The Daily Telegraph’s Jeremy Warner has written about his ‘epiphany’ moment when he realised that UK banks really are being too risk-averse:
At a Grant Thornton discussion among businessmen in the West Midlands which I was moderating, Jonathan Duck, chief executive of the flooring company Amtico, said that he had become so frustrated in trying to persuade bankers to finance new investment that he's sold the company.
Despite having £20m of accumulated cash on his balance sheet, the bank wouldn't provide the money on the scale necessary to fund planned investment in new manufacturing facilities because of conditions attached to the company's borrowing facilities. So in the end, Mr Duck together with his private equity backers simply sold the company to an American trade buyer, which immediately sanctioned the investment and provided the finance.
Mr Warner rightly identified that overcoming this problem through the banking system will mean either letting banks lend out more money based on the same amount of capital (so-called 'capital adequacy ratios') or leaving taxpayers to bear the risk. Neither are attractive choices.
But there is another option: capital taxation reform. As he goes on to say:
Ultimately, the solution to this problem may be to make equity as tax efficient as credit, thereby encouraging companies to bypass the banking system entirely in their search for finance, but don't hold your breath on that one.
The Single Income Tax shifts the basis of capital taxation from profits to distributed income, providing the solution Mr Warner describes. As well as being fairer and simpler, this shift would eliminate the pro-debt bias in the tax system that means it is cheaper for companies to raise capital through loans and bonds than through issuing shares.