Cut taxes to encourage investment and entrepreneurship

April 29, 2014 10:25 AM

The UK does not feature in the top 10 countries for producing 'super entrepreneurs', according to a report by the Centre for Policy Studies.

The report places Britain in 11th place and suggests that while our elite education and legal systems contribute to our standing, taxes play an important role in discouraging entrepreneurship:

"potential entrepreneurs must choose between a high risk, high effort option with little likelihood of success, and a generally well-paid and secure job. When taxes eat away a sizable part of the return from the rare cases of great success, the cost-benefit calculus inherent in this dilemma is altered."

But we can do something about it. Authors Nima and Timo Sanandaji highlight Capital Gains Tax and the 45p top rate of Income Tax as ones which the Government should cut if we want to increase the number of super entrepreneurs (defined as self-made individuals with companies, worth over $1 billion) and reap all the rewards that arise when they create new, strong, successful companies:

"governments can encourage entrepreneurialism by lowering taxes (particularly capital gains taxes which have a particularly high impact on entrepreneurialism while raising relatively insignificant revenues)."

Our Single Income Tax recommends abolishing Capital Gains Tax and replacing the current mess of Income Tax rates with a single, simple rate of 30 per cent. As well as the obvious simplification benefits our proposals offer, such a system would significantly sharpen incentives to work, including for those who aspire to buid the big new businesses that will create large numbers of well paid jobs in future.

Another recommendation was to retain the non-domiciled tax status of people who live in the UK but who were not born here. For a flat charge of £30,000 per year, people with this status need not pay UK tax on foreign earnings that are left outside Britain. They still pay UK on UK earnings and any foreign earnings which they bring into the country. According to Pinsent Masons, Income Tax paid by non-doms rose from £6.3 billion in 2010-11 to £6.8 billion in 2011-12, compared to just £178 million raised from the £30,000 charge, indicating the substantial average tax paid in the UK on their UK and repatriated foreign earnings.

While the system treating people differently is clearly not fair, it would be even more unfair if the status was withdrawn and non-doms relocated to a friendlier tax system to protect their foreign earnings from UK tax, meaning that the rest of us paying more tax to pay for the lost revenue. As Jason Collins, head of tax said:

"They have huge spending power, invest in UK businesses and create thousands of jobs in the UK. They can’t do this if they aren’t here so the Treasury needs to be careful that they don’t kill the golden goose."

We still have an enormous deficit and while it is growing reasonably quickly right now, our economy is still growing too slowly. We need lower taxes to ease the cost of living for ordinary taxpayers, but we also need lower corporate and top rate taxes to stimulate growth, investment and prosperity, too.

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