A tax on non-investment
There’s a Pragmatic Radicalism Top of the Policies event in London town tomorrow. This one’s on growth. You get 90 seconds to pitch your idea and then there a some Qs and As. Then you get to see if you win.
I won’t be in London but I’ve asked that my entry be read out, with some answers to anticipated questions also provided. It’s below. If anyone likes it and want to and drink beer in Westminster and present it for me, feel free. Read Kalecki as preparation. [Update: I'll be doing my pitch over speakerphone at 7.30pm.]
A tax on non-investment
The long-term trend is for UK companies to hold ever greater cash reserves, and the cash now held is around £0.75 trillion. Current economic orthodoxies hold that these cash reserves will be invested, with growth resulting, if only the government can bring to bear an atmosphere of business confidence, but such belief in the rationality of companies’ investment decisions is misplaced, given the long-term trend to hoard cash.
So let’s turn it all around, and impose a thoroughly Kaleckian non-investment tax on larger businesses which hold cash reserves over and above a certain cash: turnover ratio, balanced by positive tax breaks for certain types of investment (aligned with emerging industrial and educational/workforce development strategies), in a way which breaks the vicious cycle of no-investment-no growth-no demand-no confidence-no investment once and for all, by forcing up investment.
Anticipated Qs (and their As)
Q: Wouldn’t this lead to capital flight to countries don’t nick companies cash holdings? A: Yes, there might be some early flight by those not willing to invest, but it would be balanced by incomers focused on investing and attracted by an ‘unlocked’ investment environment (both in tersm of dynamic ‘unlocking’ government policy and positive tax breaks on certain investment types.
Q: How would we define what is reasonable investment for the purposes of not being taxed i.e. doesn’t holding govt securities coubt as investment? A: More work needed here, but ideally eligible investment would be measured in terms of employment/wages growth, although this might flow through indirectly e.g. equity investment in/peer-to peer lending to supply chain firms.
Q: Wouldn’t firms get below the ratio by dividend payments, bonuses etc.? A: Yes, but that’s a good thing, not least as such diffusion of reserves opens up to capital gains tax etc.., and of course institutional investors would be subject to same non-investment tax law?
Q: Hold on, isn’t there already a form of non-investment tax in the form of Bank of England rates to real term negative rates? A: Yes, fair enough, but note that this is a long-term trend anyway which hasn’t worked. As Keynes said: “It seems unlikely that the influence of banking policy on the rate of interest will be sufficient by itself to determine an optimum rate of investment.” We need something much more forceful, and obvious in companies’ decision-making process.
Q: Shouldn’t the proposer of this policy idea be made a SpAD in the (hopefully) incoming Labour government? A: Oh go on then.