MONEY Making sense of SET

NICHOLAS DAVENPORT

The budget of 1966, which introduced the selective employment tax, was for me a memorable occasion. I had gone to Great George Street to collect the budget papers and on emerging into Whitehall I ran into Nicholas Kaldor, the reputed father of the tax. `Nicky', I cried in a note of dismay, 'what have you done? Putting a tax on builders' labour in the vital housing industry and giving a bonus to the manufacturers of one-armed bandits!' He looked surprised. Then his face broke into a grin and in a moment he was convulsed with laughter. I turned despairingly away into the Under- ground with his laughter ringing in my ears. I recall the incident not to belittle Nicholas Kaldor for whom I have the greatest re- spect as an economist. In a flash of time, when employed as an official of the Inland Revenue, he had devised for the Chancellor a great revenue-producing tax (over £600 million net in 1969-70) but he knew that if it had to be selective there would be border- line cases which would appear ridiculous and give the tax a bad name. I am sure that he will now be laughing his head off at the somewhat comic solemnities of Professor Reddaway's defence.

Two years ago Mr Jenkins asked the director of the Department of Applied Economics at Cambridge to carry out a study of the effects of SET on prices, margins and productivity in industries on which the tax falls as a net burden. This is Professor Reddaway's first report and it deals solely with the distributive trades. The fact that he claims that a large part of the tax has been absorbed in these trades by an abnormal in- crease in productivity and that contrary to popular belief it is not a costly tax to collect —although it involves collecting from every- body and then refunding more than half of what has been collected—has been hailed by the Labour party as proof that SET is a good tax and that only bad Tories would propose its abolition. But a careful reading of the report does not support their contention. The impression I got was that SET is a more perverse tax than I had previously thought.

The report purports to show by econo- metric analysis that the actual increase in productivity in the retail trades between 1965 and 1968 was 11.1 per cent compared with an expected increase of 5.6 per cent and in the wholesale trades 11 per cent com- pared with an expected increase of 5 per cent. As a result there was a saving of 100,000 staff in retailing and 30,000 in wholesaling. But the report emphasises that this productivity gain was due to all ab- normal factors which include the ending of retail price maintenance as well as SET. Margaret Hall, an Oxford economist, who is an expert on the retail trades, has pointed out that with two opposing forces at work— the collapse of RPM tending to depress prices and the imposition of SET tending to raise prices—no amount of statistical expertise could identify on the available data the separate effects of these two dominant influ- ences. What probably occurred was that the imposition of SET speeded up the changes in retail trading which would have happened anyway seeing that managements have a

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0 is for Overheads duty to their shareholders to maximise profits. Nevertheless profits on average have been reduced by the equivalent of more than half the cost of SET.

The changes in retail trade, as we all know, involved a reduction in counter staff and an increase in self-service, so that the physical labour of shopping now falls more heavily on the customer, in other words, the wretched overworked housewife. The report argues that self-service improves the custo- mers range of choice but my experience is that if you take more time to select your goods you will see the queues at the cash desks grow longer and longer, so that in desperation you will grab blindly in a mad rush to reach the harassed cashier.

The super-store has produced a super- neurosis in shoppers, for which SET may be blamed. Any selective tax creates borderline problems and the report frankly admits that the most serious anomaly in SET is the differ- ence in treatment between manufacturers' and wholesalers' distribution, the first being tax free and the second subject to tax. (To add to the confusion some wholesalers secure partial refunds and others do not.) Wholesalers have so far held their own by increasing efficiency and by accepting re- duced profits but with higher SET there is likely to be a contraction of wholesalers' business. Professor Reddaway thinks that their turnover could be reduced by about 10 per cent (1600 million) which would lead to a real increase in the national costs of dis- tribution. The solution is either to exempt wholesalers—at an estimated loss of £50 million a year in revenue—or charge the tax on manufacturers' distribution services.

The report is also critical on economic grounds of the exemption from tax of the self-employed. There would be administra- tive problems if they were included but to exclude them leads to a distortion of the price mechanism and to a lot of fiddling. I know of one builder who lost his two best plumbers because a water board official had suggested to them that they would earn far more if self-employed. Of course they took the water board business away from their old employer.

Professor Reddaway regards criticism of

the selectivity of SET as misconceived. Why? It is not a criticism of selectivity as such, for most indirect taxes are selective, but a reasoned complaint that the selectivity of this tax is a foolish sort of selectivity—in some cases an asinine one. To remove all the many anomalies would make the Act unreadable. The best course would be to scrap it and introduce a general tax on all employment. If SET has done wonders in improving the productivity of the distribu- tive trades would it not also do wonders in improving the productivity of the manu- facturing industries which in general are far more wasteful in the use of labour than the service industries?

A general tax on employment would en- able the rates to be reduced which, as this table shows, are already looking high: SET rates

5 Sept 2 Sept 7 July

1966 1968 1969

Men 25/- 37/6 48/, Women 12/6 18/9 24/4 Perhaps Mr Jenkins on 14 April will move along these lines and steal the Tories' thunder.