Tuesday, July 28, 2009

For Richer For Poorer

A previous Tyler family Big Hat Fest

The bride dazzled, the sun shone, the champagne flowed, and our son's wedding was just about as perfect as it could be. The Tylers have gained a wonderful daughter, and have at least doubled the size of their extended family.

Weddings are one of life's great set-piece events, and old-fashioned people like the Tylers think it's important to do them properly.

It isn't just the formal business of the day - the families gathering to bear witness to their children repeating those age-old but always moving marriage vows. And it isn't just the celebration itself, or even the wedding album (the Brag Book as the photographer insisted on calling it) - brilliant though they may be.

No, over and above all of that, there's something even bigger: weddings are a reaffirmation of family ties, stability, and continuity. And at a good wedding, that reaffirmation touches everyone there, as we hope it did on Saturday.


Of course, being an economist, Tyler's mind is never far from money matters. And a wedding in the midst of recession naturally highlights the thorny issue of for richer and for poorer.

We're not talking here about the cost of the wedding itself - these things cost what they cost, and it was worth every single penny.

No, the issue that troubled Tyler was one particular relation whose previously thriving small business has recently folded. He and his family did not come, even though they have attended almost all previous such events. We fear he simply could not face the questions/sympathy/gloating he imagined he'd find. Or maybe it was the cost.

Either way, it was a great shame. But it does underline just how risky it is to be an entrepreneur.

Everybody knows about the entrepreneurs who end up making a fortune, but the vast majority never do. In fact, according to survey evidence, well under half survive even four years. And when we remember that most are dependent for initial funding on their personal or family resources - including second mortgages - we can see that their personal risks are much higher than those of an employee.

As it happens, today sees the publication of a new paper from the TaxPayers' Alliance on just this issue. Snappily entitled Tax and entrepreneurship - How the tax system impedes the creation of new firms and decreases employment, it was written by Matt Sinclair, the TPA's Research Director, and Dr Jonathan Scott, a Fellow at Queen’s University Belfast and a specialist in entrepreneurship and small firms. There's also a forward by a real live Dragon from the scary Den - Julie Meyer.

The paper runs through some of the evidence on what drives entrepreneurs, how they fund themselves, the risks they run, and their vital role in Britain's future prosperity.

It then focuses on our tax system, and how that increasingly penalises entrepreneurs:

"The tax system affects the decision over whether to become an entrepreneur in two key ways:

  • It may reduce the amount of capital they can access from their own wealth or their family. In particular, existing research suggests that receiving an inheritance leads to higher levels of self-employment. Inheritance Tax, in particular, may reduce the extent that entrepreneurs can obtain finance without the risks that come with a bank loan.

  • The tax system undermines the large rewards that justify the risks attached to starting a new

The paper points out that entrepreneurial earnings can be taxed several times over.

For example, money that is earned is taxed as personal income. Then, if that net income is invested in a start-up company, any earnings will be taxed at the corporate tax rate. Then, if the company is finally sold, its value will be taxed as capital gain. And finally, any residual value passed on to the next generation will be taxed at the IHT rate.

For most entrepreneurs that currently means 40% personal tax times 28% corporation tax times 18% capital gains tax times 40% inheritance tax. and compounded up over a lifetime, the TPA calculates that comes to an eye-watering total tax rate of over 90%.

We're right back to Denis Healey pip-squeaking territory. It's more than enough to make any rational entrepreneur take the first plane out.

Worse, rather than tackle the problem, this government has actually made it worse. The top personal tax rate is soon to increase to 50%, which means that the overall compound tax rate on entrepreneurs will shift up to 92%.

It's a great pity our struggling relation didn't come on Saturday. Nobody would have been chortling. We'd have been advising him to get out and try again - maybe here. And we'd still invite him and his family back to all the weddings.

For richer or poorer.

PS Many thanks to BOM readers for all the good wishes you sent. The day could not have gone better, and those of a certain age are already counting the grandchildren.

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