William Wallace writes: Capitalism and tax

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In case you missed it, the Times  on April 20th carried an article in its Business section entitled Business must adopt a new social contract as we reinvent capitalism (£).  It was by Jimmy McLoughlin, who was a Downing Street SPAD from 2016-19.  That’s right: a self-declared ‘free market Conservative’ who advised both Theresa May and Boris Johnson has now said, on his return from a visiting fellowship at Stanford University, that

It is time for a new social contract between business, government and society.

The business pages of both the Times and the Financial Times in recent weeks have become increasingly radical: sharp criticisms of executives taking bonuses while laying off workers, of opaque offshore accounting methods concealing the ownership of properties and companies, of the absence of coherent business leadership during this crisis.  A government which dismissed the CBI as a ‘remoaner’ organization is now hoping that the appointment of a new director-general will revitalise the organization.  Three years after Economists for Britain suggested that we could do without a significant manufacturing sector, ‘Made in Britain’ has become a vocal part of the current debate.

McLoughlin’s list of changes in approach that are needed includes the proposal, anathema until now for the small-state think tanks of the right, that “business needs to suggest where taxes will rise.”  He calls for businesses to play a stronger and more visible role in their local communities, to build closer links between business and academia, and to support greater ‘cross-pollination’ between universities and government through a British version of American White House Fellowships. He accepts that opinion polls now show declining trust in private business, and that the capitalist model needs ‘to go through its most drastic reinvention.’

That opens up a wide field for Liberal Democrats to promote proposals for rebalancing the relationship between market, society and state.  It also offers a risk that disillusion with irresponsible capitalism will fuel support for state-ownership and national cartels.  But it sinks the Vote Leave illusion that Britain can simultaneously ‘take back control’ and allow more and more key UK assets to fall under Saudi or Chinese ownership, without asking how that affects the relationship between business and society.

I don’t have answers to most of the policy issues this raises.  I look forward to Ed Davey’s task force on the UK economy and industry providing some answers.  We will want to press for a more sustainable economy, for greater emphasis on environmental and climate change issues, for a financial sector reoriented to supporting investment rather than deal-making, for a wider role for non-profit and mutual enterprises, and for taking back control of Britain’s offshore world.  The concept of a social contract between business, society and government, within local as well as national communities, will require changes in the legal framework for corporate governance.

The current crisis has undermined the dominance of free market economics.  But the economic libertarians of the right will not give up without a fight.  In the Telegraph and the Spectator, the ideologues who preach the gospel of deregulation and who drove the Brexit campaign are arguing that post-coronavirus recovery requires dropping social standards and letting private enterprise rip.

Our arguments have to be more convincing than theirs, and more firmly rooted in evidence.  So let’s embrace the idea of a new social contract between business, society and state, and spell it out through well-defined liberal policies.

* William Wallace has fought five parliamentary elections in Manchester and West Yorkshire. He is a former president of the Yorkshire regional Liberal Democrats.

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19 Comments

  • Peter Martin 24th Apr '20 - 12:45pm

    “The current crisis has undermined the dominance of free market economics……”

    The current crisis, caused by outbreak of Covid-19, can’t be blamed on “Free Market Economics”. On the other hand, the 2008 GFC was caused entirely by the erroneous, but mainstream, consensus economic theories of the time.

    The Lib Dems should have been saying all this at least ten years, ago rather than trying and failing to patch up a decrepit system in a Tory led coalition.

  • The Late Sir James Mirrlees was among the finest economists this country has produced since Keynes. Born in Minnigaff, Dumfries and Galloway, he took an MA in mathematics and natural philosophy at Edinburgh University (1954-57), before studying mathematics and then a doing a PhD in economics at Trinity College, Cambridge.
    In 1962-63 he was an adviser to the MIT Centre for International Studies in New Delhi, India, then for five years was an assistant lecturer, then lecturer, in economics at Cambridge. He became professor of economics at Oxford in 1968, holding that position until 1995, when he moved to Cambridge as professor of political economy. He was knighted in 1997.
    As an economic theorist he won the Nobel Prize for economics in 1996 (alongside William Vickrey) for his work on “information asymmetry” – the idea than an imbalance exists when one party to a transaction, sometimes the buyer but more often the seller, has more information about the product or service being exchanged.
    His influential work on taxation culminated in a report for the Institute for Fiscal Studies that bears his name – the Mirrlees Review of 2010. The review accepted the failures of current tax systems, arguing that “the UK system imposes unnecessary costs on the economy … reduces employment … discourages savings and investments, and distorts the form that they take”.
    The Mirrlees Review advocated a fundamental change both to the way in which taxes were levied and on whom those taxes fall. While there was much to appreciate from his review, it was his argument for effective road pricing (through replacing the petrol and diesel levies with comprehensive congestion charging) and the ending of most VAT exemptions and Land value tax to replace business rates that improved tax efficiency and reduced the tax system’s complexity.
    The report the IFS published ‘Tax by Design’ provides a ready-made blue-print for how the UK tax system should be reformed for the 21st Century.

  • Seems like an ideal moment to get rid of both employer NI contributions and business rates, replaced with a turnover tax and transaction tax, both almost impossible to evade unlike corp tax. These would have to be set at a rate that gets back some of the money the govn has pumped into businesses. Probably too much to hope that the current chancellor has the wit to combine employee NI contribution into income tax but it should now be applied to all income with the upper limit removed and also to dividends so that those on high salaries can’t easy avoid it via limited companies. Employee NI contribution rate could then be gradually reduced as govn revenues roll in as the economy recovers.

  • Jenny Barnes 24th Apr '20 - 3:40pm

    And replace inheritance tax by treating inherited wealth as income spread over (say) 10 years.

  • Daniel Duggan 24th Apr '20 - 4:26pm

    ”So let’s embrace the idea of a new social contract between business, society and state”
    This has the smell of corporatism.

  • David Allen 24th Apr '20 - 4:59pm

    “”So let’s embrace the idea of a new social contract between business, society and state”
    This has the smell of corporatism.”

    Hmm. Well, there has always been a pretty strong “contract” between business and state. Three hundred lobbyists for each MP have generally ensured that business gets a lot of what it wants, from conventional Tory and New Labour Governments at any rate. Recently, Corbyn and Mr “F*** Business” Johnson have each cast doubt on the strength of that “contract”. McLoughlin seems to me to be saying something like “Hey, if we promise that business will behave better, can we have our contract back, please?”

    So McLoughlin has added into his proposed contract the word “society”. What might that mean?

    A generation ago, Labour would have said it meant “Bring in the Unions to represent the voice of the worker.” A generation ago, Liberals would have said “Bring on Community Politics, so that ordinary people can decide what local Councils do. That will revolutionise the way Britain works, and the Liberals will come to power on the back of the transformation.” I fear that neither of these approaches has stood the test of time.

    But McLoughlin isn’t entirely wrong. A partnership between business and state, alone, is a recipe for the hegemony of capital. Somehow, countervailing forces must be created to counteract the one-party State we are in. “Society” must be given a meaning!

  • David Allen 24th Apr '20 - 5:00pm

    “”So let’s embrace the idea of a new social contract between business, society and state”
    This has the smell of corporatism.”

    Hmm. Well, there has always been a pretty strong “contract” between business and state. Three hundred lobbyists for each MP have generally ensured that business gets a lot of what it wants, from conventional Tory and New Labour Governments at any rate. Recently, Corbyn and Mr “Fudge Business” Johnson have each cast doubt on the strength of that “contract”. McLoughlin seems to me to be saying something like “Hey, if we promise that business will behave better, can we have our contract back, please?”

    So McLoughlin has added into his proposed contract the word “society”. What might that mean?

    A generation ago, Labour would have said it meant “Bring in the Unions to represent the voice of the worker.” A generation ago, Liberals would have said “Bring on Community Politics, so that ordinary people can decide what local Councils do. That will revolutionise the way Britain works, and the Liberals will come to power on the back of the transformation.” I fear that neither of these approaches has stood the test of time.

    But McLoughlin isn’t entirely wrong. A partnership between business and state, alone, is a recipe for the hegemony of capital. Somehow, countervailing forces must be created to counteract the one-party State we are in. “Society” must be given a meaning!

  • @Joe Bourke “it was his argument for effective road pricing (through replacing the petrol and diesel levies with comprehensive congestion charging)”

    If there’s one good thing that’s come out of Lockdown it’s the lack of necessity of a high proportion of commuting. Road Pricing would reinforce that message.

  • @ Daniel Duggan ” ‘So let’s embrace the idea of a new social contract between business, society and state.” This has the smell of corporatism.’ ”

    I remember a friend from Young Liberal days, now a member of the Great and Good, remarking to juvenile hilarity, ‘He who smelt it dealt it’.

    My lips are sealed on circumstances and personage, except for, ‘You are a veritable Daniel come to judgement’, Mr Duggan.

  • @Frank West – “Seems like an ideal moment to get rid of both employer NI contributions and business rates, replaced with a turnover tax and transaction tax, both almost impossible to evade unlike corp tax”

    Seconded!

  • William Wallace 24th Apr '20 - 9:10pm

    Daniel Duggan: after a long period in which the pursuit of shareholder value and shareholder interests has been the conventional wisdom (with legal support) of much of the corporate and financial worlds, reassertion that business has wider responsibilities and stakeholders has to be welcome. That’s not corporatism; it’s a recognition that businesses interact with the communities within which they operate, and should contribute to the life and prosperity of those communities. And yes, we need a lot of rethinking about the tax structure, as well as its overall level.

  • Katharine Pindar 24th Apr '20 - 10:08pm

    We have the policies to encourage this Tory rethink, William. I quote:
    ‘Create a sustainable economy that works for future generations by
    a) Reforming the ways companies and markets are governed to entrench a longer term, more sustainable approach, with a new Companies Act for the 21st Century, so large companies fully reflect the interests of all stakeholders, serve the common good and are accountable for their actions …
    b) Making the UK a laboratory for new forms of enterprise, with a big boost to employee ownership by extending the Liberal Democrat employee ownership trust scheme
    c) Introducing an extended public interest test for takeovers that conflict with the national industrial strategy
    d) Challenging the growing concentration of market power – including in energy, banking and the new ‘tech titans’ – with stronger regulation of monopolies, enhanced consumer protections, greater rights over data and by sharing economic benefits more widely through an innovative Citizens’ Wealth Fund
    e) Introducing a new ‘right to repair’ for consumer products…
    f) Harnessing the strength of the public sector balance sheet to open additional sources of finance for innovative business, the green economy and vital national infrastructure…
    g) Helping businesses to adapt to the challenges of the digital economy…’

    There’s much more, including ‘Devolving more powers on economic development to cities and regions within England’ in the excellent policy passed in September 2018 in Brighton, under a title beginning ‘Good Jobs, Better Businesses, Stronger Communities’.
    I recommend it, although I also recommend a more wide-ranging Social Contract than this one, as members will know.

  • Peter Martin 25th Apr '20 - 9:01am

    It’s perhaps not surprising that an LDV article about the economic effects of the Covid -19 pandemic should have a dig at the Leave campaign.

    “….the Vote Leave illusion that Britain can simultaneously ‘take back control’ and allow more and more key UK assets to fall under Saudi or Chinese ownership”

    But of course it wasn’t just the Chinese who have bought up assets. What was left of our car making industry was largely taken over by the Germans and the French. We don’t have much of a nuclear power industry left. This happened whilst we were members of the EU and the process was enthusiastically supported by governments who were wholly in favour of EU membership.

    The EU has a poor record of looking after its own fundamental economic and strategic interests. For example, it imposed harsh austerity measures on Greece and then sat on its hands as the Chinese government moved in to snap up Greek ports at bargain basement prices.

    https://www.nytimes.com/2017/08/26/world/europe/greece-china-piraeus-alexis-tsipras.html

  • William Wallace 25th Apr '20 - 9:34am

    Peter Martin: not a dig at the Vote Leave campaign, but at those right-wing ideologues (who also support Brexit) who preach sovereignty while making money out of selling off UK assets, keeping their own assets in tax havens whenever they can, andprivatise UK public assets by selling them off to foreign state owned companies.

  • Peter Martin: “ We don’t have much of a nuclear power industry left. This happened whilst we were members of the EU…”
    Where’s the connection?
    Whilst we were members of the EU I got married, had kids and grandchildren, but nothing to do with the EU.
    I totally fail to see the link.
    It may have something to do with the privatisation of the electricity supply industry in 1990 though.

  • Peter Martin 25th Apr '20 - 10:39pm

    @ William Wallace,

    To say that right wing ideologues always supported Brexit is an oversimplification to the extent of it being actually untrue. There is a very right wing aspect to the economics of the EU but this is counterbalanced by the Social charter – workers rights etc. So both the Left and the Right can find things to like and dislike about the EU.

    Many on the right enthusiastically embraced the EU’s prevailing neoliberal economics but were unhappy with the Social Charter — especially on migration. Some, like Cameron and Osborne, gave greater weight to the economic aspects and were on balance inclined to be Remainers, others eg Johnson went the other way. I don’t believe there is much, if anything, in it between Cameron and Johnson in terms of left and right.

    Some supposedly far right groups eurosceptic groups, like the DUP for example, are actually slightly to the left of the Tory Party on economic matters.

    On the real left, most gave more weight to the Social aspects of the EU and tended to overlook the inherent and very right wing neoliberalism hard wired into the Treaties. Not all of us though! There is a coherent argument to be made against the EU from a left perspective.

  • @Peter Martin “On the real left, most gave more weight to the Social aspects of the EU and tended to overlook the inherent and very right wing neoliberalism hard wired into the Treaties. Not all of us though! There is a coherent argument to be made against the EU from a left perspective.”

    Indeed, which is the outlook of Corbyn and McDonnell.

  • Peter Martin 26th Apr '20 - 9:05pm

    @ Andy Hyde,

    “I totally fail to see the link.”

    I’m sure you do and therein lies the problem. Many others, some in the Labour Party, have the same blackspot.

    The thinking of the wing of the British ruling class which was in charge before the 2016 referendum has been that we don’t need agriculture, we can import our food from France, Ireland and Spain, and we don’t need manufacturing, we can leave that to the Germans. We don’t need a nuclear power industry. The French seem pretty good at that. We can get by on being the wheeler dealers of the EU.

    You’ll probably think that’s not directly the EU’s fault. And you’ll have a point. But looked at from the perspective of the many in the Leave voting areas it is the fault of those in the UK who have been in charge, and have openly expressed their pro EU sentiments. That’s brought the EU into disrepute and why the Leave side ending up winning.

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