No growth means less equality, not more!

No growth means less equality, not more!

by Eben Wilson
article from Wednesday 13, July, 2016

THE GREEN PARTY leader, Patrick Harvie, has described as “ideological nonsense” the idea that a cut in corporation tax will increase revenues. His view is that this will only allow “tax dodgers” to profit, and “leave control in the hands of wealthy corporations” and curtail “efforts to move to a common tax base”. It’s all part of some dastardly plot to “continue with austerity”.

Oh dear, if you want ideological nonsense from a Scottish perspective, it’s Mr Harvie spouting clichés like this that offers it.

There are 361,345 private sector enterprises working in Scotland. SME’s account for 99.4 percent of all these, with 3,870 medium sized and only 2,295 with more than 250 employees. There are only 35 public corporations – wealthy corporations. Many of these are international traders.

So much bile is directed at these large traders , yet is it really likely that corporations like the Clydesdale Bank, AG Barr, John Menzies, Stagecoach and Johnson Press can be found skulking in their board rooms each day working out how to fleece their customers and workers of money? Get real; these people are audited to within a penny in each earned pound and most of them are trying to find out how to make any net profit at all. The margins they do make are re-invested or help pay the pensions of the elderly.

The lack of numeracy among many of our politicians is repeated in the notion that it is possible to find “a common tax base” for corporates taxes. I’ve explained in a previous blog piece why this is a false crusade because net profits at any one moment are almost impossible to identify for even the smallest trader. Trying to do the same calculation for all sizes of company has led to farcical outcomes with a 4,500 page corporate tax guide that no-one, yes no-one, understands - although many make large fees from pretending to do so on behalf of large corporates in an expensive merry-go-round of negotiations with an over-worked and hence ineffectual (and, more recently, arbitrarily aggressive) HMRC.

Small traders really matter in Scotland. The 99.4 percent that Mr Harvie taints with the idea of being “tax dodgers” are those who create about 1.2 million jobs – that’s 55 percent of all employment. And how do they do that? Well, think about something like a small café or shop, or small jobbing engineering firm or parts distributor:

Let’s say that to earn an extra hundred pounds of revenue you have to spend £50 in wages and £20 on product content. You are trying to work on a retailing margin of 30 percent gross. (We will come back to this figure below). Operating like that:

The employer loses £6.40 paying employer's NIC.

And then has to pay Business Rates – about another £5 if they are lucky.

And then has to pay VAT on the gross margin. Another £6 gone at 20 percent.

So, three taxes in, that’s £17.40, leaving £7.60 net margin.

You haven’t paid for marketing, office expenses, transport and other things yet. You also haven’t paid yourself. And, crucially, you haven’t paid for tomorrow’s product out of this cash flow, which will actually create a £12.40 loss (£7.60 minus £20.00) if you stick at the same gross margin. This is called over-trading and is the second most common reason for small businesses going out of business.

You are losing money, fast, so what do you do? You put your gross margin up – to 200 percent or more. You hoard cash, go canny and grow with great care so that you do not run out of it. You don’t hire new staff, or hire them part time, or on zero hours pay; you pay yourself a pittance, and you learn to laugh and be optimistic. Note how you are now part of a more unequal world; small business lives in permanent austerity; but you do it because you love what you do, even although you know your prices are higher than they could be, you are selling less and creating fewer jobs. This is what is called the “deadweight loss” of taxation.

And any time you hit a new seam of margins, cash-generating business that could make you hire more people, pay them more, expand and invest, what does the government do? It taxes you again on the extra margin you have made. Ironically, VAT is the most common reason for small business to go out of business; so we certainly don’t need Corporation Tax on top to smash their accounting success.

Taxation on companies is a core reason why economic growth does not happen at a rapid rate. It de-focusses large companies, making them staid and cautious, spending fees on the risk managers of law and accountancy. It hauls cash out of Scotland’s small businesses – entities that have been described as “bundles of informal contracts” between owner-managers, suppliers and workers; the real world of trust and honesty and hard-work.

And there is a counter-conclusion, practical and certainly not ideological; if Scotland’s 99.4 percent did grow faster, the tax revenue they would create would far outstrip what the state can get today. Think Palo Alto, not Ravenscraig. Mr Harvie is plain wrong on this.

He also says: “corporate tax competition is one of the mechanisms that has created the profoundly unequal economy we see around us today.” That is total ideological bunkum. In the business sector, it’s the one option that could create more equality through more jobs with higher wages, and higher productivity from investment.

It’s time to scrap all corporate taxes, they have failed. They have no coherent base, cannot be calculated, favour fat cats with good lawyers, and destroy investment. Above all, they take the fruits of small company imagination and divert them into hoarded cash flow or public sector coffers where productivity is dismal – creating the very inequality they are said to reduce.

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