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In Praise of Higher Taxes?

Published: Thursday, 21 December 2017 11:41

Category: The Pamphleteers

Visit any medium size Italian City and you will find independent coffee shops and family run restaurants. The service will be good, the cost similar to the UK and the quality of the product excellent. I’ve never had a duff meal in Italy on any budget. Sunday lunch in Arezzo was a delight. Half the guests were extended family, so the food and wine were wonderful for a modest budget.

Compare that to the UK, where chains will dominate. They are generally understaffed, on zero hours contracts and the “living” wage. I accept that compared to the equivalent in my youth, the general UK standard is much higher than then. To illustrate my point, I waited in a queue for 13 minutes to buy a coffee last week.

Whenever I have the chance now in the UK I always choose a non-chain pub, restaurant, hotel or coffee shop.

I was thinking about this experience after discovering my old copies of EF Schumacher’s “Small is Beautiful” and a “Guide for the Perplexed”. The latter title would be a good description of what is needed for 2018. It was published 40 years ago this year, the same year in which Schumacher died.

On the other side of the Atlantic, Gary Cohn, Trump’s Chief Economic Advisor was explaining the Trump Tax Reforms to CEOs and asked them how many would increase investment and wages. It was clearly a surprise to him that the response was far from overwhelming.

On this blog I have a number of times suggested ways in which the consensus on the dominant economic model, sometimes unhelpfully lumped into the term “neoliberal” is becoming more fragile.

The assumption is that lowering corporate taxes will unleash entrepreneurialism, stimulate investment, grow the economy and lift all boats. Hold on! When corporate taxes were higher in the US and UK in the 1970s and before, investment growth, productivity growth, GDP growth and wage inequality were moving in a positive direction. I’ll leave the worshipping of growth for a separate post. Here I want to focus on the “low tax myth”.

Earlier this year I was in a meeting with a range of companies, SME’s on the topic of the skills shortages. All complained about the UK’s woeful skills record, yet the highest training budget in the room was less than 3% of turnover. Compare that to the German Mittelstand and you can see why the productivity gap, as described by Michael Mainelli in an earlier post is so entrenched. The attitude in the room was they wanted to have low taxes but at the same time someone else had to pay for skills development.

I want to argue here that the low tax regime of the UK has led to low R&D investment, low training and development and weak investment in productivity growth. In fact, the UK regime has created a rentier economy where the returns to capital exceed those to labour.

Returning to our coffee shop example, a few people in the centre earn £1m plus and most of the wealth is sucked out of the local economy, compared to Italy where it if locally recycled.

So, if we want a high investment, highly skilled productive economy, I think we could now argue for higher corporate taxes but greater incentives for productive investment in capital and skills training and greater investment in infrastructure, from transport, energy and broadband.

I confess to sharing the scepticism that government is not inevitably a good guardian of the public purse. However, I could cite Singapore and South Korea in infrastructure. I would prefer Swiss, Swedish and Italian railways to ours. I am not arguing for nationalisation. What I think is needed is massive devolution within England and a strengthening of local governance.

Look at the way California is going its own way on climate change despite the White House directions. I have argued on this blog before that Social Enterprise and Cooperative models have their place in a modern dynamic capitalist economy.

To deal with the challenge of intergenerational unfairness, tax allowances could be made larger for companies employing people under 25 to ensure early opportunities for school leavers and graduates to join the workplace. Similarly, with an ageing workforce, tax allowances could be made for adapting workplaces to better accommodate older workers with greater employment flexibility for those who wish to work on beyond normal retirement age (whatever that may be!).

I’m keen to incentivise real entrepreneurship, innovation and risk taking over low risk financial engineering.

Lord Adonis is making major complaints about the state of UK infrastructure as Trump has in the USA. A personal example illustrates this. I was in rural Sri Lanka a couple of months ago and downloaded the Time faster than I can in rural Shropshire. The UK isn’t in the top 50 in terms of Fibre infrastructure.

With both Brexit and Trump, much has been made of the search for identity and anger against “remote elites”. I think this is true of business as much as it is of governments.

As Bobby Kennedy remarked 50 years ago:

“The Gross National Product measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country. It measures everything, in short, except that which makes life worthwhile, and it can tell us everything about America - except whether we are proud to be Americans.”

We are approaching the season of goodwill. I hope that you will get the chance for good food, good company and good health. Merry Christmas.

So, have a great 2018. Remember that small is beautiful in perplexing times.

Chris Yapp December 2017

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