04 October 2018

Inclusive Ownership Plan

What it says about Labour.

By John Watson

The thirteenth stroke of the clock may not tell you much about the time but it says a good deal about the timepiece.  Similarly John McDonnell’s Inclusive Ownership Plan says a great deal about the Labour Party and the way in which it produces ideas.

For those who do not study party conference speeches, the idea is that companies with more than 250 employees should be obliged to transfer 1% of their shares to a pool called an Inclusive Ownership Fund each year, until they reach the level of 10%.  From that pool employees will then receive their share of the dividends up to a limit of £500 each.  If the dividends accruing to the pool exceed the entitlement of the employees, the rest would be swiped by the government.

If you multiply £500 by 250 you get £125,000, hopefully a small sum compared with 10% of the profits of company employing 250 people.  Of course, the slice taken by the state will be much larger so that, if you ignore the amount paid to the employees as trivial, you are simply looking at a hike in the amount paid by the company to the state – equivalent to raising the rate of corporation tax from 20% to 28%.  That is what this proposal is about.

It may well be that there are good arguments for pushing up the tax rate on business in this way.  After all, the corporation tax rate has been above 20% in the past.  What is unpleasant is not the proposal to charge more but the dishonest way in which it is presented as being about employee participation.

Well, you may say, the proposals have already been fairly well outed in the press so nobody is really fooled.  Yet you would be wrong.  Listen to the Institute for Public Policy Research:

“We welcome this new initiative to give workers a greater stake in firms.”

Do they really believe that is right or have they just not bothered to think about it?  Who knows, but either way there are bloggers who think the same from even further back down the evolutionary chain.

It is easy to find fault with the plan and many already have.  There is the possibility that more tax will mean less investment.  The risk that it will make companies move abroad in much the same way that a hike in the corporation tax rate might do.  There is the fact that the 250 employee cut-off would cause distortion and hold back recruitment.  If you already had 240 employees, employing another 10 would be rather expensive.  Never mind, perhaps you could get round it by outsourcing some of the things which would otherwise be done by employees to one of those agencies.

Still, valid though these points may be, there is, I think, a much more serious objection.  By dishonestly dressing up a tax rise as employee participation, a Labour Government would obstruct the development of the genuine article.  Proper share schemes enable employees to share in earnings and a slice of the proceeds if the company is ultimately sold or floated.  Share option schemes give participation in future growth – perhaps the best way of aligning the interests of the employees and the shareholders.  These are ways of giving real participation and ownership, and over the years governments have rightly encouraged them.  It will become harder to sell them to shareholders, however, when they see 10% of profits already being funnelled off into something which purports to be employee participation, even if it is nothing of the sort.

To quote the great John McDonnell himself:

“Evidence shows that employee ownership increases a company’s productivity and encourages long-term thinking.”

If he really believes that he should be advocating proper share schemes and option schemes and not trying to use the rhetoric of employee ownership to carve out what is really a tax grab.  Bad boy, McDonnell!!

So now we come to a broader question.  What are we to make of a party which is prepared to sell short the workers, the very people whose interest it is supposed to have at heart, in this way?  Probably we shouldn’t be too hard on them.  Politics is a tough trade and in the turmoil of opposition it is easy to get PR confused with policy.  Not everything is thought through and an opposition party needs some sexy lines for the party conference.  Still, for all that it is disappointing.  New technology is changing everything at the moment and our commercial models, like our social models, are rapidly becoming outdated.  The “winner takes all” nature of the IT business means that new ways are going to have to be found for distributing the cash which is generated.  This whole area needs calm reflective debate and it is in the nature British politics that opposition parties have more freedom to come up with ground breaking ideas than does government.

The Labour Party should bin this fatuous proposal, honestly disclose their proposals for tax rises in their manifesto, and sponsor a debate on how best to align the interests of the various parties whose contribution is required to make business a success.