Eat the rich then starve

The UK government has done a deal with Switzerland to get a modicum of income of those UK citizens who have private Swiss bank accounts. Some moan that it doesn’t go far enough, while others warn that account holders may switch territories. However, one thing people forget is that the tax-conditions in a country will dictate where the taxable money is.

Osbourne on the Swiss slopes: could it be the end of the tax haven?
Simon Miller
On 26 August 2011 14:03

One refrain that keeps coming back as a result of the financial crisis of 2008 is to eat the rich. That is to say that there is an idea that the “rich” need to pay more, especially the pernicious bankers.

However, as with a Tobin tax, there is the law of unintended consequences to consider when enacting stringent measures to tax those in the top two rates of tax.

First of all, there is the simple expedient that people and capital are mobile; you tax them, they and/or the capital moves. You overtax a company, it will move.

Now, there are many that say ‘call their bluff’ and, yes, for certain companies, they are intricately tied into the framework of the country – think Barclays and its high-street branches.

However, let’s say the Independent Commission on Banking insists on splitting retail operations from investment banking. Immediately it gives a framework for Barclays to shift operations away from the UK, perhaps even sell-off its high-street chain. So taxable income, people (who get taxed) and company could now move – is this what people really want?

Secondly, for others, such as BP, it is a matter of funding and development.

I don’t agree with the threats to the Treasury by BP over funding oil and gas discovery in UK territorial waters, especially since compared with other countries, the windfall tax is fairly on par. But it does demonstrate another consequence. For the UK, energy security is of increasing importance. If companies like BP are willing to pay for and search for new fields then that can only benefit the UK, if and probably when, we enact emergency provision orders sometime down the line. However, tax them too much and they stop looking and paying, going to other ‘benign’ territories.

So does ever-increasing taxation work? Nope. Not at all. Yes there is a brief spike but then money starts exiting a country or ways are found to either not pay the tax or results in people being paid in non-taxable forms.  Already, the Treasury is concerned that the 50% personal tax rate is hurting income and is examining returns.

Despite what the ideologues say in the Liberal Democrats and Labour parties, the Laffer curve has been known for quite a while now. Although disputed, it is a simple formula, the more you tax, the likelihood is that you will get less revenue, with the reverse being true.

Now the Laffer curve suggests the peak is at 50%, which anecdotal evidence from Treasury officials suggests is too high at least in the UK. However, in principle what happens with taxation is that there is a compact between the state and those taxed and there is a goldilocks moment where everything is just right.

The state gets its money and the individual feels that it is OK to pay. Now I am not talking about the Abramoviches and Rothschilds of this world. The mega-rich do have a habit of avoiding tax whatever the rate. I am talking about the well-off, the generators that maintain our system through taxation, services and such-like. The sweet-spot has to be just right, enough money generated for the state and not too much taken away from the individual.

Unfortunately, this spot no longer exists. The pips are being squeezed direct and indirectly and people who you would consider ordinary members of the public are employing accountants to look at avoiding tax.

Although the government has made the right noises about cutting spending, people look at their take home pay – remember no upper ceiling on national insurance anymore – and wonder why it’s getting smaller.

This will result in more and more people avoiding tax and less and less income, a nice way to try and balance the books.

If the Treasury finds what most people expect and incomes have dropped due to the 50% rate then Chancellor George Osborne must ignore the threats from his Lib Dem partners and drop it. Indeed, I would go further and examine the direct correlation of income and taxation throughout the system.

You see, by eating the rich, eventually you will end up with an empty plate and feeling very hungry indeed. 

Simon Miller is the Editor of Financial Risks Today

blog comments powered by Disqus