Tuesday, July 28, 2009

How to kill entrepeneurship

N.B. I'm not the Devil

Over at the TaxPayers' Alliance, we've got a new report out today investigating the marginal tax rates that hit entrepeneurs, and calculating the scale at which tax policies remove the incentives to actually take a risk and be an entrepeneur.

Entrepeneurship is a risky activity for the individuals involved, which is of great benefit to the wider economy. It's in all our interests that there are rewards available for taking the risk of leaving the relative security of employment to invest your own time and money in a business idea. The incentive for taking those risks is of course the profit you make back if you're successful.

However, at every stage of the process the State is there to take a cut. We investigated the total marginal tax rate on an entrepeneur who earns a profit, saves it, invests it in a company and then leaves it to their children. Currently, that rate is 90%—they will only have 10% of their original profits left.

When you test the new 50% higher rate of income tax, though, that marginal rate goes up to 92%. An extra 2% might not seem a lot, but it is effectively reducing the existing incentive by 20%. This is yet another kick in the teeth for entrepeneurship.

We already know from various independent assessments that the 50% higher rate is unlikely to raise any revenue for the public coffers, and indeed it may well lose money by deterring investors. This latest study demonstrates quite how damaging the rate will be to a vital sector of the economy.

If we are going to grow our way out of this recession, then we will need the risk-takers, the innovators and the entrepeneurs. They won't put their livelihoods, homes and careers on the line if the Government continues to give them a kicking.

10 comments:

Thomas Byrne said...

Indeed, the whole tax system is geared against savers, is it any wonder people went on a borrowing spree?

Wossat? said...

This government seems set against anyone making money, saving money or having money. The state provides and fucks up anyone who sets out to provide for themselves - unless you are a Nu-Fascist crony.

Roger Thornhill said...

The whole "idea" wasa to thow a bone to the electorate.

John B said...

We investigated the total marginal tax rate on an entrepeneur who earns a profit, saves it, invests it in a company and then leaves it to their children. Currently, that rate is 90%—they will only have 10% of their original profits left.

Similarly, if I earn £15, get taxed on it at 40%, and then give it to Mr Patel in the offie for a bottle of cheap gin, then Mr Patel only makes £2 after VAT and excise. This proves that the marginal rate on gin-drinkers and off-license-users is 87%.

Or possibly that carrying out calculations based on multiple, unrelated transactions involving more than one individual, as the TPA have done above, is a daft idea.

cabalamat said...

Mark,

It appears you don't like the 50% top rate of tax.Yet this is nowhere near as serious a problem as the marginal rates for people coming off benefits, which are often in excess of 100%.

I imagine marginal tax rates of 50% deter some people from working; clearly rates >100% are a much greater deterrent. Yet you're not talking about this.

Perhaps you only care about high marginal tax rates for the rich?

CityUnslicker said...

Very poor maths, it is not 90%. How do you work that out. You pay capital gains, not 50%.

I am against 50% tax and wolley arguments against it!

Anonymous said...

Cabalamat,

2 wrongs don't make a right. People like you are very annoying, always bringing things back to the lowest common denominator.

I would have also thought that benefits are paid by those people on 50% tax rate (and let's not forget the pension allowance disappearing too). Personally, I'd rather my children were the recipients of what I earn through me working.

And finally, you seem to forget that by stifling people at every level, economic activity is decreased and creates the conditions where benefits are ever more important. It is a vicious circle.

P said...

Mmm,

I'm not sure about the naive formula used here with the personal income, business and inheritance tax components simply multiplied together.

The formula used assumes a certain kind of stupidity on the part of the enterpreneur.

Firstly, the enterpreneur will usually keep the personal income down, since the marginal taxes are high if transfered out of the company and there are many ways of using expenses from the company he runs to live a decent lifestyle. Also, dividends are taxed at a lower rate than income to reflect the tax already paid by the company. This will change the weighting for the first component between enterpreneurs, depending on their preferences and circumstances.

Secondly, there is a confusion between the tax on the corporation and the tax on the individual. The market value of the company is impacted by the corporate tax rate, but this only comes out at an event such as a share sale, which is addressed as a capital gain.

Thirdly, there is strong exemption from inheritance tax on "family" owned businesses. Effectively, it is possible to pass on a very large company at zero inheritance tax, while personal assets would be counted towards in the inheritance tax calculations.

Finally, your 35 year projection does not factor in the effect of inflation, so the numbers really mean nothing.

In short, if the owner of a company keeps his personal income modest (which is possible over 35 years e.g. once he has a house), can claim company expenses and keeps his assets incorporated in a company structure the tax rate would fall far short of the 90% predicted by this "model".

This is how the economy functions at all - if none of these exemptions were possible nobody would act.

I agree that the 50% tax rate will reduce revenues to the treasury. I also think that the overall system of taxes is pathetic, particularly the marginal tax on minimum wage earners.

However, I find this system of calculation to be a pretty flawed one. It kind-of demonstrates how much tax it is possible to pay if somebody acts in an unbelievably stupid fashion, but it really shows nothing of any substance, I'm very sorry to observe.

Mark Wallace said...

Cabalamt,

The TPA exists to campaign for lower taxes for all - it would be wrong if we didn't research and debate the 50p rate, which is the main tax rise currently on the table.

However, you are wrong to say we don't support a tax cut on the poor. We spend huge amounts of time on council tax, for example, which is the tax that hits the poor hardest of all. When it comes to income and marginal tax rates on the poor we have supported a far higher income tax threshold for low earners from our founding five years ago. I've personally proposed it in dozens of media interviews, and you can find our support for the idea is repeated through our thinking, e.g.

http://www.taxpayersalliance.com/campaign/2008/07/first-principle.html

http://www.taxpayersalliance.com/research/2008/11/points-to-consi.html

We have forthcoming research in the pipeline going into detail for the proposal, too.

Anonymous said...

Have to agree with P. My previous experience as a corporate finance advisor and lawyer was that it was quite easy for entrepreneurs to protect their wealth.