Friday, September 08, 2006

Taxing shares and Selling Airbus

Should we be worried about British Aerospace selling its stake in Airbus to its continental partners? Or about the Pacific & Orient being sold to a firm from Dubai?

People rail at the injustice of foreign firms, with government support or protection from takeover, taking advantage of our liberalism and buying up British firms. Whether icons or not this grates at the nerves as something British becomes something French or otherwise foreign. There are also concerns that higher value investment will be channeled to where the investors are although the data does not appear to support this hypothesis. However, even if such a relationship did hold true this would not be a reason to fear corporate sales to foreign owners.

If a company is sold to a foreign owner and its management is reasonably competent it should not be seriously undervalued. If it is being taken over by a foreign company able to do so thanks to state aid then it will often be overvalued. This will mean that money will flow into the UK economy to the value of the company. In turn this money will be reinvested, either directly by the company of by shareholders after a dividend, into strengthening the British ownership of other British companies or allowing them to invest abroad in return.

As such, a problem of insufficient ownership of companies by Britons arises not thanks to the decision to sell or not sell any company but thanks to the collective decision on how much to save and invest and whether to do so in companies or in government debt. It is this which fans of UK PLC remaining in British hands should be worried about as the amounts we save and invest could clearly be higher.

Key is to reduce the taxes which make saving expensive. Thankfully the Conservatives appear to be proposing quite an appropriate measure to achieve this end. They are proposing to do so by scrapping stamp duty on share trading. This is not only a good thing to encourage and support the efforts of those saving and strengthening provision for increasing numbers in retirement but also a great idea in that it is a scrapping of a tax. Every tax scrapped simplifies the tax system and reduces compliance costs.

Friends I have spoken to seem unsure about the politics even if they accept the economic logic of this move. I would point to a few factors which make this a good political move as well as eminently sensible economically as described above:

  1. Legitimate worries about the value of pensions are only going to grow more pressing as more final salary schemes are replaced and the demographic changes facing the UK become more obvious.
  2. It allows for the Conservatives to make the point about Brown undermining the UK's almost uniquely sound pension provision when he entered power with great force as they have a practicable scheme to improve the value of private pensions rather than simply being in a contest to spend more and more taxpayer money on the state pension.
  3. It is a tax cut that people will notice the value of quickly if we win power and are elected. Money given back to share traders (pension funds are the biggest but others as well) will quickly find its way back to the stock market and this will, other factors held equal, lead to a steady rise in the FTSE index over the Conservative time in office. Thanks to the role of expectations in setting stock prices this will happen quickly. Such a rise could create a valuable feel good factor if we are put in the fortunate position of having a new Conservative government.
  4. It would give us something sensible to contribute when a British company is sold abroad rather than trying to balance between attacking Labour and and avoiding ugly econ-nationalism.

A good policy. If backed up by a reduction in corporation tax it would be even better.


Anonymous said...

this post is purely on the politics
on the stockmaret thing, how much does the public care about that-and how much does it accept stamp duty will help?

Won't the govt be able to argue this will make it cheaper to sell british companies to foreigners-I don't dispute your logic but I'm not convinced it will sell any better than the reverse

on the "pension fund" thing why; should this work and help when the past raids on pension funds have been so harmless for the govt? it may be a growing issue -but in 20 years time not the next election

Serf said...

You mean BAE not British Airways ;)

Matthew Sinclair said...

Anon: I dealt with the economics in the first half of the post. Sorry if there wasn't enough :)

Serf: Thanks mate. Consider that one fixed.

Anonymous said...

no you misunderstand my comment (because it was badly phrased) my comment post is purely on the politics- I basically agreed with your economic analysis

Matthew Sinclair said...

Ah, cool.

Which part of the stock market thing are you referring to?

When selling a company the stamp duty isn't going to act as a serious block. It's the repeated trading of running a portfolio that racks up stamp duty charges.

I think the pension funds issue has become big in the past decade. Back when the Brown raid first took place we didn't have final salary schemes closing so firmly in the news.