can be quite different. In countless communities, supermarkets, for example, have given consumers new options besides just accepting whatever was on offer from the corner shop.
No particular scale of company has a monopoly on vice or virtue. There are good reasons, as well as bad ones, for a firm to grow large. Clumsy taxes are no substitute for the hard analytical work that underpins a proportionate competition policy.
They want to use the tax system as a “weapon” to change how business is organised and hurt big business. Gone is the old Lawsonian principle that the tax system should be as neutral as possible between different businesses and corporate organisational forms. Neutrality was the great objective of the the Thatcherite tax reforms: maybe the world has changed, but I think that principle is worth upholding still.
Remember that the most important category is not really small business or large business. It is the small business working on becoming a large business. Those are the firms that have the most profound effect on competition, they are the energetic challengers which keep existing big businesses honest or replace them, and they are the firms which create the most jobs and adapt our economy to take advantage of new opportunities.
If you depress the returns for a firm that succeeds in the difficult and risky task of becoming a large business, you will see fewer of those vital high growth gazelles. The CPS’s answer to that problem is that investors in businesses when they are small will, however long it takes, be able to realise the returns at their proposed small business rate: i.e. without paying Capital Gains Tax. They therefore have an incentive to see their investment grow.
That might mean lots of speculative investment in small firms, but it will divert investment from those firms that have more than 50 employees – maybe one or two hundred – which might have more need for external finance; where those offering external finance are better able to assess their prospects; and where the potential is greatest to grow to a scale where the firm can challenge the big incumbents.
The proposal also fails the fairness test. Most of the burden of Corporation Tax ultimately falls on workers. Why should a worker at a business with a hundred employees pay higher taxes, and therefore take less money home to their family for a given level of productivity, than a worker at a business with 50 employees? How is that fair?
If you really want a middle ground between strategic tax reform – of the kind envisaged by the 2020 Tax Commission, which proposed abolishing and replacing Corporation Tax and Capital Gains Tax entirely – and the substantial incremental progress being made in cutting Corporation Tax by the Government already, how about the following?
Cut the Corporation Tax rate to 10 per cent. Then also cut Business Rates, which for most small business owners are a more pressing concern than Corporation Tax. Ease the tax burden across the board instead of just for some firms.
Conservatives should loathe the idea of tax as a weapon. They should favour simpler, fairer and more competitive taxes for everyone.