Tax is part of the cost of doing business, not an optional extra

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Politicians of various parties seem to be lining up to support a proposal from some in the hospitality sector to reduce the rate of VAT to 10%. There’s no doubt that the sector is currently facing a number of challenges, and it’s easy to see why governments and politicians may wish to aid the sector in order to maintain levels of employment. Tax cuts are probably the easiest way for governments to provide more support, since they can do little about the other costs being faced by those businesses. There is a problem, though, with the basic premise of the campaign, based around the slogan “VAT’s the problem”. The suggestion that ‘tax’ is causing the problem is fundamentally misleading, not to say dishonest: it owes more to neoliberal ideology than practical economics.

It may well be true that if businesses in a particular sector didn’t have to pay so much tax their profits would improve. But it would also be true that their profits would improve if they didn’t have to pay for raw materials, staff wages, or the costs of their premises. It’s not one element of their costs which causes the problem, it is the fact that they are unable to sell enough of their ‘product’ at a sufficiently high price to cover all their operating costs and make a profit. In terms of market economics, any business in such a position is technically non-viable. The most basic law of economics, the one that almost everyone knows, is the law of supply and demand, and that law tells us that if competition is so intense that prices cannot be raised to a viable level, then there is an oversupply in the market. And the natural economic solution to that is to reduce the supply – capitalism requires some companies to fail in order that price levels can rise. It’s another example of supporters of capitalism failing to understand how capitalism is supposed to work.

There may well be social and economic reasons why politicians may not consider that a desirable option, and there’s nothing inherently ‘wrong’ with taking a decision to find a way of delivering subsidies. We should not pretend, though, that a tax cut in such circumstances is somehow not a subsidy. Reducing government revenue in order to cut the costs of private businesses is always going to be a subsidy, however it’s presented. VAT, in particular, is supposed to be added to the bill after the business has set the price based on its costs and profit margin: theoretically, it isn’t paid by the business at all, but by the customer. Reducing it, whilst keeping the final price constant, simply allows the businesses to underprice their product by treating the cash they are no longer handing over to HMRC as part of the revenue generated from their business activity. 

The biggest danger of all is that politicians caught up in the demand for a VAT cut end up reinforcing the neoliberal narrative that tax is in some way an ‘extra’ cost rather than part of the financial environment in which businesses have to operate.

Do businesses actually pay any tax at all?

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It looks like a silly question. Look at the accounts of any business, and you’ll certainly see tax payments being recorded. And money actually passes from the business’s accounts into the government’s accounts. But who is really paying those taxes? From a business perspective, tax is just another operating cost and, at its simplest, profit is simply revenue earned by selling goods and services less the cost of production of those goods and services. It follows that (again, at its simplest) price is simply cost of production plus profit, and the financial success of a business depends on the price being sufficiently high to generate an acceptable level of profit. If an extra tax were being paid by the owners/ shareholders of the business, then profits would fall; if profits don’t fall, then it’s because the extra tax is being paid by the customers of the business, through rising prices.

It isn’t always as immediate or obvious as this story about Halfords might suggest. It’s usually more subtle and gradual, but when any business considers its pricing, it inevitably takes account of any increases in its costs. It obviously also considers what its competitors are doing and how much of an increase it thinks it can introduce at a given point in time without losing customers and revenue, but ultimately the dominance of return on capital asserts itself, and increased taxes invariably work through into increased prices. A company threatening an immediate price increase in response to a tax increase looks to be more about politics than accounting, but that’s about presentation.

None of that is to argue that businesses shouldn’t pay taxes. They depend on the infrastructure and services provided by public expenditure, and it is entirely appropriate that those costs should be reflected in the costs of doing business, and thus in the prices of goods and services. We just shouldn’t delude ourselves into believing that ‘taxes on business’ are somehow a free source of money which don’t impact us as individuals. The Chancellor’s mantra that she isn’t increasing taxes on working people is ‘true’ in the sense that they’re not directly paying those taxes – they’re simply facing price increases. Theoretically it’s entirely different; in practice the impact ends up being much the same in aggregate. One of the key differences, though, is that a direct tax on income is related to ability to pay, whilst an increase in the price of everyday goods is not: those on lower incomes are hit hardest.

Sharing the benefits

Tweet When I posted on fracking shortly before Christmas, one commenter said that he was against it because the benefit would go elsewhere rather than to Wales.  It's not dissimilar to the argument that I've heard used by some nationalists as their excuse to support renewable energy and then oppose every individual proposal.  It's a way of avoiding or postponing taking a stance on an issue, effectively.

In itself, though, the point is a valid one.  The natural resources of Wales are indeed being exploited in ways from which we in Wales gain little.  Wales is, however, far from being unique in that sense, and it's not a particularly good argument for opposing a proposal.  If we were to prevent, or stop, all economic activity from which the primary beneficiaries were not the people of Wales, then there wouldn't be a lot left.  And merely replacing multinational capital with Welsh capital - were there to be enough of it - wouldn't necessarily make that much difference either.  If our poor economic performance is a barrier to constitutional progress, opposing those proposals which might impact the economics doesn't seem like the best way of removing the barrier.

Scotland suffers a similar problem.  I was quite taken aback at some of the coments in this report from the BBC.  If there was one element of the Scottish economy which I'd expected to be largely Scottish-owned and controlled, the Whisky industry would be it.  But that turns out not to be the case; clearly, even added together, the myriad of small specialist distilleries are dwarfed by the big boys - all of which have their headquarters elsewhere, and the profit flows to them.

More interesting, however, was the suggestion for some sort of whisky tax, as a means of retaining part of the profit in Scotland.  And even more interesting was the attempt to be creative in order to get round the little problem that Scotland doesn't currently have the power to tax the whisky - so it could instead place a levy on the water being used to make the whisky.

The companies, of course, are up in arms at the suggestion that their right to make untrammelled profit from Scotland and syphon it elsewhere should be in any small way challenged.  Well - they would, wouldn't they?  But it looks perfectly possible that some sort of levy, set at the right level, would have little effect on jobs and sales and still provide a substantial source of additional income to the Scottish Exchequer.

The message there is that instead of a knee-jerk oppositional response, perhaps we too should be looking more creatively at how we can ensure benefit.  It's true, of course, that we don't even have the powers Scotland has presently, but that doesn't mean that there aren't ways around that if we set out to be creative instead of simply blaming someone else.

There are still some proposals (including fracking) which I'd oppose - but there are other reasons for that.  The fact that profits flow elsewhere is an argument for changing the way we manage companies and their profits, not for opposing the activities which generate those profits.

Selective devolution

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According to the BBC, a report due out shortly is likely to recommend that full control over business rates should be devolved to the National Assembly as a move to help businesses in Wales.  The implicit assumption behind that, of course, is that the result of devolution of control would be a reduction in the level of business rates, although that is not the only possible consequence.

As one who favours full devolution of all taxation to the Assembly, I’m hardly likely to oppose the proposal in principle.  And I’ve argued before that reducing taxes on the operation of businesses and taxing the money through Income Tax and CGT when it is taken out of the businesses would help to boost GDP in Wales.  (With the proviso, naturally, that there are no loopholes which allow the money to be transferred to an alternative tax regime before being withdrawn.)

There are, though, two aspects of this proposal which concern me.

The first is that calling for power over one form of taxation, and then for a reduction in that tax, without the power to increase taxation elsewhere to recover any lost revenue is tantamount to calling for the Assembly Government or local councils to cut spending elsewhere.  In effect, it means transferring available funding out of fields such as education in order to give Welsh businesses a competitive advantage over businesses elsewhere in the UK. 

That implication doesn’t seem to have been spelt out at all clearly.  But it’s the reason that I would always argue for devolution of a range of tax-varying powers rather than a single tax; taxation needs to be considered in the round.

The second concern is the suggestion that business rates should be retained by individual councils rather than paid into the centre and then dispersed on the basis of some formula.  The idea is not without merit; after all, the businesses concerned receive their services from the council in whose area they are situated – why should the revenue not go to that authority?

However, the current system allows for a degree of geographical redistribution.  It may not be the right way, or even the best way, of managing that redistribution, but merely removing it without putting some sort of replacement mechanism in place is a recipe for widening geographical disparities in Wales.

Illusory benefits

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One of the arguments for the deregulation of financial services during the Thatcher era (and largely endorsed by the failure of Blair and Brown to make any attempt to re-regulate) was that these industries were of enormous benefit to the UK economy.  It was an assertion which went largely unchallenged at the time, and there is a danger that it continues to go largely unchallenged as the sector gets back to ‘business as usual’.

But, apart from the obvious problem that financial services are a part of the explanation for the dysfunctional economy of London, and the imbalance between that economy and the economy of the rest of the UK, I think we should be challenging much more critically whether we really benefit to the extent claimed.

The obvious point to make is that although the sector generated huge private profits up to 2007, it did so by creating huge liabilities in the process.  The crisis then led to those liabilities being transferred from those who had incurred them to the state, and thus to all of us as citizens.  In terms of risk and reward, they took the rewards, whilst we ended up carrying the risk.  It’s not a sound basis for an economy.

Secondly, the sector actually created very few jobs, compared to the amounts of money involved – moving money at the press of a few buttons creates fewer jobs by value of turnover than moving widgets coming off the end of a production line.  It will never be the answer to unemployment, particularly in a Welsh context.

Then, there’s the question of tax payments.  It has been claimed that financial services accounts for around 8% of the UK economy, but contributes 25% of corporate taxation to the Treasury.  As far as it goes, that’s true.  But because the sector employs so few people relative to the turnovers involved, the total taxation from the sector – adding together both company taxes and personal taxes paid by employees – comes to more like 7% of the total, marginally less than its ‘fair share’, purely on GDP comparisons, and significantly less than one might expect looking at the overall profitability of the sector.

Yet despite all these obvious questions, the political establishment seems wedded to the belief that expanding financial services, and creating the circumstances for that expansion, is somehow essential to the success of the UK, or Welsh, economy. 

Part of the reason is to do with the way in which the bankers and financiers have influence at the top table.  In 2010, just over 50% of cash donations to the Conservative Party came from companies or individuals in the financial services sector, and both Cameron and Clegg come from that background themselves.  The Coalition’s support for the sector should come as no surprise.

Reasons for the Labour Party’s attachment to the sector are less clear.  Schmoozing with Rothschilds on yachts in the Med may be a factor, but I suspect that the interchange of staff between the sector and the Civil Service, particularly the Treasury, means that advisers to governments – of whatever colour – are incanting a supportive message.  Labour’s rhetoric against boardroom salaries may sound better, but it’s unlikely to go beyond rhetoric, and it is, in any event, fiddling at the fringes.

‘Retail’ financial services – high street banking, insurance etc. – have a vital role to play in our life, and we certainly need to attract more of those to Wales.  And it would be nice if that wasn’t just call centre jobs as well.  But we’re better off without the gamblers and speculators.  And we’d be better off if we could put some distance between them and our real economy as well.

More bad economic news

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Another set of comparative economic figures, another dose of bad news, and another chance for the yah-boo of politics.  “It’s your excessive cuts”, say the Tweedledees, but “It’s your mismanagement of the Welsh economy”, say the Tweedledums.  Economic truth is an elusive commodity, but economy with the truth seems to be available in abundance.

What we know for certain is that Welsh economic performance continues to lag behind the rest of the UK, that the gap is getting wider, and that Wales' poor economic performance is a long term trend – predating the establishment of the Assembly as well as the terms of office of either the current or the previous UK Government.  I think we can also safely conclude that none of the parties or politicians involved have actively set out with the deliberate intent of ensuring that Wales’ economy underperforms, although that is nevertheless the clearly visible outcome.

Whilst economic development is a devolved matter, all the most important levers remain in London, so it’s a classic opportunity for everyone to blame someone else.  Instead of playing the blame game, let’s just recognise that – or, even better, change it.  I’m pretty confident that arguing over who is most responsible, however many juicy headlines that might get for the politicians, is a wasteful diversion from the real task of doing something about it. 

We know that what we’re currently doing isn’t working.  Wales has, seemingly, frittered away two enormous rounds of European funding on a whole series of projects which, although intrinsically useful in themselves, have really not reached the parts that previous initiatives also failed to reach.  They have simply not delivered on establishing a long term increase in GVA per head, which was what they were supposed to be used for.  We have a plethora of strategies from the factory in the Bay, but, as the First Minister himself has admitted, implementation has not been as good or as consistent as it could have been.

I had hoped for some rapid delivery from the Economic Renewal Programme; the underlying principles as stated seemed to be an attempt to move in quite a different direction.  But most of the six months since its publication seem to have been taken up by appointing panels and experts and rearranging the internal departmental deckchairs; and as Dylan J-E has painfully highlighted on a number of occasions, in a number of respects, the change seems to be rather less sweeping than the hype suggested that it would be, and particularly unhelpful to a lot of indigenous SMEs from which the new jobs are most likely to come.

With hindsight, bringing the activities of the WDA into the Civil Service looks like one of the worst decisions taken by the Assembly Government; and I don’t think it’s too late, even now, to try and resurrect the culture of that body even if the targets given to it need to be refocused onto building a more sustainable and localised economy.

And giving Wales more power to vary rates of business taxation – a proposal put forward by Plaid in the past, and encouragingly receiving some Conservative support this week – would probably be one of the most significant ways in which government(s) could act positively.  What we need is action; what we really don’t need are the accusations and counter accusations which we’re getting.

Business Rates

Tweet Business Rates is a very hot topic locally. Towns like Narberth are suffering serious problems from the revaluation exercise, but the problem is much more general. The whole basis of the system is unfair, and has been since it was introduced in the 1980s.

At recent hustings meetings, I have set out Plaid's position, which is that local business taxes should be based on profitability rather than the notional commercial rent of the premises being used. Not everyone would be a winner from such a change, of course; but overall, it has been quite a popular suggestion, since it means that there is at least some relationship between the amount being paid and the ability to pay it.

Interestingly, in one hustings meeting, the Lib Dem candidate tried to suggest that I was simply making up the policy. I'm not sure why he thought that he might know more about Plaid's thinking than I do - but what I've been saying is completely in line with what Ieuan Wyn Jones said earlier this week.

Interestingly, at the second hustings meeting where the subject came up, the local Conservative candidate decided to agree with me. I'm not entirely convinced that that's his party's position, but I always welcome converts. And I really don't have the time to comb through the big thick hard-back Daily Mail Conservative election manifesto to check.

No advance knowledge...

Tweet It was only last Friday, at the Question Time session in Narberth, that one of the questioners asked the panel why the budget announcement of more rate relief for small businesses applied only to England, and why nothing similar had been announced for Wales. The questioner obviously had no advance knowledge of yesterday's announcement by the Welsh Government - and neither did any of the panellists.

My response was that Darling had no power on the matter in England, and had not discussed his budget with the Welsh Government in advance, so that there was no way at all that the Welsh Government was able to respond instantly. Yesterday's announcement that the Welsh Government will indeed use the extra cash to provide more rate relief for small businesses in Wales is welcome.

It won't help all businesses of course, but it will do a great deal for a lot of the smaller businesses in this part of the world.

Tourism Week

Tweet Last week was Tourism Week, and as part of that, I had an interesting day out with Pembrokeshire Tourism on Friday. During the day, we started with a presentation on their activities, and then they took myself, Henry Jones-Davies (Preseli-Pembrokeshire candidate), and Nerys Evans AM to see some examples of local visitor businesses of different scale and nature across the county. They've previously arranged similar sessions with other parties as well.

It's very encouraging to see the range of activity, and the willingness to invest and expand facilities which will both attract more visitors to the county and generate new jobs. Particularly encouraging was the way in which they're anticipating the move to 'low-carbon' tourism and trying to prepare for that.

On Friday night they organised an event for local politicians to answer questions from those involved in the promotion of the county and for businesses in the sector. This was the second time for the four candidates in the constituency to appear on a panel, although this time we were also joined by the MP for Preseli-Pembrokeshire and a Labour Regional AM. I think it's something we're going to be getting used to - I already have another five dates in the diary between now and the expected election date for similar panel discussions.

A good range of issues came up, but not unexpectedly one of the biggest for companies in the sector is the huge increase in business rates which some of them are facing.

It's a crazy system of business taxation in the first place. Raising taxes on the commercial rental level which businesses would have to pay for their premises bears no relation to either ability to pay, or to the use which the businesses make of local government services. And it is a direct disincentive to businesses to invest in improving their premises or facilities to improve the customer experience, because if they do so, thay're likely to get hit by a large tax hike.

The current system was introduced in something of a rush, of course, when the then Tory Government was forced to back down over the poll tax, but it is no credit to governments of either party that it has lasted as long as it has. And at a time of recession, the rates increases stemming from the revaluation exercise are a bit like rubbing salt in the wound.

Businesses need urgent action in the short term to mitigate the effect of the rise, but I think it's also time to take a step back and ask ourselves what a fair system of local taxation on businesses would look like. It's entirely fair that businesses do pay some sort of contribution towards the services provided by local government, because they do benefit from those services. It would be difficult though to ascertain how much use each business makes of the services.

For me that leaves only one fair and workable option - a tax based on ability to pay, reflecting the profitability of the businesses. It wouldn't be universally popular, of course. There would be winners and losers - some highly successful businesses would find that they would be paying even more under such a system. But that is surely prefereable to a system which is in danger of forcing otherwise viable enterprises out of business - a result from which there are no winners, only losers.

Cut business rates

Tweet I can't say that I was enormously surprised by the news yesterday about the scale of unpaid overtime being worked in Wales.

I've referred previously to the fact that an increasing number of companies expect employees to work 'whatever it takes' to 'do the job' – an attitude expressed clearly by the CBI Chairman, when he said that "people who are being paid for doing a job should make sure that job gets done". It sounds like a reasonable expectation, until we remember that many of the same employers have relentlessly cut numbers of employees, and piled the extra work on those who are left. The 'job' that people are being paid to do has, in many cases, simply grown – and the hours expected of the people has consequently grown as well.

Leaving aside that more general trend, in a time of recession it is easy to understand how businesses, especially those which find themselves operating on the margins of viability, are looking to reduce their costs, of which staff costs are a major element. It is also easy to see how employees, faced with an apparent choice between working longer hours or losing their jobs, are opting to try and save their jobs. But however easy it is to see how it is happening, it still leaves me feeling very uneasy that it is the employees - often the lowest paid employees - who are left to bear the brunt of the effects of the recession.

The free marketeers would no doubt argue that this is the inevitable result of market forces; either employees accept a worsening of their terms and conditions or else they lose their jobs. It seems that the Tories are very much returning to this sort of position - which did so much damage in the 1980's - with their obsession about balancing the public finances rather than intervening. I find myself much closer to the interventionist position of the current government, but I remain far from convinced that they are intervening in the right ways.

I am completely unconvinced about the marginal reduction in VAT as a solution to anything – I don't think it will make any significant difference to the viability of businesses, despite its huge cost. I think it's time to look at business taxes again. Not particularly Corporation Tax at this stage – after all, only companies making a profit pay that tax. But business rates is another kettle of fish entirely.

Like the Council Tax, this is a tax based on property values, and bears no relation to ability to pay. Businesses have to pay it whether they make a profit or not, and for many businesses, the sums involved could well be enough to make the difference between viability and insolvency. Long term, it needs radical reform, but a short term suspension of business rates, on either a general or a selective basis would probably do much more to allow businesses to continue trading through the recession than the cut in VAT. And surely it's far better to help businesses cut their costs in this way than to see them transferring the problems to their staff.