Ten reasons to hate the Tories (6) Part 1

Point 6 from Cameron's Blueprint for Britain was this:

"We will cut corporation tax to create jobs (1), reform inheritance tax to encourage saving (2) and build a stronger society by rewarding families in the tax and benefit system (3)."

They've jumbled three topics into one here, so let's take ruthlessly pragmatic look at part 1.

Right now, in the teeth of a recession, it's more important to worry about preserving existing jobs, i.e. keeping existing businesses afloat, than it is to dream about businesses miraculously creating new ones. So in order of administrative simplicity, political resistance etc, here's my hit list:

a) Businesses will stay afloat as long as they are making net profits. And to make net profits, a business has to make gross profits. As the results of Sainsbury's and Wm Morrison's clearly show, reducing VAT is a good way of improving gross profits, out of which salaries are paid. Seeing as VAT swallows up 3/23 of the turnover of a VAT-able business and is payable whether or not a business makes net profits, why not resist any suggestion that VAT be increased back to 17.5% or even higher?

Unfortunately, the UK cannot reduce VAT below 15% until we leave the EU, as 15% is the minimum standard rate.

b) The optimum number of jobs (whatever that is) would exist in a tax-free world. Seeing as that is a pipe-dream in the short term, the next best position is where the tax rate on business profits is the same as that on employment (neither higher nor lower). The main rate of corporation tax in the UK is 28% and the usual rate of PAYE is 31% (20% income tax plus 11% Employee's National Insurance), which are pretty close. It is Employer's National Insurance (another 12.8% of salaries) that drives in the wedge.

So the next-best quick-fix must be to reduce Employer's National Insurance. Taking all the dynamic effects into account, it is quite possible that such a move would be revenue neutral, as it happens.

c) Those who are already out of work and claiming welfare face enormous administrative hurdles if they go back to work, and because of means testing are barely better off unless they find anything short of a full-time, permanent job on a median salary. So how about scrapping the distinction between out-of-work and in-work benefits and scrapping means-testing? It's called "Citizen's Income" and is the oldest idea in the book.

d) The next barrier against job-creation is the National Minimum Wage. At present, this is set at £5.73 per hour gross, to which the employer adds 12.8% National Insurance (soon to be increased to 13.3%) so it costs him £4.65 per hour after corporation tax relief. The employee on the other hand will probably be on means-tested benefits, so only nets 30% of the gross amount = £1.72, or barely a third of what it costs his employer.

So let's imagine we scrapped Employer's National Insurance; scrapped means testing so that a benefit claimant in part-time or low-paid work only paid PAYE at 31%; and scrapped the National Minimum Wage, and that the new gross hourly wage settled down at £4. That costs the employer £2.88 after corporation tax relief (40% cheaper than before) and the worker nets £2.80 (60% more than before). Does anybody in their right mind dispute that this would lead to higher employment levels?

e) Next up, we ought to scrap all the silly regulations that dampen economic activity in general and employment in particular, but that's a bit heavy for this time in the morning.

f) Oh yes, let's not forget corporation tax. What sort of effect does reducing corporation tax on employment levels? Not much, actually. A lower rate encourages a few marginal business to relocate to the UK (or discourages others from not emigrating). But a lower rate also means that the business owners retain a larger share of profits, so encourages them to cut costs as far as possible. In the long run, economic progress is largely only possible because of business processes being automated or outsourced to cheaper countries, of course (in other words people being made redundant, i.e . cost cutting), which is pretty unpleasant in the short run, but hey, if minimising job-losses is a short- or medium-term aim, cutting corporation tax rates has got to be pretty much at the bottom of the list of priorities.