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How to get Economic Growth

17 Feb

The Need for Growth

The UK is beset by economic woes – debt, unemployment, inflation and lack of growth. With economic growth many of these problems would evaporate.  The government says it wants to stimulate growth but it has not thought through how to do it.  So here goes.

Who Pays Tax?

At the heart of my argument is the little understood fact that there are only two groups that pay tax.  The first is you and me, the consumer.  And the second group is overseas buyers of our products.  That’s it.

Let me explain.

As consumers we pay many taxes both directly and indirectly.  Income tax, VAT, Insurance taxes and a myriad of hidden taxes that were only vaguely aware of.  And there is nothing we can do about it. Businesses also pay taxes, but not really because they can recover the taxes directly as with VAT or they can increase their prices so that they can pay the taxes.

The only time taxes really hurt a business is when their prices become prohibitive and nobody buys their products.  If they go out of business then they stop paying taxes!

Of course, businesses work hard to reduce their taxes.  But they do it for cash flow reasons and because, rightly, they don’t like increasing their prices.  It makes them less competitive.

Basically businesses can recover their taxes.  Consumers can’t.

Only consumers pay tax.

In fact, taxing a business is just the government’s way of picking up some revenue along the production chain so that it is hidden in the consumer price and is  not a direct tax on the consumer.

The only other group to pay UX taxes are those who import our goods.  The tax they pay is hidden completely in the higher prices charged by our exporters.  This issue is alleviated in the case of VAT because exports are zero rated.

But for all other business taxes, the taxes are disguised as higher prices. There is nothing wrong with that.  But within this fact is a solution to the problems of economic growth.

From Where does Growth come?

Growth comes from employment.  It comes from you and me doing useful things to increase the wealth of the nation.  It certainly does not come from 8.4% of the population doing nothing and getting so called “Benefits”.  The unemployed.

The scandal is that there are so few vacancies for the unemployed.  The job of government should be to create an environment that nurtures new employment opportunities.  And they are not good at that job.

On a grand scale the Government tries to encourage foreign investment.  This effort does create some employment but it feels very precarious to me.  What happened to all the electronic companies that once invested in Scotland’s Silicon Glen?  Where have the majority of car manufacturers gone?

Entrepreneurs

The best growth must be home grown growth.  The top priority must be to go all out to encourage an entrepreneurial spirit.  That would create self employment and healthy new job opportunities.  Barriers to new business set up should be attacked ruthlessly.

The Government tries to help small businesses by trying to force big banks to lend more to them.  But the banks are commercial organisations and are nervous of the risk.  The Government is therefore giving inducements and threats to big business and not really helping small ones!

What the Government could do

Suppose the Government slashed the tax burden on startup business.  Suppose that there was no Corporation Tax for startups.  Suppose that some income could be drawn from the business tax free or at a very low tax rate.  Suppose that the Employer’s National Insurance contribution was lower.

What would be the result?

The young business would have lower prices for a start.  It would be more competitive and less likely to fail.  It would need less start up finance.  It would be more likely to employ staff.

People do what they get rewarded for.  A huge number of budding entrepreneurs would have a go.

In itself that would create employment.  And some small businesses would grow to be big ones creating products, services and employment in real areas of business where there is a gap in the market.

But wouldn’t this approach give an unfair advantage to the start up against a bigger rival?  Of course.   The important definition would be to say when it is no longer a startup and has to go to the normal tax rates.  I guess that as long as a business is increasing its workforce year by year by some defined rate it should still qualify for the startup benefits.

Germany’s Mittelstand

In Germany, they have a culture of  Mittelstand companies.  They are relatiely small and medium sized organisations, often export-oriented. They are veru innovative.  They make high value manufactured products. They dominate some worldwide niche markets, mostly B2B.  They are typically privately owned.

The Mittelstand companies work closely with universities and researchers and cluster themselves around big manufacturers.  Theyare big users of Germany’s apprentice system which supply a steady flow of qualified workers through 34o odd recognized trades.

Apprentices

None of this UK nonsense that 50% of pupils should go to university, (which I think is just a sneaky way of keeping the young off the unemployment statistics).  In Germany the young are trained to do something useful.

It can’t be that hard.

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