Eco­nomic re­cov­ery

It’s crazy that Su­nak is plan­ning a tax raid on wealth creators. We need them to re­build Bri­tain

The Daily Telegraph - Business - - Front Page - MATTHEW LYNN

Tax­ing wealth-creators now will lose our bright­est and best to for­eign ri­vals Matthew Lynn

An in­crease in cap­i­tal gains tax? A rise in cor­po­ra­tion tax? An on­line sales tax tar­get­ing the ti­tans of the in­ter­net? We haven’t yet quite reached the stage of im­pos­ing wind­fall taxes on any busi­ness that man­aged to just about break even dur­ing lock­down, or a home de­liv­ery levy to help out the high street, but heck it is only the be­gin­ning of Septem­ber and there is still plenty of time be­fore the next Bud­get.

As the Trea­sury scratches around for ways to fill the mas­sive hole blown in the pub­lic fi­nances by Covid-19, it is clearly tar­get­ing com­pa­nies and en­trepreneur­s as the most likely sources of ex­tra money.

But hold on. That is crazy. In truth, there is never a good time to tax wealth cre­ation. But this is an es­pe­cially bad mo­ment. Why? Be­cause if we are to have any hope of cre­at­ing the jobs we will need to get out of this cri­sis, we are go­ing to need a huge burst of en­tre­pre­neur­ial en­ergy. Be­cause com­pa­nies have just had a six-month les­son in work­ing re­motely and are more likely to flee tax rises than ever be­fore. And be­cause the on­line econ­omy is the one sec­tor we need to grow, so it hardly make sense to pun­ish it. We will find out in the next year whether we have to raise taxes – but if we do, it would be mad­ness to put the en­tire bur­den on busi­ness.

Out­side of war time, Trea­sury of­fi­cials have never seen so much red ink. One of the strictest lock­downs in the de­vel­oped world also cre­ated one of the deep­est re­ces­sions. The UK’s 20pc col­lapse in out­put in the sec­ond quar­ter of the year trashed tax rev­enues, while vast spend­ing on fur­lough schemes, bailouts and loans – not to men­tion the half-price pizza deal that sadly ended yes­ter­day – has pushed the coun­try deep into the red.

The deficit is ex­pected to hit £300bn this year, the high­est in real terms since the end of the Sec­ond World War, and our to­tal debts have now crept past 100pc of GDP. If we get a rapid V-shaped re­cov­ery, we can pay that off grad­u­ally over a cou­ple of gen­er­a­tions. So long as in­ter­est rates re­main close to zero, it could be just about man­age­able. If not, taxes will have to rise. There is noth­ing wrong with the Trea­sury start­ing to ex­plore its op­tions. Right now, how­ever, it is look­ing in all the wrong places.

Its main tar­gets ap­pear to be cor­po­ra­tion tax, with a pos­si­ble rise to 24pc; cap­i­tal gains tax, which could be lev­elled with in­come tax (im­ply­ing a rise to 40pc or 45pc); and a plan for an on­line sales tax to help level the play­ing field be­tween the boom­ing

‘There is noth­ing wrong with the Trea­sury start­ing to ex­plore its op­tions but it is look­ing in the wrong places’

vir­tual econ­omy and a strug­gling phys­i­cal one. One way or an­other, busi­ness is go­ing to be made to pay.

The trou­ble is, this is pre­cisely the wrong time for a raid on wealth cre­ation. Here’s why. First, we will need to cre­ate tens of thou­sands of new com­pa­nies, and mil­lions of new jobs, to have any hope of get­ting the econ­omy back to where we were in 2019 – never mind grow­ing it again.

Fur­loughs and cheap loans have post­poned a lot of the pain, but a ter­ri­fy­ing num­ber of com­pa­nies are not go­ing to come back from this cri­sis. We have al­ready seen re­tail and restau­rant chains start to close branches, or else slip into ad­min­is­tra­tion, but as the sup­port schemes start to wind down that will get a lot worse.

We could be look­ing at two, three, and per­haps even five mil­lion un­em­ployed.

We will need lots and lots of start-ups to have any hope of cre­at­ing jobs on that scale – and we will only do that if we re­ward en­trepreneur­s in­stead of pun­ish­ing them.

Next, the shift to work­ing from home has made it eas­ier than ever to move your busi­ness some­where with lower taxes. Through lock­down, lots of com­pany own­ers were prob­a­bly won­der­ing why they needed an of­fice in the first place, with all the ex­pense of rent, rates and free cof­fee. The busi­ness seems to op­er­ate OK with­out one.

If we put up cor­po­ra­tion tax, the same peo­ple are go­ing to be won­der­ing why they need to base them­selves in the UK at all. At 24pc, com­pared with the cur­rent 19pc, which is one of the ru­moured Trea­sury pro­pos­als, Bri­tain would have thrown away its tax ad­van­tages.

Re­mem­ber this as well. Peo­ple re­act to change. Faced with a big rise in tax bills, and af­ter a six month les­son in run­ning vir­tu­ally, plenty of busi­nesses might de­cide that Ire­land (12.5pc com­pany taxes), or Hun­gary (9pc) or the Ba­hamas (0pc) were just as good a base. Higher cor­po­rate taxes will sim­ply drive an ex­o­dus, es­pe­cially in the high-out­put, work-from-any­where econ­omy. It could eas­ily turn into a spec­tac­u­lar own goal.

Fi­nally, surely we want to move busi­ness on­line as fast as pos­si­ble? You can just about make a case for tax­ing Face­book and Ap­ple a lit­tle more. But one of the most sig­nif­i­cant de­vel­op­ments dur­ing the cri­sis has been this. Lots and lots of small com­pa­nies have found in­no­va­tive ways of shift­ing on­line. That im­proves pro­duc­tiv­ity and growth, and, hardly in­ci­den­tally, helps us con­trol the virus.

Why would we want to pun­ish them for that? It makes no sense at all – and, even worse, it will send out a sig­nal that the UK is one of the most tech­hos­tile coun­tries in the world. In re­al­ity, if we raise taxes on busi­ness we will only make the re­ces­sion even worse.

It re­mains to be seen whether we have to make tough de­ci­sions on tax. We might be able to trim spend­ing, bor­row more, and some­how en­gi­neer a fast enough re­cov­ery to avoid it. That re­mains to be seen. But if ac­tion must be taken, we shouldn’t be go­ing af­ter wealth creators. They might seem an easy tar­get, but we will need their en­ergy and ideas more than ever in the tough few years ahead.

Rishi Su­nak, the Chan­cel­lor, is wrong to con­sider hikes in cor­po­ra­tion and cap­i­tal gains taxes

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