Sunday, May 02, 2010

LibDem Tax Policy Could Kill Entrepreneurship

Here's an email from a young entrepreneur who is raising a real concern about LibDem tax policy...

Sorry for emailing out of the blue, but I thought you may be able to help me hi-light an issue with the Lib Dem's manifesto that has gone largely unreported, despite its potentially damaging consequences for the economy and in particular to those who dedicate themselves to starting and growing businesses (and creating jobs for others) such as ourselves.

I'm a young entrepreneur (26). I've so far set up two, soon to be three, companies that between them employ 7 full-time members of staff - hopefully more soon. We've undoubtedly suffered through the recession (one of the companies is involved with graduate recruitment, a particularly hard-hit sector), but we've managed to make it through.

The NI increase put forward by Labour wouldn't be great for any of the companies at this time, but there's a bigger issue that hasn't been getting very much attention - the Lib Dem's proposed Capital Gains Tax changes.

From the point of view of an entrepreneur these changes are a real kick in the teeth. They basically mean that, should any of their endeavours bear fruit in the form of the sale of a company, they would be taxed not at 10-18%, but at "income" rates of up to 50% (and with a reduced annual allowance too). That's hardly encouraging anyone start or grow a business; in fact quite the opposite.

It's even more worrying when you consider investors. I'm not sure about your own ventures, but two of my companies are backed by 'angel' investors. They have been prepared to take a large personal risk with not insubstantial sums in order to help these businesses get off the ground. Part of the reason they've been able to take these risks is that their investment gains are taxed at 0% (if EIS relief is granted) to 18% (standard rate). Under the Lib Dems, they would also be taxed at up to 50%. This would effectively make the investments of many such 'angel' investors, once risk is taken into account, uneconomic - they therefore just won't invest. This could cripple many startup companies at a time when we should surely be looking to expand the economy and create jobs by encouraging new businesses.

I invite any LibDems to respond to this.

UPDATE 11.00am : Here's another email I have just received.


I read your blogpost this morning on the LibDem Capital Gains Tax policy with great interest. I am an accountant by training, so this policy leapt out at me when I read the LibDem manifesto as being anti-enterprise and actually regressive and unworkable. So I raised the very issue with Vince Cable at a hustings on 22nd April and invited him to respond. His answer was that "the details would need to worked out" and that the LibDems would "consult widely". In other words, he admitted that his policy had not been thought through. Or costed.


DespairingLiberal said...

It looks like this is about individual CGT (as far as can be told from the manifesto), and it does depend on how your business is structured, but it is unlikely that most limited companies would pay it just like that, so the point raised by your correspondent is not likely to be an accurate one. That's if this is a genuine letter - I've noticed you seem to pull these very political and rather well-written (and very much in the style of CCHQ) missives out of the hat whenever needed.

On a more general note, how exactly do the Tories plan to reduce the deficit? They don't say in their manifesto. At least the LibDems have made an effort to say which taxes would go up and what would be cut.

Simon Turner said...

As a business owner with experience of both using angel investors and also investing in other companies myself, I completely agree and am astonished that business organisations and the tories haven't made more of an issue out of this.

Roger Thornhill said...

The LibDem policy could only have been written and supported by people with absolutely no real exposure to entrepreneurs and wealth creators.

It is part of the disingenuous "banker paying less tax than his cleaner" meme. They believe their own lies - how else to be so convincing? - and write policy that presumes the implied falshoods are in fact true.

Do we need any more proof that the LibDems should be kept as far away from the levers of power and, I am afraid ducks, the red boxes? This includes any form of coallition.

Ps this goes for local govt too.y flesh crawled listening to the LibDem leader of the Ealing Council group (currently Tory run) talking about control of schools in such an arrogant, patronising and authoritarian way. As we say, neither Liberal nor Democratic.

DespairingLiberal said...

Iain, have you got any comment today on the story on the front page of the Observer that Philippa Stroud, the prospective parliamentary candidate for Sutton and Cheam, has established a church that prays that homosexuals will be cured and their "demons" driven out?

Have you spoken to her (this seems likely, as she is one of the principal architects of Camerons manifesto) and if so, did she offer to pray for you?

What do you think of someone holding such views being so close to the heart of Tory policy?

golden_balls said...

another positive post from the spinmeister i gather your taking Mandys job as dark arts specialist after thursday.

The Tories keep insisting they want and are carrying out a positive campaign while friends of conservatives are doing exactly the opposite. Good cop bad cop style is working well.

LibCync said...

So why did Lawson/Thatcher think equalisation of income tax and capital gains was a good idea then?

Unknown said...

I amused by all the right wing comment on Libdem policy as if they really think the libdems have a chance of forming the next government.
Surely the Tories are confident by now of forming the largest party on Friday perhaps even with a small majority.(some of us remember Wilson in 64 after 13 years of Conservative government including a reckless overseas adventure.

I want a strong opposition and a rejection of the old socialist left which Blair covered up. Unless Clegg gets 150 seats or more, extremely unlikely given the current polls , I can't see any direction changing demands on a "one country" tory queen's speech.

David Cameron seems willing to accept the poison chalice, If he takes care he may succeed in avoiding Greek style street protests and strikes, if he doesn't then CLegg could well be PM in 2015.

The new mix of expenses free Tory and Libdem MPs with as few old school Labour proponents I pray will lead to a less adversarial commons. Why the Tories haven't promoted their excellent team with brilliant folk like Gove , Haig and co more I don't know. Are we doomed to X factor presidency in this country?

I am stuck with a faceless Labour MP who I've never seen once on the parlement channel and if there were even AV in place I would have had a chance of my vote actually counting

I shall be voting Libdem in the hope that other folk who want to see a one country future might be able to confine him and his cosyness to oblivion

Mark Datko

James Chard said...

A more balanced account of the issues around CGT is contained in this FT article:

The Tories under Thatcher/Lawson recognised the dangers of having income and capital gains tax regimes wildly out of step with one another.

In 1987 Lawson quite correctly said, "In principle there is little economic difference between income and capital gains, and many people effectively have the option of choosing, to a significant extent, which they receive. In so far as there is a difference, it is by no means clear why one should be taxed more heavily than the other."

As for your young entrepreneur, he probably would lose to a degree. But you have to be extremely careful having a relief which is widely misused in the way Lawson describes. Additionally, the existence of rollover relief very substantially limits the loss.

Finally, I don't believe the Tories have ruled this out and indeed their policy talks about simplification of CGT which they correctly state is a very costly tax to administer. They only say they will have a review, but I am willing to bet good money with you that something very much like this will be the outcome of that review.

Tim Leunig said...

That one is easy Iain.

Under Mrs Thatcher, CGT was 40%, as it was under Blair. Only in the last couple of years has it fallen to 18%. There has been no rise in entrepreneurship in the last couple of years, and so it is unlikely that there will be a fall when we go back to something close to the old system (most CGT would be taxed at 40% under LD plans).

Taxing income at 40% and capital gains at 18% also means that clever tax accountants manage to redefine income as capital gains, allowing people to avoid income tax. So the biggest revenue raiser from changing CGT is as a tax avoidance measure - this is why Nigel Lawson was also so keen to make sure that the two rates were the same.

There are lots of people in Britain on the dole. For those, the LDs do have an entrepreneurial offer - if you get a job, or become self employed, you get the first 10k tax free.

For me the question is why the Tories don't support this pro-entrepreneurship policy which would affect people across Britain?

Red Rag said...

I know it is a bit off topic but waht is you take on Phillipa Stroud?

javelin said...

I totally agree with this guy.

However I do believe the banking crisis has it's roots in over inflated house prices. I think that capital gains tax of 40% should be paid on second homes. This would mean the housing bubble that caused the banking crisis would be less likely to happen and the profits from housing will be used to pay from the damage they have caused.

Perhaps a tax concession on large structural improvements to houses (planning permission required).

House prices are not entrepeneurship they are simply making people pay more to live.

I think there is a natural justice to this that should be adopted asap.

David Miles said...

During the leaders' debate on Thursday, Nick Clegg was talking about capital gains and said "that's income to you and me".

If he doesn't know the difference between income and capital gains then it's not surprising his party has such a bad policy on CGT.

Anonymous said...

No opinion on the latest God-bothering and gay-bashing senior Tory, Iain?

Unknown said...

That's a very good point. As ever, the devil's in the details.

Hope CCHQ are paying attention to this landmine.

Paddy Briggs said...

And Ken Clarke as Business Secretary could kill any hope of a moral dimension in Britain's business sector. I like Ken - but his work as a director of BAT shows that he supports a corporation on the distant fringes of respectability. He'd bring this attitude to the job - I'd rather have Mandy!!

Chris and Laura said...

There illustrates the problem with left wing thinking on tax. They assume that changing tax provisions does not change behaviour - and they do their sums on that basis. So they just take the capital gains currently taxed at 0-18% and assume that if you put up the rate to 50% it won't affect the level of the gains to be taxed. They look at it from a 'moral' position. A company owner or an angel investor probably makes a good income anyway so it's only 'fair' for them to pay more tax on their capital gains - which as Clegg ignorantly said in one of the debates is "income to you and me". The flaw in the argument is that at 50% CGT the angel investor won't take the risk so there is no company. Therefore no capital gain to tax; no corporation tax from profits; no income tax or NI from employees. So it actually reduces overall tax revenues. Capitalism is not 'fair' and if you try to make it so then you destroy it and everyone is poorer. Lefties can't cope with this simple truth.

Chris and Laura said...

For those saying it was 40% until recently - not the whole story. If you were personally involved in the enterprise it was 10%. Brown equalised at 18% for everyone.
There may not have been that much entrepreneurial activity in the last couple of years but it hasn't been the best of times! As we come out of recession we need incentives to invest and create new business.

golden_balls said...

@ DespairingLiberal & Red Rag

I'm not sure he's got the party line from CHQ yet give him afew hours its sunday after all.

I suspect he won't comment at all or blow it off as nothing major.

Chrome Diplomat said...

Despairing Liberal is pretty much right-its largely about individual CGT.

Its also worth pointing out that, in addition to the £10 000 threshold, which the IFS recognizes will do more to encourage and bring people into work than the Tories NI proposals, there are also a number of other things they intended to do to encourage entrepreneurs.

firstly they would create regional Local Enterprise Funds which will work to link entrepreneurs and SME owners to private investors in the local area. Its hard to find private investment so having such a fund would help people to find suitable contacts.

Secondly the would introduce Regional Stock Exchanges where SMEs could float themselves, allowing more investment to help expansion etc.

Add to this the reforms of business rates so that they reflect land rather than property value so that your rates cost more based on local infrastructure than being in a nice building and there is clear a lot of help in the manifesto.

So please Iain, for the love of God, read the manifesto before posting random emails trying to scare everyone- I'm pretty sure your leader said that kind of thing isn't on.

Ken Tindell said...
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Ken Tindell said...
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Anonymous said...

Libdem supporters galore here! They hate Tories so much I wonder why they bother to visit this blog. They support loony policies like "regional immigration" ( just how do they propose to keep these immigrants in those regions?) and amnesty for those immigrants not legally here without papers. Blears campaign case has shown that the illegal immigrants are made of mostly foreign students who dropped out of colleges and new universities and visitors who have overstayed, and Libdems do not want cap and will let in more and more of these potential illegal immigrants who come as so called legitimate students and visitors, overstay and expect more rounds of amnesties. What a bunch of weirdos these Libdems are! Come to my borough which is ruled by Libdems and see their loony policies in action as they are ready to be ousted.

Charles said...

Despairing Liberal et al.

You complete mis the point in terms of individual CGT.

My father has been an active angel investor for more than 30 years. Originally he did this through a limited company, but now it is almost impossible to get cash out of a company in a tax efficient manner, so most new investments are being done on a personal basis.

It is the INVESTOR not the company that pays capital gains - and so if the after tax return goes down from 82% of the net profit to 50% of net profit that has a hige impact on the attractivenes of the investments,

Ken Tindell said...
This comment has been removed by the author.
Alan said...

Some people seem to think that CGT was at the same rate as Income Tax under the Tories.

This illustrates the problem with comparing headline rates.

I have paid a lot of CGT in my time, and have rarely paid the headline rate (until very recently)

There has always been tapering (or indexation before that) to discount the effective CGT rate to encourage longer term investment in business, as opposed to short term speculation.

So equalising the rates now, without reintroducing some form of tapering discount, would penalise longer term investment.

Why would I invest my money in something over ten years (with all the additional risks) rather than a succession of ten one-year punts (much less risky), if the tax I pay would be the same in both cases (assuming similar gains).

I wouldn't.

And many others wouldn't either.

Chrome Diplomat said...


I come to this blog because most of the time Iain offers something useful to the debate- sadly this has been less and less the case as we get closer to polling day.

Let me explain...very slowly using small words for you..the LibDem regional immigration policy.

In order to come to the UK as an economic migrant yo currently need a) a skill that is required and b) a job to go to.

The policy would bring in a third criteria- that the job you have to go to is in a particular area.

On the basis that people don't usually commute 7 hours to get to work each day its fairly obvious that, if a job is in a particular area then the immigrant will also live in the area.

This doesn't need 'border checks on the M4' because the job ties people down and, if they loose that job then they have 6 months (as in the existing system) to find a new job in the same area (note they cannot claim benefits at all during this time). If they fail their VISA has ended and they must return home.

On the Amnesty- it is a ONE OFF policy to deal with the balls-up the Tories and Labour made be relaxing border controls. If someone CAN PROVE they have been here 10 years (so came prior to 2000) then they will be able to earn their citizenship.

It is dealing with a current problem, not suggesting long term policy. Furthermore- as well as having PROOF they have been here for a decade they will also need to speak english, pay taxes, and do community service as punishment for coming here illegally.

Finally on the ridiculous Tory cap plan. If the cap was set as 20 000 people a year and we reached it by for instance June. Does that mean if West Ham want to by an African Striker during the transfer window they can't?

What if we reach 19 998 and a family of four wants to come here- are the pro-family Tories going to say that only parents can come? Or one parent one kid?

I think Tories calling LibDem policies loony is like a pot calling a brand-new white fridge black.

Unsworth said...

@ Paddy Briggs

"I like Ken - but his work as a director of BAT shows that he supports a corporation on the distant fringes of respectability."

Oh dear! And how about the ethics of Shell?

Toby said...

DespairingLiberal, thank you for the accusation that this email is somehow from CCHQ. I can assure you it isn't, because I wrote it and have no such links!

Yes, I am talking about individual CGT, as that's the one that entrepreneurs and smaller angel investors care about. CGT policy is undoubtedly a difficult area, but posters above are right to note that these particular parties have historically always had a rate of tax lower than that for income, whether through a lower basic rate or some form of relief system. This is surely philosophically correct given the inherently risky nature of earnings derived through these activities compared to income.

Chrome Diplomat, thanks for hi-lighting the Local Enterprise Funds. The trouble is that they're not going to have many individuals on the investment side thanks to the CGT policy! And as for regional stock exchanges, the burden of a 'public' listing on small companies is huge (trust me, I've been there) - and you've (again) got the problem that investors would have to be promised unbelievable rates of return to counteract the CGT policy.

Yet again, this hi-lights a Lib Dem policy that is badly thought through - it's based on a fundamental misunderstanding of entrepreneurship and investment and the philosophies behind them.

Unknown said...

CGT is wildly misunderstood. Under the Thatcher/Lawson rules only the true gain, AFTER the inflation element of the gain had been deducted, was taxed and added to your income, and even then there were allowances and investment reliefs.

Darlings 18% flat scheme is a joke. It is 18% on the whole gain including inflation. If you hold an asset worth 100k, and ten years later it sells for 200k but there has been 100% inflation you pay 18k tax under the Darling scheme meaning that you are taxed on inflation. Darlings scheme progressively penalises long term investors and rewards short term speculators. The Thatcher Lawson Plan was very fair. It would be fair if top slicing was used.

Notwithstanding that, given that banks won't lend to businesses because they are too risky, you really must ask yourself if this the right time to put 50% tax rates on angel and owner/operator speculative investment returns. The State currently takes 17.5% out of most business turnover, about 30% of the profits, a further 20% on dividends on those profits, tax and NI from every employee and the cherry on top, business rates. And it takes no risk whatsoever.

The State is already too greedy when it comes to enterprise, this measure will just kill the golden goose off. There is no incentive to invest, a quick buck is the way to go now.

Sad really.

Gareth said...

It is insensible to compare the current and only recently changed taxation on crapital gains with what the Lib Dems propose.(Which at first glance look a lot like returning to what they were)

As others have explained there was taper relief and under the last Conservative Government they also looked at equalising rates. It simply makes sense - if capital gains tax is lower than income tax businesses will use it reduce their tax liability. The tax differential means that income tax itself has to be higher to compensate.

It *is* a sensible, long term view for income tax and CGT to be taxed equally. It would allow both to be at a lower rate too.

The natural end point of such a stance is something no major party is advocating though - a flat tax - no loopholes, no stealth taxes, no phoney war of National Insurance which is income tax by another name, include in that gains on the gain on homes and you would dampen down the housing market bubble.

It costs a lot of money for the Government to manage such a complex tax regime and it is also one of the reasons why inequality has increased under Labour - the advantages are all in the hands of higher earners who can afford accountants to plan their financial affairs efficiently. If the tax regime itself was efficient this advantage would evaporate and the cost to taxpayers in collecting taxes would be reduced.

A flat tax would enable voters to easily appreciate how much of our money the State pinches so could make a good judgement on whether the Government was value for money.

Unknown said...

For god's sake !

Loose = free, slack .

Lose = to not have any more , the opposite of win .

Anonymous said...

@Chrome Diplomat. Let us see what you are saying and ignoring your jibe which is infantile:
"This doesn't need 'border checks on the M4' because the job ties people down and, if they loose that job then they have 6 months (as in the existing system) to find a new job in the same area (note they cannot claim benefits at all during this time). If they fail their VISA has ended and they must return home"
Why should they return home, when they can drop out of sight and become illegal immigrants expecting another round of amnesty? How would you trace and catch them and deport them? I can give you cases of those who came on a work permit which tied their job to an employer and when the work permit period ran out and employers could not employ them , they disappeared. I know a number of them when they contacted me.

2. About the amnesty. You have not read what I posted. Typical of a libdem. I said that the number of illegal immigrants are swelling fast because of the drop outs from colleges and new universities-a conservative estimate of over 100,000 every other years as these so called students come to work. They do not bring enough funds. This happens as the foreign students start working 20 hours which they are entitled to and this means their studies are neglected, their attendance goes down , they cannot engage with their courses and they drop out. There is over 50% of drop out rates in this category. Also overstayed visitors, their numbers not as large, but significant. Hence your "On the Amnesty- it is a ONE OFF policy to deal with the balls-up the Tories and Labour made be relaxing border controls. If someone CAN PROVE they have been here 10 years (so came prior to 2000) then they will be able to earn their citizenship" makes no sense. You are as deluded as your leader Clegg. If they have nop papers,no way of proving when they arrived and after citizenship , they will bring their dependedants swelling the numbers more. Just look at the Spanish experience. Spain is ready to give a second round of amnesty for another million built up.
Clegg and libdems, a bunch of misfits.

Anonymous said...

@Chrome Diplomat: "f the cap was set as 20 000 people a year and we reached it by for instance June. Does that mean if West Ham want to by an African Striker during the transfer window they can't?

What if we reach 19 998 and a family of four wants to come here- are the pro-family Tories going to say that only parents can come? Or one parent on"

The answer for both is that they have to wait next year. Cleggy said about the striker which is pure drivel.

I actually prefer a capping at a much reduced level.

Nigel said...

Despairing Liberal, the LibDem CGT proposal has nothing to do with reducing the deficit.

Had you actually bothered to read their manifesto, you'd know that it's part of the dodgy funding (which also includes the laughable 5 billion a year from 'reducing tax avoidance and evasion') for their tax cut, not for reducing the deficit.

A CGT rate of 50%, especially without any form of taper relief, or indexation for inflation, would be catastrophic for investment.

Lola said...

Just why should anyone that takes all the risks to set up a business, employ people and create wealth, grown the business whilst often drawing less salary than their staff - despite carrying all the risk, often at the risk of total personal financial armageddon - and then sell it to get their reward for all this effort and risk, pay any tax at all entirely escapes me.

CGT is an evil tax that kills enterprise and investment destoys jobs and destroys wealth. As a method 'redistribution' all it does is redistribute unemployment.

And why do we still have the concept of tax 'allowances'? Implicit in this description is that everything belongs to the State and in its wonderful benevolence is deigns to allow you to keep some of your wealth. It is about time that we reversed this so that their is no such thing as a 'tax allowance'. In future it shoud be stated what is taxed, not waht is not taxed.

Tim Leunig said...

Iain - the IFS said that we had underestimated the revenue yield from the CGT change, not overestimated it, as your addendum suggests.

DespairingLiberal said...

Nigel - up to a point, I agree - they are trying to attack tax evasion. To be fair though, CG has been seen as a route around paying income tax. The problem with all these methods is that they are attempting to counter the smart-moves of the very rich but generally have the side effect of hitting the small businesspeople, who in many ways are the "working class" of the business world.

I'm not 100% in favour of this LibDem policy, but that doesn't get away from the fact that Iain and the other champion Tory bloggers are making little or no effort to explain what they think the main Tory tax increases will be. We are all supposed to accept a sort of la-la land belief that all will be well under the Tories - taxes will go down and so will the deficit. Dream on.

Unknown said...

Paddy Briggs - And Ken Clarke as Business Secretary could kill any hope of a moral dimension in Britain's business sector... I'd rather have Mandy!!

And what "moral dimension" does the twice disgraced Mandelbum bring to politics?

Unknown said...

Paddy Briggs - And Ken Clarke as Business Secretary could kill any hope of a moral dimension in Britain's business sector....I'd rather have Mandy!!

And what "moral dimension" does the twice sacked Mandelbum bring? Presumably you mean being "seriously relaxed" about businessmen (esp. Peter's Friends) being filthy rich is a moral dimension?

Alan said...


I agree - none of the parties are telling us the truth about how much will need to be cut to reduce the annual overspend.

As a result, with no manifesto details to go on, we have to judge on likely character.

The Tories undoubtedly have a good track record in cutting spending. Labour most definitely do not, being intrinsically tax-n-spend.

In my view, Clegg probably errs on the side of smaller government, but Cable is further Left than Darling, and cannot be controlled by Clegg. On the whole, just as likely to smack taxes & spending up than down.

Martin S said...

So the message is clear. If you want businesses to have a chance to succeed, best not vote Lib Dem.

The King of Wrong said...

"the LDs do have an entrepreneurial offer - if you get a job [...] you get the first 10k tax free."

Do you - or the LDs - actually understand the words you're using? There is nothing entrepreneurial about getting a job, entirely the opposite, in fact.

Unknown said...

Watched a recent film documentary, business leaders and young entrepreneurs embarks on a journey of discovery rather than a mission of invention or creation.
''The YES Movie'' by Louis Lautman


Really off the full width of Personal capital gains as a means of paying for a uniform £10k earnings lower threshold is really damaging and ill thought through.I voted Conservative- why the hell is this Liberal madness imposed upon me? Its not in the Conservative manifesto..its not policy.Why is this flagged immediately within hours of the "Deal" being made, like its cast in stone.