The BBC reports that today David Cameron is inviting many of the country's biggest employers to Downing Street and urging them to take on more staff. Many of the firms attending - from Morrisons to Microsoft - have pledged to employ thousands more staff as they grow in the economic recovery. A lot of the talk on the news this morning was about what new incentives those companies might get to encourage them to do more to help get people back into work.
What the Government really need to avoid is the temptation to micromanage, to create a "new jobs in the recovery tax credit" or something like that. The Conservatives made that mistake before the election. Those sorts of gimmicks normally produce underwhelming results and complicate the tax system. Instead of creating specific incentives for new employment, they should work to establish the right environment for British firms to prosper and the employment situation will take care of itself when the economy is growing strongly.
At the same time, Cameron could be talking to the wrong people. There is good evidence, as we set out in the report Tax and entrepreneurship, that small and rapidly growing firms that create most new jobs:
"David Birch demonstrated in the US, and more recently Trends Business Research showed in the UK, how new firms create the vast majority of the new jobs. Indeed, high-growth “gazelles” were found to be responsible for creating the vast majority of new jobs."
While obviously thousands of new jobs at major retailers and other big firms is very welcome news, even the impressive numbers listed in the reports this morning are a small fraction of what is needed. As well as the big corporates adding to their work forces, we particularly need to see new and energetic small firms doing well in Britain. They particularly need tax and regulation cut to ensure that there are proper rewards if their risky ventures pay off and, while they are too small to have a compliance department, they can spend their time running their business instead of filling out forms.
In our report on entrepreneurship we set out how high the combined marginal tax rates on income earned, saved, invested in a company and passed on to children is: as high as 92 per cent with the new 50p top tax rate. The big rewards that make entrepreneurship, and the associated risks, worthwhile are hit particularly hard by the tax system.
More recently, Dominique Lazanski set out what small businesses in Silicon Roundabout, where lots of exciting new technology businesses are developing, felt they needed to grow more quickly. They included cuts in corporation and capital gains tax, and lower business rates.
If we want higher employment, trying to rig a specific set of incentives to encourage established businesses to take on more people aren't the way forward. Lower taxes can help all companies, but particularly the small and rapidly growing firms that tend to be the real source of new jobs over time.
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