It is that it would widen share ownership. Wider share ownership is an unalloyed good thing.
However, for many businesses, the shadow chancellor’s proposals amount to little more than a confiscation of other people’s property.
Say you are an entrepreneur.
You had a good idea for a business, you remortgaged your home to raise capital to set up the business when the bank wouldn’t lend to you, you worked long hours into the night and the weekends, making heavy personal sacrifices, foregoing holidays, the kids birthday parties and other social events.
There were weeks, even months, where you couldn’t afford to pay yourself a proper salary. Your business is a success and you are able to take people on, provide them with jobs.
You take the business onto the stock market and see a value attached to your life’s work. Then, at the end of all that, Mr McDonnell wants you to hand over 10% of everything for which you have worked to an “Inclusive Ownership Fund” (IOF) without you receiving any compensation.
It is hard to think of an idea better designed to kill entrepreneurship stone dead or to drive wealth creators, the people who take risks to build successful businesses and create jobs overseas.
How would you like it if you were obliged to hand a 10% stake of your home, or your car, to someone else without compensation? That is how many entrepreneurs will feel about being made to give up a stake in their business without compensation.
Ah, you may say, but what is wrong with a big, faceless FTSE-100 company, a Royal Dutch Shell or an HSBC, being obliged to deposit 10% of their shares in such a fund?
The answer is because this would still represent confiscation by the state of other people’s property.
All of these companies are owned by their shareholders, in the main, members of occupational pension schemes and holders of insurance policies. These companies belong to them and, if you take away 10% of them and give it to someone else without compensation, that amounts to theft.
Even if companies issue new shares to deposit into this IOF, existing shareholders would still see their stake in the business diluted, which amounts to the same thing.
Worse still, many of the big battalions of the FTSE 100 or the FTSE 250 now have a significant proportion of shareholders on their register from overseas.
Again, it is harder to think of a policy better constructed to drive away foreign investors from the UK.
Many City investors are currently battling to stop Unilever, the third biggest company in the Footsie, relocating its head office to the Netherlands because the move will result in it being ejected from the index.
That would force some investors to sell their shares in Unilever without receiving any kind of takeover premium. A lot more companies would contemplate similar actions if these scheme comes to pass.
Think how you would feel if, for example, you had bought shares in one of America’s tech titans, like Apple or Amazon, only for the US government to confiscate 10% of your shares?
Or if you had invested in one of Germany’s prestigious companies, like BMW or Adidas, only for the German government to insist 10% of your shares were given up without compensation. You would think twice about ever investing a penny in America or Germany again. Post-Brexit, the UK needs desperately to attract foreign investors, not risk repelling them.
Then there’s the way Mr McDonnell proposes to cream off some of the dividends paid by the shares in this IOF once every worker has received their £500-a-head entitlement from the pot. That looks very much like a backdoor increase in corporation tax.
There’s also the question of who would sit on the board of trustees of this Inclusive Ownership Fund or how powerful they would be to stop a future government from dipping into the fund to divert money from it to pet projects or to plug budget deficits.
Another problem with these proposals is that they create an uneven playing field.
Labour admits that unlisted companies would not be prone to this rule and neither would the UK subsidiaries of foreign companies: it would only apply to companies listed in the UK.
These proposals could very well compel some companies to de-list from the stock market – depriving the public, potentially, of a lot of exciting investment opportunities and resulting in the exact opposite of the wider share ownership Mr McDonnell claims to seek.
Quoted companies provide a return to their investors by giving them a share of profits. This is usually in the form of a dividend.
However, if companies are forced to hand over 10% of their dividends to this IOF, you could see companies responding to these proposals by ceasing paying dividends, returning capital to shareholders instead via share buy-backs.
The IOF would not raise the sums Mr McDonnell expects them to under such circumstances.
There’s a further wrinkle with these proposals. Companies list on the stock market to raise capital. Companies that are already listed issue new shares to investors if they need to raise more capital.
In such fund-raising exercises, existing shareholders usually have the automatic right to buy some of the new shares being issued, so their stake is not diluted. Would the Inclusive Ownership Fund be allowed to take up its rights in such circumstances?
And, if it did not, would it later demand more shares from the company once the IOF’s shareholding had been diluted below 10%? Mr McDonnell isn’t saying.
Ironically, these proposals come just as Labour is proposing to re-nationalise a number of private sector businesses, including water companies and the Royal Mail.
At present, workers in those companies are able to own shares in them – indeed, employees of Royal Mail currently own 12% of the business – but will lose that ability if Labour nationalises them.
That is inconsistent with Mr McDonnell’s claim that he wishes to see wider share ownership. It’s worth remembering that most Royal Mail employees have spurned the opportunity to sell their shares they were awarded at privatisation but have held onto them.
Besides, there already exists a very good way of enabling employees to buy shares in the company for which they work.
It is called “Save As You Earn” (SAYE) or “Sharesave” and was introduced by Margaret Thatcher’s government in 1980.
Under SAYE, employees divert some of their earnings – before tax has been applied to them – into a regular savings scheme, which gives them the right or ‘option’ to buy a certain number of shares in the company for which they work at a set point in the future.
Employers top up these savings with a cash bonus and the options in the shares are eventually exercised. Employees can pay between £50 and £250 per month into such schemes.
SAYE has been highly successful in widening share ownership and tens of millions of British workers have benefited from participating in such schemes during the last 38 years.
If Labour is sincere about widening share ownership, it could raise the monthly limit employees are allowed to save on a tax free basis from the existing £500, or it could reduce the minimum term of the contract from the current three years.
Or, if it wanted to make it easier for people to buy shares, it could abolish Stamp Duty on share dealing.
Currently, it is committed to introducing a Financial Transactions Tax (FTT), sometimes referred to as a ‘Robin Hood Tax’, which would actually have the impact of making it more expensive to buy shares.
Wider share ownership is highly desirable. There are lots of ways to achieve that aim. Mr McDonnell’s proposals actually risk achieving the opposite.