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In praise of merit, talent – and a juicy inheritance

(Cross-posted to Liberal Conspiracy)

The TaxPayers' Alliance's latest report, "Tax and entrepreneurship: How the tax system impedes the creation of new firms and decreases employment", contains four familiar ingredients:

1) A foreword by someone well-known (or at least not completely unknown)

2) A generous handful of footnotes (whether relevant or not)

3) Some elaborate formulae (to add a scientific veneer)

4) A hard-hitting press release (however flimsy the research).

In this case, (1) is provided by Julie Meyer, "the well known founder & CEO of Ariadne Capital, founder of Entrepreneur Country, co-founder of First Tuesday, dragon on BBC's Online Dragons Den and weekly columnist in London's City AM".

That's how the TPA describes her, though it may have been equally attracted by her recent article, "Call me one of Thatcher's children any day", in which she said of the great matriarch:

"She wanted the children of Britain to be strong and grow tall, and some would grow taller than others depending on their merit and talent... Thatcher obviously couldn't make life perfect for every single British citizen. But she raised the bar very high indeed in terms of executing a vision of 'Great' Britain."

Meyer's foreword for the TPA report continues in a similar vein - a queasy mix of motivational speak and market fundamentalism. Thus we have:

"We are fortunate that there exists that class of people - who have been there throughout history – the Michaelangelos, the Gutenbergs, the Christopher Columbuses – who are the artists, adventurers, architects, inventors and business people of their day - who are prepared to live abnormal lives in the bringing to life of their vision of the world, their products and services. Greatness drove them, not work life balance. They sought excellence, profits and transparency, and made the impossible inevitable."

followed by:

"No one under 30 that I know wants to work for anyone anymore... We are all slowly becoming Individual Capitalists. Not only can the government not shoulder the burden of the bloated welfare state which it has created. The balance sheet creaks enough already. But far more importantly, we - the little guys of the world - know what to do with our lives."

To help pad out ingredient (2), the footnotes, the report substantiates its own conjecture by citing the conjecture of others - like James Manzi of the right-wing Manhattan Institute:

“Some people start companies because they’re driven by a dream that transcends rational economic calculation. But most successful entrepreneurs are pretty serious about comparing risks with opportunities. Higher tax burdens raise the price of entrepreneurship. When you raise the price of something, then, all else held equal, you usually get less of it.”

Ingredient (3), the formulae, includes the likes of:

T(E) x P > T(E)

and:

(1-t1){[1+r(1-t2)(1-t3)]^T}(1-t4)

The latter is used to calculate "the marginal tax rate on income that is earned, saved and invested in a company and then passed on as an inheritance", where "t1 is the income tax rate, t2 is the corporate tax rate and t3 is the capital gains tax rate and t4 is the inheritance tax rate and r is the pre-tax return on an investment in a company".

We'll come back to that in a moment, but here at the Other TaxPayers' Alliance, we have our own formula:

tpa=bs2

Finally, add ingredient (4), the press release, which begins:

New research attacks 50p tax rate that will mean fewer entrepreneurs and fewer jobs

  • New report argues that government tax changes will reduce the incentives to become an entrepreneur.
  • The top marginal tax rate on income earned, saved, invested in a company and then passed on to children is currently 90 per cent.
  • With the forthcoming 50 per cent top tax rate, that will rise to 92 per cent. That means the measure will take 20 per cent of the money entrepreneurs are left with the current 40 per cent top tax rate.

Note the contrived formulation, borrowed from (3) above: "The top marginal tax rate on income earned, saved, invested in a company and then passed on to children." Although this report is ostensibly an attack on the new 50p tax rate, the TPA can't resist bashing its other bête noire, inheritance tax (liability to which is naturally taken as given - despite the fact that 94% of estates are below the threshold). Loss of compound interest has been chucked in the mix too, to inflate the figures further.

Now, I suppose it is conceivable that some of the buccaneering twentysomething entrepreneurs that Julie Meyer eulogises - "the Michaelangelos, the Gutenbergs, the Christopher Columbuses" - will sit down and calculate that because they may one day be fortunate enough to find themselves among the top 1% of income earners and 6% of estates, and because they may not be able to pass every penny of their enormous wealth tax-free to their children, they'll think sod it - let's go down the pub instead. But this research doesn't prove or refute that - it simply speculates.

And, more to the point, isn't there something ridiculous about a report that invokes the entrepreneurial spirit to make the case for untaxed inherited wealth? I hope you have a strong stomach, because we must turn once again to Meyer's foreword:

"The trouble in the UK is – and I can say this as an American who loves this country, and plans to become a British citizen – that effortlessness is considered a virtue. No one likes to talk about how hard they have worked. I first realised this at INSEAD, where I went to business school, where without exception, all of my British classmates suggested that they hadn't prepared for the entrance exam at all.

"So British society doesn't educate itself about the work that went behind the fortunes as the whole goal is to make it look easy."

If your fortune comes to you in the form of a huge inheritance, it doesn't just look easy – it is easy.

Posted by Other TPA at 02:29pm on 28 July 2009
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Comments

I particularly like how people are driven by greatness, a vision for the world and a desire for excellence, unless there’s a bit more tax to pay in which case those things aren’t worth the bother.

Posted by Jodi at 04:53pm on 28 July 2009

Another word for entrepreneurs should be small / medium sized businesses. Yes small businesses (including co-operatives) are an essential part of the economy. Most small businesses recognise the benefits of paying tax on their profits as the social security and health services provide an essential back-up to their employees. These services would otherwise need to be paid for through high cost private insurance schemes.

The tax system should not be structured in such a way to reward short term profit grabbing (or asset stripping) as is all too often the case where the interests of shareholders take precedent over the interests of wider society or the employees of a business. Rather taxation should be lower on employment (ie employers should be incentivised to take people on) and should instead focus on environmental taxes, higher corporation taxes and closing down loopholes which allow companies to ‘export’ profits to tax havens.

Public spending will inevitably be squeezed during an economic downturn. However, well targeted government spending will help the economy come out of the recession in better shape. Supporting the green economy for example will allow companies to invest in new green technologies. Also spending on public transport and education is an investment in the long term well being of the country as a whole.

Posted by Dominic at 06:46pm on 28 July 2009

Most entrepreneurs will never make enough to get into the highest tax band. And those that do will have limited companies, not be self-employed.

The TPA also appears to be double-counting - I found this comment on the Spectator website:

“you have indeed got it very wrong indeed. Your formula (1-t1){[1+r(1-t2)(1-t3)]^T}(1-t4) assumes that corporate profits are subject to both corporation tax and capital gains tax, and ignores the way that personal dividend tax credits reduce the effect income tax rate on dividends. Either corporate profits are paid out as dividends, in which case they are not subject to CGT and are grossed up by the dividend tax credit for income tax purposes, or they are reinvested and add to a capital gain in which case they are not subject to income tax. So you’ve done a lot of double counting.”

Posted by Cara at 05:18am on 29 July 2009

It’s worse than double counting

The TPA shows it does not know tax - shares in almost all entrepreneurial unquoted companies can be gifted free of Inheritance Tax - bit that’s not taken into account here

Oh dear - looks like the TPA really should cut down on the BS and get a good accountant

Posted by Richard Murphy at 08:55am on 29 July 2009

Readers should also check out Richard Murphy’s duel with one of the report’s authors here:
http://www.taxresearch.org.uk/Blog/2009/07/29/the-taxpayers-alliance-needs-an-accountant/

Posted by Other TPA at 06:52pm on 29 July 2009

I wanted to have a say on this because it looks as thought The TaxPayers’ Alliance have really lost it on this one. There is no way in which inheritance is an effective way to encourage entrepreneurship, it’s a bizarre argument.

http://leftoutside.wordpress.com/2009/07/29/inheritance-and-entrepreneurship-fail/

Posted by Left Outside at 11:50pm on 29 July 2009

It really is amazing the way that these guys don’t understand the distinction between entrepreneurs and monopoly capitalism, isn’t it? It’s the reason why most ‘minarchist’ claims to being libertarian are so plainly a simple defence of privilege. Like demands for ‘meritocracy’, it’s all about the defence of the head-start.

Posted by Paulie at 12:13pm on 30 July 2009

Paulie - I couldn’t agree more.

Posted by Dominic at 10:13am on 31 July 2009

I just wanted to say thank god for this website having penned angry letter to a national newspaper saying the TPA were a bunch of blue nosed elitist snobs having spent a few hours following an internet trail on Matthew Elliot (most impressed by his” one of us” award from the conservative way forward group (headed up by a tory banker educated privately of course). I had a pang of anxiety, had I got it all wrong, maybe they truly are the champions of the ordinary hard working tax payer keeping a watchful eye on public spending. Then I found your website and am relieved to see others recognise the danger of this lot of elitists currently pulling the wool over the eyes of the public from the sheep suits they are wearing covering up the wolves underneath who want to pay no tax on their “entrepreneurs’” salary or massive inheritances preferring the little people in the street (thats us hard working ordinary tax payers )to rely on their charitable donations all sounds a bit Dickensian to me. Keep up the good work the public need to know who these people really are!!!!!

Posted by dawn ,dundee at 12:07pm on 1 August 2009

I too am also fed up with seeing the Tax Dodgers Alliance being quoted everywhere as representatives of us hohnest hardworking tax payers.

Their main motivation is greed but if they can have a go at ethnic minorities as well they will. I don’t mind my tax money being spent on lots of things (excxept war), I do resent it being missapropriated by our politicians and people dodging taxes in tax havens. I do resent companies ripping off the tax payer for billions in dodgy PFI deals and privitisations. I don’t resent spending a measly £2000 on a community event for travellers I do resent handing billions to greedy bankers. We pay taxes for to improve our society not line the pockets of the rich. The Tax Dodgers Alliance believe the opposite.

I agree their comments are not properly researched and their statements are rarely if ever qualified.

There are many problems within our society, most due to inequalities of wealth and the greed of the wealthy and powerful. The Tax dodgers Alliance are treated as representatives of tax payers, but only those who don’t want to pay taxes. They have never campaigned to do away with Tax Havens or create a fairer tax system. They merely use the organisation to spout right wing propagander. They love having a go at Muslims and ethnic minorities and any money spent on the poor and vulnerable.

How do they think we pay for vital services. Not all services can be for the exclusive use of rich people. Not all of our taxes can be used to subsidise and benefit the wealthy. Communities and community events are valid expenses. I work for a national charity we reach vulnerable people through community events within diverse communities, most to mainly white groups but sometimes in order to be fully inclusive we go to or stage events targeted at minority groups. We do this to be inclusive to all tax payers not just the white ones. It seems the Tax payers alliance don’t mind taxes if it’s the poor that pay and the money is spent reducing the taxes of the wealthy but not on improving the lot of the poorest or providing services to everyone irrespective of their class, culture, religion, sexuality ot religion.

Posted by alex at 08:56pm on 3 August 2009

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