Michael Taft: From Each Business According To Its Ability

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From top: Nick’s Coffee Shop repossessed in Ranelagh, Dublin 6 yesterday; Michael Taft

It is commonly asserted that we will have to be innovative, coming up with new solutions to the unprecedented challenges we face. Of course. The Financial Times’ Martin Sandbu has come up with such a new solution. Referencing a policy letter from the Leibniz Institute for Financial Research SAFE, he writes:

‘Meanwhile, some smart new taxes can be introduced. A group of European economists has proposed helping small businesses not through loans, which can leave them overstretched in the recovery, but through grants combined with a later profit surtax — in effect mimicking government equity injections, even for sole traders and family companies.’

In effect, the Government would provide grants to businesses that would be repaid through a tax surcharge. This would be superior to loans which negatively impact a business’s balance sheets.

Let’s compare a potential tax-based grant system with the SBCI’s (Strategic Banking Corporation of Ireland’s) ‘Working Capital Loan Scheme’.

The SBCI scheme, open to micro-enterprises and SMEs, would provide loans of between €25,000 and €1.5 million with a maximum interest rate of 4 percent, to be repaid within three years.

A tax-based grant scheme would provide similar loans but repayments would be based on profits – for instance, a company would pay their normal 12.5 percent corporate tax and then a 5 percent surcharge which would continue until the loan is repaid. Interest could be a marginal 0.5 percent.

The advantage to the business is that it wouldn’t be carrying debt, would only repay the loan when it was in profit, would spread out repayments as long as it took, and – if inflation exceeds 0.5 percent – the loan would be effectively written down over the medium term.

The advantage to the state is that it would recoup some of the subsidies to the business sector. This would set up a revenue stream in the years ahead, though it wouldn’t recoup all the grant money as many businesses would still go under.

Nonetheless, effectively interest-free grants to be repaid over the medium-term and only out of profits, would increase the number of companies that survive. Indeed by subjecting grants to a tax surcharge, the state can invest more in business supports.

Brian Keegan writes in the Business Post (pay-walled) of the bewildering range of business supports:

‘There are at least a dozen state-supported funding options announced from the Covid-19 working capital schemes to the SME credit guarantee scheme . . for many businesses owners struggling to deal with the day-to-day practicalities of handling a collapsing business, the range of options, terms and conditions can be bewildering . . . We need simple and quick supports to cope with the Covid-19 unemployment crisis, not a complex new industry of loans, grants, tax breaks and deferrals.’

Business groups are certainly not shy in making demands on the Exchequer:

‘Retail Excellence wants the Government to waive local authority rates for 12 months, give grants equal to 60 per cent of commercial rents for the period of the emergency, offer zero per cent loans for all impacted businesses as well as putting in place a Covid-19 compensation scheme.’

Without commenting on the efficiency of any particular proposal, far-ranging business supports will be needed. Retail Excellence’s proposals could be easily wrapped up in an omnibus tax-based grant system. We now have an opportunity to rationalise business supports into three main schemes:

1) Equity provision for large companies, whereby the state gets a stake in a company in exchange for equity investment

2) Tax-based grants as outlined above

3) Direct, non-repayable grants (e.g. Temporary Wage Subsidy Scheme)

Rationalising and funding the schemes to the extent necessary to save as many businesses as possible has now become urgent. It will be more equitable and efficient (e.g. avoid loading debt on business) if we adopt the following principle:

From each business according to its ability to pay, to each business according to its need.

Michael Taft is a researcher for SIPTU and author of the political economy blog, Notes on the Front. His column appears here every Tuesday.

Rollingnews

Yesterday: Meanwhile, In Ranelagh

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13 thoughts on “Michael Taft: From Each Business According To Its Ability

  1. Jonickal

    “From each business according to its ability to pay, to each business according to its need.”

    I reckon you’re going to eat those words some day, especially considering you’re the most Marxist commentator in Ireland.

    1. Michael Taft

      Jonickal – the most Marxist commentator in Ireland? My Marxist friends (some of my best friends are Marxists) would be amused to read that.

  2. V'ness

    From each business according to its ability to pay, to each business according to its need.

    Someone needs to tell the Professor how Ireland actually functions

  3. Cian

    I like the idea of a loan that gets paid back from future profits… but is there not a loophole whereby I can create a second company and route all my profits through it? The original company will never make a profit so will never repay the loan?

    1. Michael Taft

      Cian – any new scheme (like all such subsidy schemes) would have to come with a number of conditions and anti-avoidance provisions. The Revenue Commissioners would be the best agency to oversee this process as they have decades of experience in this area.

      1. V'ness

        Not much they can do if tax laws, charges, levies, rates and particularly reliefs, exemptions and credits are agreed in the annual Budget(s)

        For example, they can’t pursue Banks currently for taxes on profits because they are currently exempt
        they can’t pursue Private Equity Funds aka Vultures for posting their losses against profits, (*which are already guaranteed anyway)
        same for multi nationals

        Revenue can only collect what they are legally obliged to within the year being reported
        and that is entirely in the hands of the Minister for Finance of the day

        * Michael Noonan btw

  4. Johnnythree

    Why are we supporting retail when it is on its dying legs in most cases. Really? Support businesses who are solvent and have a business model that will work. Why should our tax be used to support retail rates and waivers?

  5. wearnicehats

    Michael. On the profits suggestion. Say I borrow €100k. I make a profit of €100k Is the calculation that I pay 12,5% CT on the profit as usual plus 5% on the €100k loan? Normally loan repayments would be taken out of the profits and then CT paid on the remainder. Admittedly only a saving of €625 but more palatable nonetheless

    Would the interest be annual? accrued?

    Similarly, what would happen if the company makes a loss? Doesn’t effect the CT but would you still have to pay the loan repayment?

    1. Cian

      My understanding is that if you borrowed 100,000 this year and return no profit – there are no repayments (+interest @0.5%);
      Year 2, you make 50K profit… so pay off €2,500 of the loan.

      In this way, the 100,000 loan won’t be paid off in full until the business has made €2,000,000 in profit!

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