Taxes and entrepreneurs

Tweet One of the themes running through Tory economic policy is that, as the party’s leader in the Assembly put it a few weeks ago, “Low tax economies are more competitive, more attractive to job creators and are where small businesses are most likely to prosper.”

But where is the evidence for this being a causal relationship?  Note that their approach to taxation is to reduce personal taxes on income, a policy which disproportionately reduces the tax bill of those with higher incomes.  It also shifts the emphasis of taxation from progressive income based taxation to more regressive forms of taxation such as VAT.  But where is the evidence that lower income tax either attracts people to set up businesses, or makes those businesses more likely to succeed?

There are some things to note about these people called entrepreneurs: 

·         Some of them are extremely successful, and earn huge amounts of money as a result.  They’re a small minority of the total, but they’re a minority for whom the small differences in taxes being proposed are little more than small change.

·         There are other entrepreneurs who are running small to medium businesses very successfully.  I’m sure that they’d like to have more money in their pockets (who wouldn’t?), but a tax cut isn’t really going to make that much difference to their entrepreneurial activity.

·         And then there are a large number of them who barely make a living from their economic activity, and for whom the sort of salary at which higher rate tax cuts would start to make a significant difference is but a distant dream.

·         Entrepreneurs tend to be hugely (and often overly) confident.  Their business idea is invariably brilliant – to them at least – and a certain route to earn them a fortune. 

From none of these perspectives does it seem likely to me that a cut in higher rate taxation is going to make any significant difference to the level of entrepreneurism in Wales, which is the stated objective of the policy.  That’s not the same as saying, though, that it’s a policy from which no-one will benefit.

When we look at the higher paid people in Wales – those who would benefit from this sort of reduction in personal taxation – very many, perhaps most, of them are high paid public sector workers.  (Now, it might be argued that that is a problem in itself, but that’s an argument for another day.  Let’s just accept that things are as they are for a moment.) 

How likely is it that any of those people will wake up one morning and say “Oh look, I’m going to pay less income tax.  So I’ll throw in the day job and go and start a company”.  It doesn’t immediately strike me as an obvious reaction.  Far more likely is “Let’s have another holiday this year”.

Now of course, enabling people to have another holiday adds to GDP if they spend their money in the local travel agent (although it doesn’t have quite the same effect if they book online; and a lot of that GDP leaks out of the country to the foreign hoteliers and airlines), but if the result of those tax cuts is cuts to public services, it isn’t so much ‘extra’ GDP as ‘redirected’ GDP.  And, above all, it’s a switch in effective spending power from those at the bottom to those at the top.

So if it doesn’t seem likely to achieve the stated objective, and on the not wholly unreasonable assumption that the Tories know that as well as I do, what is the real aim?  It couldn’t possibly be to try and buy the voting loyalty of the better off could it?