How do we decide who to subsidise?

Tweet

 

There is not a tax-paying business in Wales (or in the wider UK come to that) which would not instantly look more profitable if it didn’t have to pay tax (with the caveat that abolishing tax on that business or that class of business is the only change). However, it does not follow from that assertion that tax is the 'problem', holding business back by making them unprofitable. Yet that often looks like the conclusion that politicians draw, when they demand that taxes be reduced on one or other type of business. The latest example a few days ago was from a Plaid MP in relation to beauty salons; but there are plenty of other examples of MPs in other parties demanding similar concessions for other businesses. But the bottom line is that, in simple terms, a business which cannot sell enough of its goods and services at a high enough price to cover all its costs (including tax) and make a profit does not have a viable business model in a capitalist economy.

The bigger problem, though, is that cutting a tax here or there to make a business viable is a micro-economic approach to a macro-economic question. Even supposing that it were possible to isolate a single tax change, a tax cut in one area might increase the spending power of individuals or businesses in that area, but for those who believe that any changes must be ‘fully-funded’ based on the household analogy (a category which seems to include most politicians in most parties), there needs to be a corresponding tax increase in another area. Overall spending power in the economy then remains unchanged – it’s just that spending power has moved from one group to another.

That’s not necessarily a bad thing. Using taxation policy to encourage some types of economic activity and discourage others is an entirely valid, not to say sensible, approach. Governments trying to determine which businesses should succeed and which should fail at a company level isn’t exactly a policy with a good track record, but identifying that deploying resources into certain types of activity serves the economy and society better than deploying them into others is a worthy aim. And if the limiting factor on growth is, in fact, not a lack of money but a scarcity of real resources, encouraging particular uses of those resources is essential to any policy aimed at achieving higher value growth with better-paid jobs.

Without disparaging in any way the training, skill and professionalism of those working in any particular sector or business, and with no particularly strong view on whether beauty salons per se (or whatever particular type of business for which an MP advocates) do or do not justify special treatment, when I see a call for special treatment – by any MP, for any business – the question I ask myself is whether or not that is the type of economic growth that we want for the Welsh economy, or whether the same resources could more usefully be employed in other activities. Building a strong Welsh economy might just require a certain hard-headedness and, if we’re going to call for subsidies (and that's what selective tax cuts are), maybe we should start by identifying what activities we most want to see increasing, rather than simply responding to those which say they are struggling.