UK: Tax reform the solution to investors' short-term myopia.

UK: Tax reform the solution to investors' short-term myopia. - Management Today comments:

Last Updated: 31 Aug 2010

Management Today comments:

Bankers now rank marginally above thieves, pimps and whores in the public mind. Some would say that they belong in the same category judging by the pasting that banks have taken recently.

The BCCI affair - with tales of global connivery and corruption on a gigantic scale - simply confirms all the prejudices of a bankophobe. Television ditties about caring banks beavering away in the community on behalf of their business customers seem a little rich when those same customers in real life are up in arms over extortionate bank charges and crushing borrowing rates way above the real level of interest rates.

But despite the loathing that bankers now engender, their moves into risky areas of lending or efforts to find new businesses (sometimes leading to disaster) are mere symptoms of a problem, not the cause. Banks, like industry and business generally in Britain, are subjected to enormous short-term pressure to perform. The general motto for the Anglo-Saxon world (for it is an American problem as much as a British one) is: look after the short term; the long term can take care of itself.

But our major industrial competitors - principally Germany and Japan - do manage to encourage a much more long-sighted view of the world, where investment in the future comes before short-term gain. This holds even though the Japanese model is looking somewhat tarnished because of the recent chicanery indulged in by leading broking houses in order to protect favoured clients.

In Germany, company profits are deliberately understated and huge amounts are poured into investment and research and development. But then, like Japan, there is no real tradition of hostile takeovers and the like, which also force the drive for short-term gain. The banks have long had close relations with industry (some would argue too cosy), but it seems to work and the German economic colossus goes marching on, even if slightly sidetracked by the enormous costs of unity. Only in times of crisis do British banks feel compelled to start to "nurse" companies back to health, in order to ensure a loan does not go dodgy.

Ironically, a long-term investment culture in Britain can only be achieved by a determinedly Thatcherite and free market move. The British taxation system must be changed root and branch. Taxes on investments in equities on a long-term basis must be gradually phased out to be replaced by higher taxes on consumption.

Of course, Personal Equity Plans have done this to a limited extent. But the Government should simply abolish any upper limits on PEPs, extend the deadline from five to, say, seven years, with stiffer tax penalties for anyone exiting early from the scheme. If pensions and the like could be included in a PEP it would create a huge force for stability, long-term saving and investment. Pension funds would be more concerned to see companies through the full seven-year cycle. Industry would have a much longer timescale, while the British public would rediscover the joys of saving rather than paying VAT of 20% on usually imported consumer durables.

The Government could also help by scrapping its unhelpful plans to entice would-be shareholders in the next British Telecom sale to become stock market punters through cut-price dealing bribes. The last thing that the British quoted industrial sector needs is a multitude of short-term investors. Encourage investors to put their money into equities, yes - if it is for the long term, even better.

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