Martin Wolf has an article in the FT this morning on the corporate savings glut. What he explores is the trend that has developed over the last decade or so ( and which preceded the financial crisis) of the world's largest companies making substantial profits, being little taxed upon them, paying out somewhat less than the sum earned to their members in dividends, and also investing somewhat less than the total amount they have retained, all of which means that they have, in effect, been saving very large piles of cash for a long period of time.
The scale of the problem is huge, especially in the context of sectoral balances. If governments really want to reduce their deficits then they are, in effect, going to save. The trouble is, that in pure cash terms, for every saver there must be a borrower: that's a simple requirement of double entry bookkeeping. If, however, the business sector is also insisting on saving whilst the government wishes to do so and the only people who can borrow more to permit the change in government behaviour are then either the public, where borrowing rates are already high and if increased would exceed the level seen in 2008, or the overseas sector, who currently insist on saving the UK in very large amount as well.
Since I cannot see the overseas sector changing its behaviour in a big way at present, because the UK remains a safe haven for overseas savings, and because I also want to see the scale of household debt reduced, because I think it is at dangerous levels for the well-being of the economy as a whole as well as particular borrowers, then if the government is going to in any way reduce the scale of its borrowing it has to find ways to change large corporate behaviour so that these companies stop saving.
There are two ways in which they could do this. First, these companies could distribute a lot more of their profits to their members. I think there are strong economic arguments for them being expected to do so: it is only perverse tax incentives that have created low tax rates in companies coupled with low capital gains tax rates on the holding of shares that have encouraged this savings glut. The overall tax rate of those saving has been reduced by tacit agreement that the companies should retain their profits with the underlying increase in net asset value being reflected in increased share prices which are then taxed at lower rates as capital gains than would be the case if dividends were paid. This is the first problem to be tackled.
The second is the fact that businesses are simply not investing anything like enough. When business investment is of enormous significance to growth and the overall rate of investment by business in the UK has fallen from about 14% of GDP in 1998 ( which rate was, it must be said, exceptional) to less than 10% now this is macro-economically important. The simple fact is that we invest too little and save too much: no wonder we are in the economic doldrums.
Tax is a mechanism to change this, although I have to say that, as is quite common when it comes to tax, Martin Wolf gets much of his prescription wrong. The answers are, in truth, fourfold.
First, the standard rate of corporation tax has to be increased significantly in the case of larger companies. I am quite happy to consider rates of 30%, or even more.
Second, when dividends are paid reduced rates of tax should be applied to the part of profit used to settle these payments. The obvious rate to apply is the basic rate of income tax at the time of payment, or 20% at present. This then gives the business an incentive to pay and this tax charge then settles the basic rate tax liability arising on the shareholder.
Third, capital gains tax rates on shares need to increase: there is no reason at present to use the tax system to encourage corporate saving when we need the opposite behaviour in the economy. Low capital gains tax rates encourage that saving and so they should be changed.
Fourth, we need to encourage more corporate investment. If higher capital allowance rates were given (especially in non-financial companies) on investment then, in combination with the higher rate of corporation tax on non-distributed profits, there would be a significant cash flow advantage for companies that invest.
Put these factors together, in combination, and you have a policy that firstly might raise more revenue, secondly encourages appropriate behaviour and thirdly delivers the investment we need whilst fourthly reducing corporate saving which, fifthly, is a precondition of the government reducing its deficit. That is joined up thinking. But I don't expect to see it in the Spending Review.
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I’m really confused by this for every saver there must be a borrower. If I have £10 in my wallet, or bank account, and I decide to save it till the January sales, or I decide to spend it today, how does this affect someone’s borrowing?
If you have £10 in your wallet as a note then the Bank of England owes it to you
If you have £10 in the bank then the bank owes it to you
Really not very hard at all
Unless you don’t want to get it
And please do remember: you do not own the money in your bank account. You have lent it to the bank and they have borrowed it from you. They do not hold your property for you
Every financial asset has a corresponding liability somewhere, as Richard succinctly wrote in his response. For you to spend less than your income someone must spend more than their income.
As long as the £10 note is in your wallet it is not being spent. Therefore revenue in the form of income tax ( money spent is someone elses income) or vat is not returned to hmrc.The £10 note is therefore part of the goverments budget deficit. You would presumably refer to this as government borrowing. You are the saver the government is the borrower, simple really!
Richard’s right. All ££ are asset/liability pairs. The issuer accepts the liability or debt the holder acquires the asset. No debts means no assets. The govt has to be in debt otherwise we’d have a barter economy or (even worse ?) we’d have to use the euro.
The world’s National Debts sum to over $60 trillion. Who do we owe it to? Mars?
All money is created by crediting and debiting accounts. Money functions as a unit of account, medium of exchange, store of value, and record of debt. Every debt has a corresponding credit denominated the unit of account of that jurisdiction, so that all debt is someone’s liability and someone else’s asset, which nets to zero.
Since money is not only someone’s debt (a payable) but also someone else’s credit (a receivable), it is just as true to say that the world owns over 60 trillion in financial assets expressed in USD, as it is to say that the world owes 60 million in financial liabilities.
If there were no credit-debt relationships, that is, if all financial liabilities were extinguished, then there would be no money, and the exchange of goods and services would be reduced to barter.
“Fourth, we need to encourage more corporate investment. If higher capital allowance rates were given (especially in non-financial companies) on investment then, in combination with the higher rate of corporation tax on non-distributed profits, there would be a significant cash flow advantage for companies that invest.”
However in the comments on this blog you agreed with the broad premise of Kevin Farnsworth’s work on corporate welfare, a large proportion of which he identified as capital allowances for investment, and you agreed such allowances were a ‘tax subsidy’ to large corporations.
http://www.taxresearch.org.uk/Blog/2015/07/10/the-budget-imposed-a-10-pay-cut-on-those-earning-12000-a-year/comment-page-1/#comment-727671
So by your own words, you now propose to increase corporate tax subsidies?
If subsidies are given for the right reason with the right likely result I have no problem
As I would have no problem withdrawing them if they did not work
That’s what fiscal policy is all about
Please keep up
Would it be reasonable to surmise that the approach taken here is one of being consistent in applying value for both money and society criteria to public money for both spending and tax subsidies/reliefs rather than applying it only to one or the other?
Perhaps someone could explain, with substantive supporting evidence of course, why anyone might, for example, consider it an efficient and effective approach to apply such criteria only to public sector spending and support for British SME’s when planning cuts in expenditure but not apply the same criteria and approach to tax subsidies/reliefs and committing vast sums of public money to overseas competitors?
Of course, I do realise such a question rests on the huge assumption that someone actually understands the point at issue. Having to Janet and John it multiple times with still no evidence of either understanding or wanting to understand the point does indicate there may well not be any light bulb screwed in to light up.
I think if it stops raining this afternoon I’ll pop round to the farm up the road to tutor the farmers pigs in how to solve quadratic equations. I would probably have more success.
Well we have capital allowances now (at 100% rate) and you say companies aren’t investing enough. So do you propose a rate above 100%?
For smalle businesses
But not all businesses
So if I’ve followed recent threads properly, entrepreneurs don’t need the incentives of tax breaks to become entrepreneurs but they do need tax breaks to invest in the businesses they don’t need tax breaks to set up and run?
I suspect you have never been near a business
If you had you would know that there is market failure when iut comes to access to capital
That is what I am suggesting be corrected
Your attempts to patronise and insult fall as wide of the mark as your understanding of tax. I have been advising on tax to OMBs and family run businesses for over two decades, and these the two most recent decades of my career rather than you, who have done no real business tax advising for the last decade.
You clearly have no idea of the practical working of entrepreneurs’ relief (you even write it in the singular which no practitioner of it would do).
Most (of the very many) entrepreneurs who I have advised are not retiring, they are moving on to new enterprises. Many are savvy enough to know they have taken an idea as far as their skills can and now a different skill set is needed. Many, though, are staying on in the business to manage and guide it and some are merely taking on new investment into their business so it grows even faster, all benefitting from entrepreneurs’ relief. And you’re right it isn’t money that motivates them but they sure do enjoy the things that money can buy them.
You clearly know nothing of such people and yet they make up the vast majority of entrepreneurs.
The reason leaving them as much of their gains as possible is such a great idea is simple. Who would you trust to take money and turn it into success? Someone who has already proved they can do it or some career civil servant or worse still some dogmatic economic fantasist with nothing but unproven ideas?
I’ve often wondered why all these entrepreneurs you claim to know so well who share your views aren’t more vocal in support of you. Why we never hear who they are.
Maybe they need to be real, rather than figments, for that?
I note your comments
And note you do not address the issues
Tell me why you think 3,000 people need £600,000 of tax relief each, for a start, when 4 million families in this country are about to lose about 10% of their income?
And tell me why taxing these ‘entrepreneurs’ at 28% would stop them reinvesting?
Oh, and why also should they get a subsidised cost of capital when many new start ups don’t, meaning the market is skewed in their favour by state subsidies?
Please enlighten if you really know so much.
It is a question of reward, incentives, and signalling.
Entrepreneur’s should get to keep more of their money because they have created growth in the economy. £600k of ER benefit translates to an enterprise value of well over £3m from one person’s input. £2.7bn represents what, £15bn of business value. That value represents more jobs, more sales, and of course more VAT, NI, PAYE and CT – and will have had knock-on effects through the value chain, too.
Entrepreneurs are directly influenced by the tax rates. I’ve had people explicitly tell me that something’s not worth the risk because so much of the potential profit will go in tax. When I show them that the tax will be lower than they expect (because of ER, or an SDLT relief they didn’t know about, or the possibility of holder relief, or whatever) then the deal becomes viable.
You have to remember that a new venture is an unbalanced bet. To take a simple caricature: if you have a 50% chance of gaining £100, and a 50% chance of losing your investment of £100, then you really don’t want to take that deal: tax on the gain means the potential loss exceed the potential gain (as relief for losses is so restricted).
If you’re talking about CGT at 28%, you need expected income of £150-odd to be breaking even; if it’s at 10%, it’s worthwhile with expected income of £110. Of course people routinely ignore this sort of thing as they’re confident that they’ll be hugely successful, but many people (the more successful ones) do pay attention.
And ER signals to entrepreneurs that they are valued. What would the PR impact on the UK’s SME community be if Osborne were to withdraw ER? It would be a massive slap in the face, and a clear signal that no-one cares about them. Conversely, maintaining it signals that they are important and to be encouraged.
Oh dear, poor little entrepreneurs need to know they’re valued
You’ve written some utter rubbish here before now Andrew but this is pure straightforward crap
Ask Warren Buffet: as he says, if there is money to be made (and there is here, 72% would be left if ER went) then no rational person will stop because of tax
So you’re just making a callous plea for tax subsidies for the already well off who are past their use by date here
And if you want to talk signalling – tell me what cutting the income of 10% of the population by 10% signals?
I think sometimes it is very difficult for us ordinary folks to get our heads around who owes who what. I can understand that the bank owes an individual if he/ she holds bank note or has a deposit with the bank, but given that it is fiat money what is actually owed and how does it manifest itself?
If business investment needs to increase, and 14% of gdp is exceptional while sub-10% is too low, what sort of figure should we be looking for?
I’m not sure where to find comparative data for eg other members of the G20 and EU.
The FT had it
10% would be good now
Richard,
I have just received this address from my son. Although not directly relevant to the topic ‘…corporate savings glut’, the article contains a powerful & original approach to the current (30+ years of it) obsession with balanced budgets.
https://medium.com/@girlziplocked/why-amazon-isn-t-a-fucking-idiot-and-runs-a-deficit-f9d5734b68ec
An interesting piece.
I enjoyed reading it but will have to reserve judgement until I have solid evidence that this is the way Amazon operates.
Well how about a little bit of inflation to push things along? If we had 5% then what would the corporations do then if their stockpile of cash was losing half its value every 14 years?
Another approach to the question of savings (more consistent with MMT which at one time you claimed to support but perhaps no longer?) is to not describe them as a ‘huge problem’ but to use these savings on behalf of society by “borrowing” them at zero interest – unless, that is, we want to hand out freebies to corporate interests. What’s the problem? Inflation? That’s less likely if government uses sensible policies to keep the economy functioning so that there is always something to buy if and when the owners of these cashpiles start spending again.
On the question of tax, we should of course do everything possible to make sure the ultra wealthy are paying their fair share -for social reasons. Economically it doesn’t matter that much in the short term if the wealthy aren’t spending but it may in the longer term if their ‘semi-legally’ acquired wealth is put to use in socially irresponsible ways.
trend over the last 10 years “of the world’s largest companies making substantial profits”
A well known source shows that comparing the top 10 companies of 2005 by market capitalisation with the top 10 today reveals only 3 are the same ( Exxon, Microsoft and Johnson&Johnson for what it’s worth ). It’s a bit like visiting a house of ill repute 10 years on – you’ll still find some old favourites working, but not many.
So?
There are more than 10 companies in the world
As yet
The overall tax rate of those saving has been reduced by tacit agreement that the companies should retain their profits with the underlying increase in net asset value being reflected in increased share prices which are then taxed at lower rates as capital gains than would be the case if dividends were paid
re above, surely the transaction in securities anti-avoidance regulations stop this from happening?
Oh come on
This is how the entire market works
Raise capital allowances and corporation tax rates to discourage hoarding.