{"id":31257,"date":"2015-11-18T07:53:42","date_gmt":"2015-11-18T07:53:42","guid":{"rendered":"http:\/\/www.taxresearch.org.uk\/Blog\/?p=31257"},"modified":"2015-11-18T07:53:42","modified_gmt":"2015-11-18T07:53:42","slug":"how-to-tackle-the-corporate-savings-glut","status":"publish","type":"post","link":"https:\/\/www.taxresearch.org.uk\/Blog\/2015\/11\/18\/how-to-tackle-the-corporate-savings-glut\/","title":{"rendered":"How to tackle the corporate savings glut"},"content":{"rendered":"

Martin Wolf \u00a0has an article in the FT this morning<\/a> on the corporate savings glut. What he explores is the \u00a0trend that has developed over the last decade or so ( and which preceded the financial crisis) \u00a0of 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.<\/p>\n

The scale of the problem is huge, especially in the context of sectoral balances. \u00a0If 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: \u00a0 that's a simple \u00a0requirement of double entry bookkeeping. \u00a0If, 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 \u00a0permit 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.<\/p>\n

Since I cannot see the overseas sector changing its behaviour in a big way at present, because the UK remains a safe haven for \u00a0overseas 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.<\/p>\n

There are two ways in which they could do this. \u00a0First, these companies could distribute a lot more of their profits to their members. \u00a0I think there are strong economic arguments for them being expected to do so: \u00a0it 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 \u00a0this savings glut. \u00a0The overall tax rate of \u00a0those 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.<\/p>\n

The second is the fact that businesses are simply not investing anything like enough. \u00a0When business investment is of enormous significance to growth and the overall rate of investment by business in the UK has fallen from \u00a0about 14% of GDP \u00a0in 1998 ( which rate was, it must be said, \u00a0exceptional) to less than 10% now this is macro-economically important. \u00a0The simple fact is that we invest too little and save too much: \u00a0no wonder we are in the economic doldrums.<\/p>\n

Tax is a mechanism to change this, although I have to say that, as is \u00a0quite common when it comes to tax, Martin Wolf \u00a0gets much of his prescription wrong. The answers are, in truth, fourfold.<\/p>\n

First, the standard rate of corporation tax has to be increased \u00a0significantly in the case of larger companies. \u00a0I am quite happy to consider rates of 30%, or even more.<\/p>\n

Second, when dividends are paid reduced rates of tax should be applied to the part of profit used to settle these payments. \u00a0The obvious rate to apply is the basic rate of income tax at the time of payment, or 20% at present. This then \u00a0gives the business an incentive to pay and this tax charge then settles the basic \u00a0rate tax liability arising on the shareholder.<\/p>\n

Third, \u00a0capital gains tax rates on shares need to increase: \u00a0there is no reason at present to use the tax system to encourage corporate saving when we need the opposite behaviour in the economy. \u00a0Low capital gains tax rates encourage that saving and so they should be changed.<\/p>\n

Fourth, \u00a0we need to encourage more corporate investment. \u00a0If 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.<\/p>\n

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. \u00a0 But I don't expect to see it in the Spending Review.<\/p>\n","protected":false},"excerpt":{"rendered":"

Martin Wolf \u00a0has an article in the FT this morning on the corporate savings glut. What he explores is the \u00a0trend that has developed over
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