Company Tax and Economic Growth

ajsexton

Had a similar conversation at work recently...

I think everyone can pretty much agree that economic growth is directly linked to the success and profits of private business, when they are successful, they expand, take on new staff, resulting in more taxes being paid, more money being spent in shops etc etc

I also think that many would agree that a lot of businesses focus on London and the South East resulting in uneven growth around the country. I will say the a few other cities are getting some investment such as Manchester and Birmingham.

Could a method be devised to encourage business owners to expand outside of the SE via a method of a altering tax requirements for different areas of the country and adjusting for growth in an area each year.

One we discussed was if the corporation tax rate was 20%, then companies output from poorer areas such as the NW/NE could be taxed at a lower rate (say 16%) that tax rate would gradually move back towards 20% as growth occurred. This could be recalculated every 2 years - every year seems a bit overkill.

This might not deter existing investment in the SE as for a small %age reduction the costs to move would be prohibitive, but it might be enough to encourage incoming foreign large companies to make their UK operation bases in cities (and even towns) other than London.

Discuss...

CLAPTON

ajsexton wrote: »

Had a similar conversation at work recently...

I think everyone can pretty much agree that economic growth is directly linked to the success and profits of private business, when they are successful, they expand, take on new staff, resulting in more taxes being paid, more money being spent in shops etc etc

I also think that many would agree that a lot of businesses focus on London and the South East resulting in uneven growth around the country. I will say the a few other cities are getting some investment such as Manchester and Birmingham.

Could a method be devised to encourage business owners to expand outside of the SE via a method of a altering tax requirements for different areas of the country and adjusting for growth in an area each year.

One we discussed was if the corporation tax rate was 20%, then companies output from poorer areas such as the NW/NE could be taxed at a lower rate (say 16%) that tax rate would gradually move back towards 20% as growth occurred. This could be recalculated every 2 years - every year seems a bit overkill.

This might not deter existing investment in the SE as for a small %age reduction the costs to move would be prohibitive, but it might be enough to encourage incoming foreign large companies to make their UK operation bases in cities (and even towns) other than London.

Discuss...

interesting idea but as with all interesting ideas the originator should add the first 10 'unintended ' consequences he/she can think of so save everyone else doing so.

so could you please add those and then we could have a better discussion

ajsexton

Ok obvious unintended consequences we came up with are: (some of these are tenuously broken into 2 parts) - only came up with 6 I'm afraid - it was only a brief discussion we had. Will that do as a starter?

1 ) Companies 'move' in part and route all income via the cheaper location - maybe even having multiple locations to flip to the cheapest when rates change

2 ) Causes firms to relocate entirely away from the expensive areas - probably only practical for very large operations

3 ) Potentially causes costs to rise in the lower rate areas as firms try to acquire premises/land for use - overspilling into preventing local business growth

4 ) The sheer headache and cost of managing/auditing the accounts of multi location businesses

5 ) If 1/2 occurred the potential drop in house prices in the SE as workers relocate

6 ) House prices increase to the lower rate areas as firms arrive, potentially locking out FTB.

AndyGuil

Incentives are already available across the country. Some of them are very significant. However businesses that succeed are based where they can get the skills and people to do the job. For many this is London. Areas of the country that are wanting businesses to move to them need to offer skills. These bases are developed over the long term.

ajsexton

AndyGuil wrote: »

However businesses that succeed are based where they can get the skills and people to do the job. For many this is London. Areas of the country that are wanting businesses to move to them need to offer skills. These bases are developed over the long term.

Ill agree in part, but Ill also offer that London only really has those skills because there is demand there from these firms, many many people are moving to London for these skilled jobs as there are few firms wanting their skills locally.

vivatifosi

There's a history of setting up enterprise zones in this country to attract investment into an area and incentify the creation of new jobs. Ironically, the London Docklands was one of these in the 1980s and early 1990s.

Another part of the issue with certain parts of the country is that is where the critical mass with the skills base is. For example, around Oxford and Cambridge for biotech, along the M40 corridor for high tech automotive, around Reading for technology.

Further, the government has already tried moving jobs to lower cost areas and it is not easy. There have been plans to move different civil service jobs out of London since the Thatcher era and it is not straightforward. The Lyons Review in 2004 was a major step towards it but it is not easy. It is on the cards again at the moment. It makes sense, but making it happen is hard and the risk of losing critical people high (a case study is the Met Office move to Exeter).

Finally you need a business infrastructure in the place you want to put the jobs. For example, there may not be adequate office or factory space in the area where jobs are needed, or that space may be out of date or inappropriate. I recall when I worked in commercial property that if there is not a high enough return or yield, people will not build new buildings in an area, which adds to the problem. Further you may need supporting industries and services which may not be there.

That's my 2p worth anyway. I'm sure as CLAPTON says that there are others.

ETA: incidentally, if you look at the following report, you'll see that the UK is doing well in terms of FDI (inward investment) and last year bucked the trend against many countries. A lot of that is going to regions:

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/225424/UKTI_Inward_Investment_Report_2012-13.pdf

princeofpounds

Yes this could be very helpful, although it would also be piecemeal and compex.

These areas are not growing because they are uncompetitive. There are a few things that can happen in response to this, excluding supply side reforms (so we are assuming they aren't just being run inefficiently on a micro scale).

- If these areas were nations with an independent currency, they would devalue.
- As that is not possible, they end up with internal devaluation, where wages and employment slip behind.
- Once that inequity becomes too extreme, fiscal transfers are used to support the region.
- One way of doing this is for the government to spend more money there. Politicians and people like this, because something is seen to be done, even if the spending is wasteful and inefficient and leads to socialist client-regions.
- Another way is not to spend more, but to raise less. This has the added advantage in my mind of balancing out the competitiveness. But strangely it tends to be less popular.

http://en.wikipedia.org/wiki/Optimum_currency_area

AndyGuil

ajsexton wrote: »

Ill agree in part, but Ill also offer that London only really has those skills because there is demand there from these firms, many many people are moving to London for these skilled jobs as there are few firms wanting their skills locally.

The firms move there for those skills. Recently Vodafone moved its headquarters to London because of this. It is both these factors together that self reinforce. It is natural process and other cities can and do emulate this. Areas that seem to be deprived of private sector work would do well to try and establish a new base. This could be connected to university specialisms in that area or trying to grow existing skill sets in the area.

vivatifosi

Another issue with London is that it is one of only a couple of truly global cities in the world. The others being NY and arguably Tokyo (with a few others on the up). Places like Madrid can't compete with that, there's no reason to think that Huddersfield could.

AndyGuil

vivatifosi wrote: »

Another issue with London is that it is one of only a couple of truly global cities in the world. The others being NY and arguably Tokyo (with a few others on the up). Places like Madrid can't compete with that, there's no reason to think that Huddersfield could.

They don't need to compete directly, London isn't best at everything but it works well because it is diverse and this makes it is very resilient. There is only so much market space to take in the same areas as London but there will be more in areas it doesn't compete as strongly with.

Generali

vivatifosi wrote: »

There's a history of setting up enterprise zones in this country to attract investment into an area and incentify the creation of new jobs. Ironically, the London Docklands was one of these in the 1980s and early 1990s.

Another part of the issue with certain parts of the country is that is where the critical mass with the skills base is. For example, around Oxford and Cambridge for biotech, along the M40 corridor for high tech automotive, around Reading for technology.

Further, the government has already tried moving jobs to lower cost areas and it is not easy. There have been plans to move different civil service jobs out of London since the Thatcher era and it is not straightforward. The Lyons Review in 2004 was a major step towards it but it is not easy. It is on the cards again at the moment. It makes sense, but making it happen is hard and the risk of losing critical people high (a case study is the Met Office move to Exeter).

Finally you need a business infrastructure in the place you want to put the jobs. For example, there may not be adequate office or factory space in the area where jobs are needed, or that space may be out of date or inappropriate. I recall when I worked in commercial property that if there is not a high enough return or yield, people will not build new buildings in an area, which adds to the problem. Further you may need supporting industries and services which may not be there.

That's my 2p worth anyway. I'm sure as CLAPTON says that there are others.

ETA: incidentally, if you look at the following report, you'll see that the UK is doing well in terms of FDI (inward investment) and last year bucked the trend against many countries. A lot of that is going to regions:

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/225424/UKTI_Inward_Investment_Report_2012-13.pdf

I'd take any town with perhaps 75% or less of the average GDP per capita (let's not get hung up on the percentage but you'd be looking to include maybe the poorest couple of dozen urban constituencies outside London).

Then you say that there will be a presumption of acceptance, subject to zoning, for planning permission in those areas. No business rates or employers national insurance will be payable in those towns for a time (let's say 5 years for the sake of argument) and the local college will offer student loans for vocational courses (repayable when incomes hit £xxxx). Let's face it, the take from business rates in Wigan or Blackburn or any of those other northern hell-holes must be pretty much nil any way.

Sending the Civil Service Oop North just makes things worse. They massively outpay local employers and so take the cream that hasn't moved away already. Private enterprise that could actually turn the area around can't afford to compete.