But such proposals would require a sense of political imagination…
From a Guardian editorial on how appalling it is that no one will invest in Britain via the stock exchange.
But the stock exchange isn’t providing enough access to capital, and listed companies aren’t investing to boost growth. British pension funds, once major buyers of UK equities, have retreated. Many have shifted to gilts, or headed to the US to take advantage of the tech boom. In 1997, UK pension schemes allocated 53% of their assets to UK equities; today, that figure just is 6%.
Well, yes. 1997 is also when Gordon Brown abolished the pensions tax credit. It used to be that a pension fund would have the corporation tax already charged on the dividends it received paid back to it. Then it didn’t. This lowered the return to a pension fund of investing in a British company by the rate of corporation tax - variedly 31 to 20% over time. Pensions funds invested less in British companies.
That is, changes in the taxation of investment income change the amount invested to gain an income. This should be obvious - you always do get less of whatever you tax - but we’re now in a situation where folk not only aren’t grasping that simplicity they’re entirely all at sea about what did happen. It’s a mystery, innit? To the point that we’re getting some very silly indeed ideas about how to solve the problem:
Public investment must form part of the solution. Government-backed regional banks could lend money to upstart companies outside London.
Loans are not capital for a start. Further, government allocation of capital - or loans - never really has had a reputation for efficiency of allocation now, has it?
Rather better, we think, to acknowledge the cause of this decline in pensions investment in British stocks - that increase in taxation on their doing so.
Actually, we think it absolutely essential that people acknowledge and grasp this. For what are the current demands? More tax on the income from having invested - higher CGT, perhaps national insurance on investment income, all the way out to simple confiscation of the results of having invested with a wealth tax. With the associated claims that the rich won’t leave, no one will invest less, we’ll simply gain the river of revenue without any change in underlying behaviour.
Oh Yes? Seen what happened last time, Matey?
If we could just call Mr. Santayana into evidence: “Those who cannot remember the past are condemned to repeat it”.
Taxing the returns to investment reduces investment. We have a simple proof of this over the past 30 years in this country. We also now think that reduction in investment is a problem that needs to be solved for it’s making us poorer. So the reason yet higher taxation of the returns to investing will not make the future poorer is?
Tim Worstall