Tuesday, 5 March 2013

Labour Plans for Capital Gains Tax

One idiot, Ed Balls, has asked another idiot, Sir George Cox, for ideas to tackle "short-term" thinking in British business. Or maybe I'm being harsh to Sir George. Perhaps he's just realised there's good money in telling lefties what they want to hear, and in doing so removing corporate oversight by shareholders. The state, big banks and corporate "business leaders" in a massive conspiracy against the rest of us.

"Short-term thinking" is one of those problems which exists more in the fevered minds of left-wing politicians looking for something to justify state planning, than in reality. And how did that work out every time it's been tried? Even though state intervention in industrial planning is an idiotic idea, it has been successfully placed into the mouths of "almost three fifths" of "business leaders". Wow! Just over half of "business leaders" think we should think "longer term". I am frankly underwhelmed at the support of "business leaders".

There are problems in some businesses that are too focussed on the next half-yearly report. This is better than the US system where quarterly earnings are the norm. To my mind, 6-months gives shareholders the right level of detail to make decisions. Any company that feels their share price is too low can buy-back shares. Any company that thinks it's too high, can issue shares. And in practice this is what happens. And in any-case  keeping your shareholders informed of expectations through trading updates and so forth means shareholders are likely to be pretty tolerant of short-term trading problems. The outlook statement is often a more significant driver of the shareprice than the numbers.

Some businesses fail. These problems are not problems caused by "speculation". Speculative share-buying is an issue looking for a problem. Lefties, like Ed Balls don't like the idea that someone can buy shares and sell them at a profit. Companies sometimes don't like the fact that shareholders can run from a company on a profits warning. Chief executives hate the fact they are overseen by thousands of unaccountable people. But good companies, with good products and high barriers to entry get bid up and trade on high multiples (which means their cost of capital is low) and bad companies who're likely to ask their owners (the shareholders) for more money, or who are likely to go bust trade on low multiples. This means the system is working. Speculators drive this process. They don't kill companies, they're the canary in the mine.

Speculators also create liquidity in the market. Liquid shares trade on higher multiples, meaning lower cost of capital, meaning more business investment. If you limit the speculative money, you make markets more illiquid, reduce the price of shares, and increase the cost of equity capital.

Debt interest comes out of profits BEFORE tax and shareholders' dividends AFTER tax, so built into the tax treatment of companies is a big tax advantage to debt finance. The beauty of  equity finance is that the shares can go down, but the company can go on regardless. Debt can rapidly spiral out of control. Both sorts of finance have their place - I like to see an appropriate level of gearing - but capital gains have, in effect already been taxed at the corporation tax line. If a company has no immediate need for capital, it can ignore shareholders and the share-price. This is not true of debt finance.

So by increasing CGT, you will increase the level of debt carried by companies. You will make companies MORE focussed on short term results, because you can bet your bottom dollar your bank is NOT thinking long-term (and especially the state-owned ones). They are at the moment absolutely focussed on their bad-debt numbers and they will pull the plug on viable businesses long before the end. This is why debt-financed businesses are riskier than equity financed businesses and equity finance better than debt for speculative, risky or long-term projects. One miss of a target, the bank pulls your loan in. Shareholders cannot do this.

Lets look at some examples: Is RBS, a government owned and operated business, whose remuneration policies and semi-annual results are the stuff of breathless news reporting more likely to be thinking for the next headline than, say ITM power, who have spent a decade on primary science and innovation around the fuel cell and electrolyser, but who only started making commercial sales recently?

The proposal to tax capital gains between 50% and 10% depending upon how long they're held is just stupid, and will reduce the ability of ordinary people to buy into the likes of ITM power. The idea that long-term shareholders are somehow better than short-term shareholders is risible, and bears no scrutiny. Long term shareholders tied in by CGT rules will not be able to influence the company at all. Short-term shareholders vote on the company by buying and selling the stock. Liquid stocks are less volatile.

All this stupid, facile, imbecilic proposal will do is further increase debt finance over equity finance. Any influence small shareholders have will be lessened. This is just the state regulating for the benefit of big corporate bosses who prefer to deal with large institutional shareholders. This is just mindless corporatism that will worsen corporate governance, increase costs and decrease liquidity and therefore increase volatility of stock.

An aggressively tapered CGT regime will at a stroke make worse the problems it is meant to solve, and anyone thinking it's a good idea should be sedated and kept away from sharp objects. Of all the ideas to come out of the Labour party, this is the most obviously stupid for some time.



5 comments:

@parlow72 said...

The most wicked thing that successive Governments (mainly Labour but Conservative also when they're being lazy) have done is to a label some behaviours as inherently evil and in need of taxation. Two such behaviours are corporate profits and capital gains. Listen to the language used by Balls et all. It's about "excessive" profits, and "producers vs predators". Neither of these really are taxed to include externalises in the price consumers pay, in the way that fuel duty is. It is about an easy, sell the docile political consumers.

What really pisses me off is that the Conservatives, mostly, let it slide. At most they mumble about being business friendly (itself a chewing the urinal cake stupid thing to say), then tinker around the edges of the marginal rates.

There is no voice, or even desire, to challenge the mind numbing stupidity of the Labour party proposals because the underlying thesis promulgated by the Labour party isn't refuted. This is why Cameron will lose the next election, and God help us because Milliminor will be a fucking disaster.

Jackart said...

Parlow72, Re your comment: I agree 100%. The tories need to fight on ground of their choosing, not the chippy left-wingers choose.

Rosscoe said...

That in a nutshell is the problem with the Tories, they don't have the faith in their own convictions to proactivly argue the case for low taxation, low regulation hands off, small state conservatisim (possiblt because so few of them have ever actually worked in the world outside of the westminster bubble) and so when they do engage with Labour it's usually on the ground of Labours choosing having already allowed the chippy lefties to define the terms of reference of the argument.

Jackart said...

Yes, though to be fair, the media's not giving them a chance to fight on pro-business ground. Meanwhile Cameron's off on trade-missions to india.

They're just getting on with doing the right thing, and hoping it works in time.

vipul patel said...

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