Willy Hutton is a one, isn’t he?
One of our constant - consistent - insistences is that a value of markets and capitalism is that they kill mistakes. Ooops, well, that didn’t work, into the dustbin of history with it. This is not, to be mild about it, how politics works. In that field of endeavour, a mistake is followed by loud insistences that it really should have worked and so let’s do more of it.
Which brings us to Willy Hutton:
Working on the Growth Trilogy – three reports on how Britain can best nurture our many startups – over the past 15 months,
We have to admit the one report we’d really like to see is the adminstrators’ one into the death of the Industrial Society but it seems that never is going to come out - or perhaps just there never will be one.
But as an indication of the level of thinking from Hutton here:
Consider this: two-fifths of Europe’s fastest-growing tech companies, with revenue ranging between $25m and $1bn, are British. From this pool of 770 companies – which ranges from satellites, semi-conductors and fintech to AI-driven drug discovery and green technologies – the great companies of tomorrow will emerge, with all that means for jobs, wealth, tax and national morale. If Britain can create a better ecosystem of financial, business and public support, that prize is within our grasp.
OK, more capital to go into high risk and high growth companies. What an idea.
Indifferent investor interest in an underperforming stock market given the flight of pension fund investment – a trillion pounds of UK shares sold since 2000 – has cut the viability of sourcing capital via an initial public offering (IPO).
OK, how might we turn that around?
It starts with pension funds, which have the scale, time horizons and expensive in-house expertise to assess and take on diversified risks. International evidence shows that the larger an economy’s pension funds, the better it performs economically.
They invest in domestic public equity, lowering businesses’ cost of capital. They create a lively IPO market and find a proportion of their investments (1% or less) to allocate to venture capital.
Could be, could be.
It must be buttressed by transformation across the ecosystem. Pension funds which choose not to play their part in this mobilisation could forgo tax privileges. Britain needs them to invest more in a vibrant stock market. Stamp duty needs to be recast to promote share buying.
Nor should the taxpayer pay for savers to save cash in their individual savings accounts (Isas); at a minimum, tax relief should be given on cash only if there is an equal investment in shares. The tax system must be reshaped so there are tax incentives for issuing equity – the yeast of today’s fast-moving economy – and tax relief on company debt is phased out.
Phasing out tax relief on debt is simply stupid. Ignorance. We can tax a flow of payments at either end. Tax the people paying it or tax the people receiving it. We can even mix and match - as we do with dividends, we tax the corporate profit then top that rate up for higher rate taxpayers. Taxing interest upon corporate debt - we do. We just tax it in the hands of the recipients. It’s a deductible expense to the company - the payer - and a taxable income to the recipient. Sure, sure, we could change that. Tax it at the company and it be tax free to the recipient. This has equity problems - higher rate taxpayers would do better from this - but sure, we could do it. We’d also not change much for the coupon to be paid on a tax free income will fall by the amount that tax free income is worth to the recipient. Just like the municipal bond market in the US where the local sewage works - to a State itself - pays a lower interest rate than Uncle Sam’s taxable Treasuries. It’s much of a muchness and other than that equity part about higher incomes there’s not much to it.
But look at what is really being suggested. Pensions funds could be that great source of capital. This would be hugely bolstered by pensions funds investing in equity in the stock market - that would produce higher stock prices, increase the price a seller gets and so lower the cost of capital. Great!
So, we’re going to reinstate the pensions tax credit then, are we? That change in taxation by Brown, G, which led to the pensions funds fleeing the stock market in the first place? Ah, no, we’re not under the Hutton Plan and this is what we mean about governance never reversing mistakes. Instead Willy is taking the Dickie Murphy route of piling ever MOAR TAX on those who aren’t doing as he wishes. Rather than reversing that mistake which pulled pensions funds out of the stock market in the first place.
For as that US municipals market does show less tax on an investment increases the investing done. Munis pay a lower interest rate than Treasuries even though the risk is (marginally) higher. Of course, this is also something that those arguing for an equality of income and capital gains tax are missing but there we are, that’s a future mistake.
Just to put forward an oddity that might work in this nation of animal lovers. You can train a dog to do something, you can train a dog by being forceful and insisting even. Cats have to be tempted - and we put forward the idea that investors are cats not dogs. You can get an entire horde of cats to stampede to the plate of sardines but you’ll never, ever, herd them there.
Tim Worstall