Coalition is confused about business

Allister Heath
WE love you – actually, no, we hate you. That, roughly speaking, seems to be the government’s attitude to business and business leaders. The signals are so mixed that they are utterly incomprehensible.

Take tax policy and incentives. The official position is – well, there isn’t really one. The coalition is likely to retain the top income tax rate indefinitely, even though Tory members privately concede that it isn’t raising any real money and is damaging growth and investment. But at the same time that the concerns of supply-side economists are dismissed when it comes to taxing income, they are enthusiastically embraced in other areas. It was confirmed yesterday that from April 2013, income from patents will be taxed at a corporation tax rate of just 10 per cent. Why? To encourage patents and to boost investment into the UK, which are very good things, but which the government clearly values more than work, which is taxed at 52 per cent (plus employers national insurance at 13.8 per cent), even though it is also a very good thing.

So the government doesn’t believe incentives matters in some cases – but it simultaneously believes that they do in other cases. If you are the first employee of a new business, you will pay £1m on your first £10m in capital gains. Great. But if you are the second employee, and are thus not technically an entrepreneur even if you were the one who organised and built the firm, you will pay 28 per cent on any capital gains – and obviously up to 52 per cent on your salary. Weird.

The government needs to make its mind up. It loves people who make £10m from setting up and selling businesses – but it appears to dislike them when they make £10m in pay for running a global multinational which employs hundreds of thousands. An entrepreneur who cashes in early (rather than building a new British Facebook) is celebrated but a boss who spends years building up a Plc is denounced as a fat cat who is probably taking his shareholders for a ride. There is too much moralising, too many fatuous distinctions being drawn and enshrined in law between broadly equivalent activities.

There was more schizophrenia yesterday. After a campaign to tell the City that the attacks had ended, and on the same day that the prime minister said that protecting it was now a key aim of European policy, the Treasury launched another round of banker-bashing, albeit of a rather inconsequential nature aimed primarily at telling the public that “it is cracking down”. It announced that the top non-board execs at banks would have their pay disclosed “to help tackle unacceptable bank bonuses by improving pay transparency at large banks” and to “help curb unsound compensation practices.” Of course, this is not the policy’s real aim; pay in banks is already falling sharply at the moment. For a start, the government keeps confusing bonuses and total compensation. Secondly, compensation is already extremely regulated in all FSA-registered firms – EU rules stipulate the mix of long-term deferred compensation, salary and bonus to align incentives and reduce risk. Does the Treasury not realise this? Even though it has previously boasted about having backed this? Finally, there is a widespread belief that transparency tends to boost salaries, not reduce them. If true, that would just be the most silly of a long series of contradictions at the heart of government policy.
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