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Social entrepreneurs, not investors, need tax breaks

Rod Schwartz
Rod Schwartz, posted on 04.12.12

Blog comments1 comment

In 2010, I wrote a piece in Third Sector arguing against tax incentives for the social enterprise sector, saying they were ineffective, complex and unfair.

I have added elsewhere that they are distortive. Such advice seems to be falling on deaf ears - our sector, and the world of social investment generally, is very much in favour, and this government is committed to providing further encouragement through fiscal incentives.

Despite the fact that ClearlySo might be a beneficiary of state largesse, I remain opposed to such incentives. Hyping the sector further could actually delay its necessary path to sustainability. Supporting a sector already predicted by Boston Consulting Group and others to grow at more than 35 per cent a year is unnecessary, wasteful and likely to have unintended consequences.

In the likely event that my advice is ignored, I would urge the government to target the incentives on social entrepreneurs rather than social investors, for three reasons. First, social enterprises and the positive social outcomes they generate are what we seek to encourage, rather than social investment, which is a means to an end. Government incentives should be targeted at intended beneficiaries of any programme, and the best way of doing this is by incentivising the creation of social enterprises directly.

One problem with my approach is that there is no single category of social enterprise. However, community interest companies, industrial and provident societies and cooperatives could be suitable beneficiaries. Another approach could be to reward the desired social impact itself. In this way, many social businesses, structured as limited companies, could also benefit from the scheme. I appreciate that this approach involves complexities, but they are not insurmountable. Government would identify those outcomes it seeks to support and the credits could reflect anticipated savings in public services budgets commensurate with the outcome achieved. This is similar to payment-by-results structures, but might cost less to implement.

The second attractive aspect of this proposal is that, if done cleverly, it could enable capital markets to amplify the impact of such subsidies and credits. Imagine if the government announced credits to reward the generation of easily identifiable social benefits and made it clear that more would be forthcoming. The capital markets would favour social businesses and enterprises that generate these social impacts and incorporate estimates about future policy changes, thereby lowering the cost of capital to many social enterprises. Even today, capital markets value social impact - for example, in anticipating punitive charges on polluters.

The third argument against incentives for social investment is that they would only benefit the rich, as only they have meaningful savings to benefit from fiscal incentives. A recent report by Lloyds Bank said that 30 per cent of UK households have no savings and a further 19 per cent have savings of less than £1,500. That's half the population unable to benefit from these incentives.

I am as keen as any practitioner to help ensure the social sector grows faster, but we need to be careful of what we wish for, aware of practical issues about implementation and mindful that this is not the time to be creating loopholes for the well-off.

This article was originally published in Third Sector Magazine.


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1 comment so far.

Blog comments Jeff Mowatt, 22.12.12, 16:45

Rod, There's far less chance of me being listened to. Creation of social enterprises directly was however where we came into this in the UK 8 years ago with a strategy for creating social enterprise through what we'd described generally as a Community Funding Enterprise. Today, this might also be a CIC or a Bencom, where the direction of profit is toward stimulating the local economy. Providing tax incentives for the CFE, would enhance the approach suggested below which comes from a proposal for the Crimean Tatars: "By combining a community-funding enterprise (CFE) with a micro-credit union, the limitations inherent in each one is greatly diminished. The CFE provides sufficient funding to ensure the operating costs of the credit union, reducing the risk that the credit union will have any need to use its capital to sustain itself. The credit union immediately makes available sufficient loan money to match the needs of the community, thereby eliminating the time needed for the CFE to generate the same amounts of money. Additionally, CFE profits over and above what is needed to help with the operating costs of the credit union can be put directly into the credit union. Over time, the amount of money used to originally fund the creation of the CFE is offset by CFE contributions to the credit union. The credit union is increased so that larger amounts of money become available either to make larger loans or to service more borrowers. Together, the CFE and credit union create an enterprise where the original funding not only remains but also increases with time. They complement and balance each other by addressing the economic goals both have in common and offsetting each other’s limitations." . http://economics4humanity.wordpress.com/2012/09/22/creating-shared-value-mk1/ One of the greatest obstacles has to be the way in which media tilts the conversation toward impact investors and often censors the alternate view.