Help me rich guy, you’re my only hope

Civitas, 7 March 2011

David Cameron made a speech yesterday claiming the only route left for economic growth is via entrepreneurs and ‘go getters’. It’s rather disconcerting to begin with that this is now officially ‘the only strategy’, but the plan will lead nowhere unless the Government is prepared to put its money where its mouth is and create the conditions these entrepreneurs need. For this, there is one key manoeuvre: reduce income tax.

So what would an average entrepreneur require to start their business? Presuming they already have the killer idea to make their success a reality, money is the next biggest hurdle. The Government’s main role is to ensure they have access to the funds without which everything remains a pipe-dream.

Maintaining pressure on the banks to loan funds to entrepreneurs is a sound enough idea but 88% of start-up funding is from personal savings or loans from friends and family; only 12% is from banks. The real way to get behind go-getters is to reduce personal taxation levels. Simple as that.

It is through the accumulation of personal wealth that entrepreneurs and their private investors will be able to launch their ideas. Many potential entrepreneurs are paying the 50% income taxation rate, ie those earning more than £150,000 and like it or not, the easiest way for more of them to go solo is to cut that rate substantially.

While not everyone in the highest tax rate has the initiative and chutzpah to set up their own businesses, the lower the rate the more will make a go of it. Other incentives such as substantial tax breakers for entrepreneurs could ensure minimal freeriding off Government goodwill. Obviously, the Treasury will be receiving less directly for a time, but the manoeuvre should be thought of as an investment.

Starting up a company takes time, but the successful ones will need to hire employees, injecting further income tax and also reducing unsettling unemployment levels, especially at the younger end. Indirectly this also reduces the pay-outs of JSA, a hidden benefit. In addition, the company will also begin to turn over a profit, leading to corporation tax payments, respectively. Hence a high-end reduction will actually lead to more in the long run.

Looking at the stats, this appears to be true. Those paying over the 50% margin have accounted for £41.4bn since the rate came into force, out of a total of £161bn, a rise of £10bn on the previous year and pre-50% tax rate. The money of these earners could perhaps be better used if made available for entrepreneurial activities and contributing to the ‘long tail’ of tax income.

Alternatively, incentives could be created by working within the current system. Dividend income tax currently stands at 7.5% less than income tax and savings interest tax when paid over the basic limit of £37,500. This means more money can be earned through shares and investments than through wages and simply depositing money in the bank.

If the margin between the rates was further widened, then the system would reward investors in entrepreneurs and would arguably be fairer, rewarding only those individuals who use their money in an economically beneficial manner.

Without the necessary tax breaks, Cameron’s rhetoric consists of empty words and the Government’s last-ditch attempt at growth will surely fail. Let’s hope it doesn’t come to that.