Taking stock

The IWA has just published, A Strategy for the Welsh Economy, by Dr John Ball of Swansea Metropolitan University. One of Dr Ball’s key points highlights a continued weakness in the Welsh economy: the lack of a sound financial sector and the associated difficulties of funding business and raising capital. Establishing a Wales Stock Exchange would substantially expand legal and financial expertise and the development of a financial sector, and lead to an equity market built on understanding the unique needs of Welsh business finance. This would lead to improved business education and the development of a wider business and financially literate community. In addition, it would encourage internal growth and ownership, provide new sources of long term funds for Welsh firms and act as a catalyst for a regional financial cluster. Specific and sectoral exchanges have been on the agenda recently.

Differences in taxation-based incentives, Dr Ball says, have proved to be a powerful tool of economic development in many parts of Europe. Such incentives have been based on corporation tax, however, but profit has to be made before any such incentives become attractive. An alternative response is to introduce a tax based not on profit but on turnover. While the encouragement of profitable businesses is essential to economic well being, the definition of profit is at best ambiguous. Profit levels can be manipulated and transferred between operations and countries, resulting in a situation where there are no profits to be taxed. The great advantage of a turnover tax is its simplicity and transparency. Tax-based incentives, such as capital allowances would still apply but be off-set against the liability arising from the turnover tax. The mechanism for the collection of the tax already exists through the VAT system. The tax would incorporate a sliding scale at the lower end to encourage smaller, and probably local, businesses and as with VAT there would be a threshold below which the turnover tax would not be paid.

Although separate data on the amount of corporation tax paid in Wales is not currently available, extrapolating figures produced during the 1990s shows that a turnover tax would at the very least equate with the total amount of corporation tax paid in Wales. To boost competition, introduce buying power into the economy and simultaneously address the benefits trap, Dr Ball calls for a fundamental change in the personal taxation system, replacing the present taxation system with one based on a single, flat tax. Adopting a single, flat tax, applicable across the board would have the effect of putting money, and demand, into the economy. The resulting economic dynamism would generate additional revenue for local businesses. In addition, low taxed incomes would mean that those on social security would no longer be penalised when moving into work, even if the work was low paid. This measure alone would have the particular attraction of addressing the benefits trap, boosting incentives to seek employment. There would be little or no loss in taxation income to HM Treasury, since many of those who would benefit from this tax system would almost certainly be in receipt of social benefits or below the personal taxation thresholds.

Dr John Ball, Swansea Metropolitan University. A Strategy for the Welsh Economy by Dr John Ball is available for purchase: £10 to non-members and £7.50 to IWA members (plus £1.50 for P&P;). Email [email protected] or telephone 029 2066 6606 for more information or to order.

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