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All net new jobs are created by small businesses. This is a mantra which is
regularly intoned by economists of all stripes, and it is backed up by shoals
of economic studies. Even politicians know it to be true. The problem then is,
how do you construct policies that will help small business to continue this
miracle of conjuring work from air? But even asking the question is wrong, and
that's where it all goes pear-shaped.
Keynes, the famous Keynes, talked about animal spirits, although not in this
context, and believe me, an illegal immigrant in Wolverhampton, Albuquerque
or Paris struggling to feed his wife and three children by selling Italian-produced
Chinese shoes in street markets does not want or need any help from the State,
he just wants it to get out of the way. Of course he doesn't pay taxes, have
a bank account, or create any other trace which could lead 'them' to find him.
He relies upon the support network of his fellows. But oh boy, does he create
jobs! And he consumes, and saves, and educates his children for all he is worth.
Unfortunately politicians, and even many economists, think they have to interfere
in the small business sector to make it work better, partly out of genuine concern
and partly - especially before elections - out of self-interest. So they exempt
new hires from payroll tax (the US, last week, but the worker must have been
unemployed for at least 60 days), or they offer loans to cash-strapped small
businesses (Spain, last week, but it's just a proposal which might be agreed
in principle by May, and will be operated through the Official Credit Institute),
or they offer tax deductions for capital expenditure (almost all countries).
All such schemes are highly bureaucratic and involve the small business concerned
in a clammy embrace with government which distracts it from its real job of
making profit and leads to a long tail of paperwork, inspections and accounting
costs. These schemes also carry a big load of moral hazard: if the government
will pay you for spending money on buying laboratory equipment, you will classify
everything under the sun in that way, so that an inspector has to crawl all
over your accounts to check that you are not cheating. And one can say, cruelly,
that if a small business needs to borrow money from the government then it is
best off bankrupt, so that the owner can dust herself off and start again.
What is really needed by small businesses in such times, apart from the best
ones, which government will never see, can be divined from the pleas of small
business support organizations. The UK's Federation of Small Businesses is begging
government not to apply its new social security tax hike to its members, accurately
calling it a 'tax on jobs'. The Irish Irish Small and Medium Enterprises Association
says that labour costs in a multinational represent 8% of total expenses, while
in a small business the figure is 48%.
As a generalization, it is the bloated state of the public sector which crucifies
small businesses, both directly through legalistic and bureaucratic interference,
which costs time and imposes pettifogging rules (your illegal immigrant laughs
at the idea of an 8-hour day and maternity leave), and indirectly through the
need to pay for the hordes of useless civil servants via income tax and social
security charges.
What then can be done, with the confines of a legitimate and caring society,
to help small business? Turn a blind eye to the immigrants, even encourage them,
and take the resulting social problems on the chin; they are probably the single
most helpful prop to the forward growth of the economy if they are allowed to
work in sufficient numbers. They will soon emerge into the light and become
upstanding tax-payers, if you give them a chance. Create highly tax-privileged
regimes for small business by taxing turnover at a low, set rate, and abandoning
the whole paraphernalia of VAT, sales taxes, income tax, social taxes, property
tax and the rest, until the firm in question reaches a critical size at which
it can afford to join the standard tax regime. This is done quite successfully
in many Eastern European countries; but the EU doesn't like it, being against
competition. The EU is also against free zones, which is just dotty. Exporting
is widely acknowledged to be just about the the most beneficial economic activity
there is: what is wrong with creating free zones near airports, ports and major
motorways where no-tax or low-tax regimes could be offered to small companies?
And finally, or perhaps first, de-bureaucratize the whole process of starting
and running a small business. Employees of small businesses should be allowed
to make their own tax returns, which will do more than anything to provide cash
flow to businesses; OK, some of them will be feckless or will cheat, but so
what? Eventually it will catch up with them.
Of course there are entrenched vested interests which will prevent any of this
from happening; that's why China grows at 8% and Europe managed 0.1% at the
end of 2009. And so it will continue; just thought you'd like to know why! But
humans and their animal spirits are the same everywhere; only give them a chance, and you'll be amazed at what they accomplish.
Penelope Wise
Penny Wise but not Pound Foolish! But remember: I am not offering investment advice. My comments are just for your general information; I do not recommend investments, and you should take professional advice before entering any investment contract.
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The mobile rang at six am as promised, so struggling past the thickets
of red roses and tasteless, glittering pink hearts cluttering up my hallway
(not!) I made it out of the door and through a light blizzard to join my friend
Julie in her Bentley. As we purred our way down the M4 to Heathrow, Julie explained
how she had come by the Scottish forest we were going to visit. A long story
involving pre-nups, gifts inter vivos, divorces and so on. Upshot, a tax-efficient
forest, which had been hers since the previous Wednesday, and she couldn't wait
to see it.
"In Invernesshire, in February?" I protested. Julie explained how
the gulf stream makes northern Scotland warmer than Devonshire, but I don't
think she believed it any more than I did. It took us all day to get to the hotel in Inverness,
so we had plenty of time to bone up on forestry with Julie's Blackberry. Lots
of countries have tax breaks for forests, it turns out: the UK, the US, Australia,
New Zealand, for instance.
It's the ultimate green tax shelter, you'd think? You buy land that has just
been planted with trees (or you can buy shares in a company that does so) and
thirty years later you or your descendants can sell it without paying capital
gains tax; and in some countries including the UK there are government grants
to pay for planting and upkeep.
The agent joined us for breakfast the next morning. Luckily for Julie, who
is Persian by origin and has problems with the accent of London cab-drivers,
never mind Robbie Burns sound-alikes, Hamish spoke perfect Oxford English. That's
true of much of northern Scotland, I found out later. Clambering into Hamish's
towering 4 x 4, and equipped by the hotel with vacuum flasks and sandwiches,
we set off through light snow towards the forest. The road was along a narrow
valley, in company with a railway track and a stream, the three of them constantly
intersecting, with road and railway now on one bank of the stream, now the other.
It was very picturesque, with the forested hills towering above us on either
side of the valley, more white than green. Occasionally the sun came out and
you could see the tops of the mountains, but most of the time they were lost
in swirling, snowy mists. I wished I was back in London, but Julie was on a
high.
"It's so beautiful," she kept saying.
After an hour or so, just at a railway station with an improbable name like Lochrothiepethray,
we turned off the highway and began the ascent to Julie's forest.
"If the snow was much worse we wouldn't be able to get there," said
Hamish helpfully. Eventually he stopped the car (tank) on a knoll and pointed
ahead to a vista of serried pines stretching in all directions, covering a series
of undulating hills. "You can see about half of it from here," he
said. "There is about 400 acres altogether."
The trees were in rows, the way the Forestry Commission usually does it, all
the same height, about fifteen feet, with occasional rides which break up the
monotonous effect to some extent. I could see from Julie's face that this blank
landscape didn't at all chime with her romantic imaginings of 'forest', some
amalgam of Hansel and Gretel, beech-woods in Surrey and horror movies set in
New England.
"Can we walk in it, a bit?" she asked rather uncertainly. So we did.
We walked up and down one of the rides in a couple of inches of snow, while
Hamish explained that the forest was about half-grown, and would be ready for
felling in fifteen years' time. "The trees will be thirty feet by then,"
he said encouragingly. 'Still all the same,' I could hear Julie thinking to
herself.
Blessedly soon, we were back in the tank, gliding down towards the station,
sucking for dear life on the coffee flasks, which the hotel had thoughtfully
fortified with local single malt.
"There's a problem," said Hamish suddenly, drawing to a halt in a lay-by at
the side of the road. "It's overheating. We're not going to make it back
to town. I'll have to call for help." There was no signal on the mobiles,
so in a tense silence we free-wheeled down the remaining couple of miles to
the station, just making it up a short incline to the station car park.
There was a signal again, now, so Hamish got to work on his phone.
"Maybe there's a train," ventured Julie. Hamish merely grunted, but
Julie and I went onto the platform and found a timetable. It was in very small
type, and hard to decipher, but we thought there should be a train in an hour's
time. At the bottom of the sheet, though, in large letters, was the emphatic announcement:
'UNLESS DIFFERENT'. That was the only time we laughed all day.
Hamish's friend, Malcolm, turned up before any train, in another cross-country
monster, and we were back at the hotel in time for lunch. Hamish and Malcolm
excused themselves: "We have to fix the jeep," they said.
The very next day, as it would happen, I saw a report in a tax newsletter
that an Australian academic had criticized forestry schemes for reducing the
land and water available to food growing, although this hardly seemed to apply to Julie's forest: 'Government assistance to forestry
and logging is equivalent to 42% of the industry’s unassisted value added;
tax-based subsidies through plantation managed investment schemes are estimated
to make up 77% of the assistance.'
So that's forests for you. Remote, boring, cold and not even green. Tax-efficient, of course. After that,
when Julie talked about her forest among friends, I could tell that she was
imagining her dream forest, not the daunting reality on that Scottish
mountainside.
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