Friday, August 17, 2007

Tides and waves in the financial market just occurred to me whilst reading the Economist about recent turmoils in the financial market: one could paraphrase Mr Buffet of Hathawy Berkley (aka "the sage of Omaha") and say: "it's when the tide goes out that one can tell the boats from the turds"

Rude, I know ;-)

Tax & Spend (& Kill)

Yet again Labour is at work to raise taxes, no doubt to plunge yet more money into hapless public sector projects.

This time round, it's Capital Gains tax (CGT) that's under scrutiny: according to the, Alistair Darling "is considering an increase from 10 to 20 per cent in the base rate of capital gains tax for investments classed as business assets, such as holdings in unlisted companies or shares owned by employees." (, 16 Aug.)

Although to the clueless (and I freely include in this category the entirety of Labour party) this would be a way to tax the "fat cats" of private equity, it will, instead, have the usual "uninted consequence" of dampening even more the ability of small start-ups to attract and retain talented people, and, ultimately, to drive away venture capital investment from the UK.

The reality of the matter (which clearly escapes our erstwhile ministers) is that the very people this tightening of tax rules should affect (the super-rich, mega-millionaires who drive multi-£bn deals) have no "UK domicile" for tax purposes (or can easily obtain that, if the tax burden becomes too much).

The ones affectes are the likes of you and I: ordinary folk, working in excess of 16 hours a day on a business idea, whose only
reward (uncertain, and at some point in the future) is in the value of stock options. We are quite unlikely to get domiciled in the Bahamas, and even less likely to afford to hire expensive lawyers and accountants to tell us how to dodge the tax bullet.

Because of the risk, uncertainty of outcome and time delay, the final reward attached to stock options must necessarily be quite high to compare favourable with today's "loss of earnings:" by using the universally accepted Discounted Cash Flow - DCF - to arrive at a Net Present Value - NPV - that one uses to compare a certain outcome today (say, a defined monthly salary and a pension at 60 years of age in the Public Sector and the certainty of not being fired, irrespective of how badly one can screw up) with an expected, but uncertain, outcome some years in the future.

The "unintended consequence" of those tax changes then will be to drive even less people into starting new businesses, driving innovation, and into making Britain an (even) less attractive place to invest into - driving up at the same time the cost of hiring talented people (the lower the value of stock options tomorrow, the higher the salary I want today).
Additionally, VCs and their ilk, when deprived of the kind of returns they expect (given the risk profile attached to their investments) will be even less likely to bother with smaller enterprise (the ones needing between £500k and £2m).

They won't care anyway - they can easily invest in China, India, US, Ireland, or wherever takes their fancy: away from tax-crazy Britain.

Why is it that our politician are so myopic they can't even see across the Irish Sea: there, a significant reduction in the level of taxation has driven the economy onwards and upwards, making Ireland one of the most attractive places in Europe (and the world) to invest and work, and the Irish people have moved from one of the poorest in Europe to being among the wealthiest and happiest (if only the weather would co-operate, we would all move there, wouldn't we?)

And, guess what? The Irish Government has never had it so good, raking in tax revenues at a record rate, and expanding the expenditure in public services at a much greater rate that even our rapacious Gordon "tax-and-spend" Brown, can only dream of.

But, oh, no - Labour still lives in this 70's zero-sum game mentality: if you have success in life it surely must be at someone else's expenses, so "they'll squeeze till you squeak."