The Telegraph is wrong to be critical of of the Conservatives considering a plan to lower business taxes. Lower and simpler business taxes are a good idea and will do much to spur the attractiveness of Britain as a place to do business. Reducing Britain's debt mountain is really important for all of us too.
The business tax system allows a lot of reliefs - notably for capital allowances and debt interest. Some of these reliefs could be reduced and the tax rate cut. A "Lawsonian" approach. This means you get a lower tax rate and a simpler tax system. Discourage excessive debt by treating interest more like dividends and you encourage more equity investment. Can't pay a dividend? Well, the business passes on the dividend and can keep going until better times. Can't pay the interest? The business cuts investment or, worse, goes bust. Debt financing seems great on the way up - it is terrible on the way down. This is exactly what we are seeing. It has made the recession tougher than it needed to be.
So why then are some business interests so keen on debt being so tax attractive? Well a culture has grown up where interest is basically used to avoid UK tax. On an industrial scale. Large multinationals and private equity barons use this relief to reduce UK profits and get the money offshore to places where there is no tax - like the Channel Islands. Great for them, bad for the taxpayer, bad for all of us and our jobs in making the recession harder than it needs to be.
Now, debt is not always a "bad thing". It has its place. It is also entirely understandable that big business interests will hate any change in this area as it would put a stop to mass tax avoidance and stamp out much tax haven planning.Yet it is not right it should be tax preferred over equity financing as it is. As we can see from the effects of the recession, it would be better and fairer to enable a more level playing field between equity investment and debt, attractive to reduce the country's debt mountain at all levels and desirable to have lower, simpler business taxes.
