The virtues of John Lewis-style businesses

UK Deputy Prime Minister Nick Clegg has argued that firms should get tax breaks to encourage them to structure like Britain's successful John Lewis department store chain. Basically, the staff in John Lewis stores are not employees so much as partners – they all have a stake in the success of the business. And this is what Nick Clegg wants to encourage.

Up to a point, I agree. Back in 1989, the Adam Smith Institute did a report, Incentive Through Ownership by the entrepreneur Michael G Bell, arguing the case for just such arrangements in business. They make sense particularly in 'people' businesses, where making profits hinges wholly or mainly on the talents of the staff. Where people are a business's main asset, it makes sense not just to reward them with bonuses for exceptional effort, but to cut them in for a share of the business themselves. That gives them an asset they can trade and use, a stake in the business and in the country.

So these arrangements can be valuable, but are not for everyone. Businesses where the individual workers are less important than the land or capital that is employed have little scope to use such schemes, and might well not benefit much from installing them. And the other point I would make is that the tax system ought to be neutral It should not be used to promote one kind of business arrangement that particular politicians happen to favour, over any other. Sure, there may be other factors – such as other parts of the tax code or other regulations – that skew the way businesses are put together, and then there might be a case for using the tax system to restore the balance. But generally it's better to restore the balance by not having the distorting taxes and regulations in the first place.

Having said all that, our report Incentive Through Ownership made a strong case for the virtues of employee share ownership, and the evidence it produced in support was overwhelming, as it continues to be. In politics, good ideas usually come out in the end, though it can take a lot of time. In this case, over twenty years, which is about average in fact.

I wonder whether firms based on partnerships may benefit, not just from the incentive effect of share ownership, but from a possible reduction in employment regulation. Hire a single employee and you are immediately drenched in a mountain of tax law and employment regulation. That's why many people don't. Take on a self- employed colleague and things are different. So it is quite possible that, if such partnerships took off, so would growth.

Just don't tell Her Majesty's Revenue and Customs, which has campaigned for years to stamp out self-employment. Nothing irritates it more than people who don't fit its standard tick boxes, and whom it can't simply capture money from every month through their firm's finance department. If it came to a contest between Clegg and HMRC, that would be messy indeed.