Well, continuing in my theme of talking about folk heading off to mountainous nations with more sensible tax laws than in the UK, I see that Sir Simon Jenkins thinks that Britain would be well rid of the thousands of financiers and other folk who are threatening to leave the UK because of high taxes. Jenkins is a rum fish: he is often quite astute in pointing out, for example, the damaging impact of regulations on certain industries and in some ways his instincts are quite liberal in the old, proper use of that word. But he also thinks that tax rates don’t really matter. To hell with ’em, he says: these bankers are just bluffing:
“There may be someone out there outraged at paying 10 per cent more in tax from an enormous income, and equally outraged at his firm being taxed on his enormous bonus. Of these a few may be so outraged as to uproot their families, desert their friends and go into exile — before they find that a £2 million London house costs £9 million in Geneva. If they can do their business entirely online, why be in London at all? But I doubt if there really are 9,000 such sad, migratory souls.”
Jenkins needs to get out more. There are indeed thousands of people who are not amused at the prospect of having their wallets so comprehensively lifted. In my travels and through work in the media and wealth management sector, I can tell Sir Simon that the exodus of folk is not a mirage. It is happening. Note the lazy assumption that because these evil bankers are paid so much, it will not make any difference if the state seizes another 10 per cent of their annual income. In fact, once changes to pension allowances, thresholds and National Insurance are taken into account, the top rate of income tax in the UK will be more than 60 per cent in marginal terms for anyone earning more than £150,000 a year. That tax bite is higher than will be the case on top earners in France, if my memory serves. Way to go, Mr Brown! But what is objectionable about Jenkins’ reasoning – if we can dignify his comment by such a word – is the idea that such folk have no right to be outraged at having almost two-thirds of their income above a certain level seized, at source. The assumption is that no-one really “needs” all that filthy lucre and should be jolly grateful that they do not have to surrender even more. The unconscious collectivism is all too evident.
The consider this classic:
“We used to get the same tax-dread from the British film industry, howling at being taxed like ordinary mortals. Yet the last time Britain made really good films, in the Sixties and Seventies, marginal income tax was 80 per cent. In 1986 the Big Bang transformed the City of London, leading to German, Swiss and American banks pouring into London. It ensured that the City, then languishing under competition from abroad, would flourish. At the time, marginal income tax was not 40 per cent or 50 per cent but 60 per cent.”
That is a silly argument. No-one is claiming that if taxes rise, that the economy collapses overnight – the damaging effect can take quite a while to have its effect. But have its effect it did. Many of the stars of 1970s films, such as Michael Caine, Peter Sellers, Sean Connery, Richard Burton, Roger Moore, did not live in the UK for part of the period that coincided with confiscatory tax rates. Sellers, for example, ended his days in Switzerland.
“It was not until two years later, in 1988, that the chancellor, Nigel Lawson, cut the tax to 40 per cent. By then Margaret Thatcher was so fearful of over-heating the economy that she pleaded with him that 50 per cent was enough. It was not Thatcher who cut the tax, as Johnson keeps saying, but Lawson. It led to inflation, boom and bust.”
Well, if Mrs Thatcher really did think that 50 per cent was “enough”, then all I can say is that I am glad Mr, now Lord, Lawson, prevailed. If the state takes a smaller chunk of a person’s income at source, that does not necessarily fuel inflation – since before the tax was cut, presumably the money being seized from such taxpayers was being spent on something else. In fact, I would add that one of Mrs Thatcher’s faults was her support for mortgage interest tax relief, which encouraged people to over-extend their borrowing on property and helped fuel the housing boom of the late 1980s (UK regulations restricting house building did not help either, but that is another story).
Finally, there is this:
Bankers can drift around the tax havens of the world while we are stuck in London but I don’t see why I should pay off their gambling debts with my taxes when they will not pay them too. If they storm off in a huff, good riddance. I don’t want such people investing my money.
Here he is confusing good arguments – no bailouts for failed bankers – with a sort of vengeful “fuck-you!” spite against bankers in general. If Sir Simon wants to make the case against “too big to fail” bailouts of bankers, argue for a genuine free market in banking rather than the statist, moral-hazard disaster we have now, and insist that the Keynesian madness now in vogue be challenged, I will be cheering him on. I suspect I might have to wait a while.
Yup. Typical of those hedge fund managers, all buggering off to CH to save 10% income tax.
Little do they know that CH has, effectively, a 1% annual property tax – but they don’t care, because rents and property prices are correspondingly lower, so the 10% income tax saving is a real saving, and the 1% property tax costs them nothing.
Meanwhile, hordes of asset-rich, cash-poor CH pensioners are beating a path to our door to take advantage of our lower property taxes … oh … hang on …
The Swiss could make an even bigger killing if they created an English-speaking Canton within their borders. Expats would flood in, and the Swiss would also add English, the world language, to their other assets.
As for the first comment, for those who don’t know, CH stands for Confederation of Helvetia. If there is a swap of citizens, this is again an advantage to both, though the Swiss system seems more stable, whereas the British system could collapse with the next act of Parliament.
Or the Brits could move to the Isle of Man. Is that as free as I keep hearing reports claim it to be?
Perhaps that fool doesn’t remember that John Lennon, no raging libertarian, happened to die in NY. And the reason for that was in part that living in NY at that time was still cheaper tax wise than the UK. What that fool does not understand is that taxes trickle down and eventually his will go up to cover for those who have taken their money out of the country.
Most of what government spends money on doesn’t benefit the net taxpayers. Especially the more you pay. In the US, the Republican victory in MA has clearly delineated to anyone who wants to see that even left leaning voters who happen to also be taxpayers have a limit of just how much they will swallow paying for other people’s ‘benefits’ as opposed to what they perceive as a benefit for them. MA has it’s own state version of Obamacare and the taxpayers there decided they don’t need to pay for other peoples ‘health care’. Obama is done. America is slowly stirring herself back to sanity and recovery. I wish the same for the UK and europe.
Mark, I was expecting you to peddle your LVT line, with all the predictability of an English batting collapse at cricket. The key point that differentiates Switzerland, say, from Gordon Brown’s Britain is spending, not the specific structure of the tax code.
I would settle for a low LVT or some other property tax if – and this is the clincher – government spending as a share of GDP were a fraction of what it is now and if the revenue raised by this tax were offset by cuts to things like income tax and particularly, National Insurance, which is a job-destroying tax. I am not holding my breath that such a prospect is on the table.
In any event, property is, to a certain degree, taxed in the UK already, such as stamp duty taxes on property deals, Council Taxes (for the benefit of non-Brits, this is a local authority tax that is linked to valuations of people’s homes).
Anyway, I have no desire to reprise the whole LVT line, suffice to point out that if anyone thinks that property taxes curb land speculative bubbles, then take a look at Hong Kong recently. For those who want to read a good take-down of Georgist economics, check this out by Paul Burch.(Link)
So there!
“It was not until two years later, in 1988, that the chancellor, Nigel Lawson, cut the tax to 40 per cent. By then Margaret Thatcher was so fearful of over-heating the economy that she pleaded with him that 50 per cent was enough. It was not Thatcher who cut the tax, as Johnson keeps saying, but Lawson. It led to inflation, boom and bust.”
Hold up, This really is a gold-mine of hilarious stupidity.
Ignore for a minute his claim that lowering taxes causes inflation for some reason. Is this man saying that the early 90s global recession was caused by the UK top rate of tax being cut by 10ppt? It’s amazing that we wield such influence, by the minutiae of our tax system to be able to collapse the US Savings and Loans industry, cause the Gulf War and resultant oil price spike, send Japan into stagnation for twenty years and even project our god-like hand back in time to cause the 1987 stock market crash.
Verily these Chancellors are no mere mortals, and Sir Simon Jenkins a genius among us for so brilliantly disregarding the most basic laws of cause and effect in order to reveal the truth.
Well yeah, me too. There is one assumption under which Jenkins would be superficially correct – namely, that most of what we have at the top level of banking presently is, in fact, a class of super-efficient rent-seeker rather than of wealth-creator. Under this assumption, their disappearance or discouragement might be a serious loss for the Exchequer, and yet remain a plus for the real economy.
Taxing everyone who reaches that sort of level, and leaving in place a banking system still (by assumption) incentivized to create rent-seekers – only now with the most competent examples pissing in at us from outside the tent – does not seem to me the most obvious way of addressing the problem. But it has a sort of semblance of sense when scarfed down in a snatched minute in the staff room or on the train. And it will offer the same in a prime time TV soundbite or a bull-session down the pub.
Hence the danger, and the need to knock it down. Nice work.
The point is not whether there exists somewhere that has lower taxes than the UK. The point is that the marginal attractiveness of living and working in this country has fallen. For a German or Scandinavian expat, the decision to forsake space, cheap housing, closeness to family, good transport, natural beauty, better public services, in exchange for a high flying, high paying London career, may well have been a marginal one before the Gordon Brown tax increases and banker witch hunt. Higher taxes may well be what tips the balance and sends many expats home. Of course, UK born ‘talent’ is less likely to flee, but they too may consider their options. Maybe the exodus of professionals seen in the 70s will repeat itself. I for example, am a British citizen. My fiancee is Korean. Once we are married we are contemplating moving to Korea for a few years. One of the main motivations are financial. As an expat I would pay no income tax. Even the locals only pay something like 20%. The situation is similar in Japan and Hong Kong.
Lowering taxes does cause inflation inasmuch as it actually lowers tax take, because the buggers almost never decrease spending accordingly, and carry merrily on printing the difference.
Peter – I’d check about Korea if I were you. I’ve lived here for almost 4 years, I’m pretty sure almost all expats have to pay tax. Lower than Britain for sure, but the rates are, as far as I know, broadly similar for Koreans and foreigners. That can range from about 1.5% to 35% depending on whether you are a permanent or contract worker and how much you earn.
I could be wrong, but I have never heard of foreign workers being tax exempt. Maybe there is some loophole I don’t know about for certain careers, people with particularly desirable skills and so on, but in general, foreigners have to pay tax too, at least, if they are considered resident in Korea.
Not true, Gray, because of your fundamental error in assuming that lower taxes result in lower revenues. Reducing marginal tax rates (which is what is meant by “lowering taxes”) always produces higher tax revenues for the government, as the increased incentive results in greater (taxable) economic output. It’s a win-win, because if spending is held constant the rate at which the Treasury’s printing presses run can be slowed down, reducing inflation. Of course, if you could couple that with actual spending reduction you’d have a triple-win, but that’s not likely to happen.
“Jenkins is a rum fish.” I have absolutely no idea what that means, but it is a wonderfully evocative phrase!
I don’t assume it, Laird – I specify it as a condition that must be true for my conclusion to hold: “inasmuch as it actually lowers tax take”. I apologize for the evident opacity of my phrasing.
But I don’t follow the rest of your argument at all: it’s not clear to me that the product of the reduced tax rate and the increased economic activity it engendered is necessarily always greater than in the former situation. You seem to be describing a Laffer curve with its optimum at, or arbitrarily close to, zero – which is patently absurd, so presumably isn’t the thing driven at.
Are you referring to decreases in the top-end loading or ‘progressive’ nature of the tax schedule?
What people like Sir Simon neglect in their social equations is consideration of:
THE FUNCTION OF TAXATION
The function of taxation is to provide revenues for the functions of government.
We face two perversions of functions:
(1) The functions of government are perverted beyond the needs for governments in the human interactions that make up the “economy.”
(2) the function of taxation is perverted to use as an instrument to influence, direct and control the human interactions within an “economy.”
The perversions generate the possibilities for the growth and establishment of a fixed political class whose members attain influence, dominance and power through manipulation and use of those perversions.
We live in perverse times.
I am referring to the demonstrable historical fact that every significant cut in marginal tax rates (at least since income taxation became ubiquitous) has resulted in substantial increases in tax revenues. C.f. the Kennedy and Reagan tax cuts.
Yes, that’s a Laffer Curve phenomenon, but you misunderstand where we are on that curve. Every major western nation is far past the optimum point, well down on the right side of the curve. This illustrates graphically why a cut in rates will necessarily result in increased revenues. Which, of course, is a utilitarian argument, not a philosophical one, but since the two are (at present) in alignment I’ll take what I can get.
I was broke when I left the UK, but I was damned if, should that change, the repellent gang of thugs who took over in 1997 were going to get a penny from me. And thus it has proved.
Thanks, Laird – I ought to look up the tax history you suggested. I wonder how things look in the UK, likewise.
It will be a very curious thing, easy to credit though it feels, that we are far past the Laffer optimum in any major nation – assuming that there really is a proper function involved, and that the tax-rate/revenue curve isn’t path-dependent in weird ways. It’s not hard to see how it could be so.
But my curiosity is founded on the fact that governments are in many ways bandit corporations, and so might be expected to be good at their core competencies – dominating populations and stealing their stuff. Otherwise we ought to be in for a change of bandit any time soon… Why would we expect governments as a general class to weaken and impoverish themselves needlessly? Monopoly decay and management infighting? I wonder if we can do better than that.
If there are two tax rates that can be set, and the more profitable one also enhances the managers’ security of tenure and reduces immediate coercion and PR costs, why rationally pick the worse?
The only explanation that occurs off the top of my heads is that it’s a strategic expense – a more heavily or capriciously taxed population being less productive, but also much easier to dominate, so that the smaller size of the revenue is outweighed by the increased security with which the takers enjoy it. Which is an interesting, if somewhat sinister, notion!
It’s at times like this I wish I were economist enough to knock up a decent mathematical model, and play about with a few toy worlds to see what qualitative behaviours came out.
Not always, but that’s the way to bet. The thing is that the tax rate that maximizes the power of politicians is higher than the rate that maximizes the amount of tax revenue. And so the politicians who set the tax rates have strong incentives to set them at the higher rate that’s maximizes political power rather than revenue. Thus lowering taxes to rates that politicians see as “unnaturally” low will raise the amount of tax revenue.
First of all Simon Jenkins is trying to smuggle in false “history” – i.e. the claim that reducing the top rate of income tax “overheated” the economy. It was the INCREASE IN THE MONEY SUPPLY (not the reduction of the top rate of income tax) that led to the boom/bust of the late 1980’s and early 1990’s.
If Sir Simon Jenkins does not understand the above he is of no use in the examination of other economic matters.
As for higher taxes on the City of London – on top of the taxes AND THE ENDLESS REGULATIONS that now exist, well that would indeed lead to a further decline.
“But various banks and other such have been subsidized by the taxpayer”.
As J.P. says – THEY SHOULD NOT HAVE BEEN.
That does not mean that more taxes should be imposed now – any more than TARP (and so on) mean that the Obama tax on certain banks is a good thing (especially as the Obama tax would only apply to banks who have already paid back the TARP money – and would NOT apply to such entities as Fannie Mae and Freddie Mac who have not paid back the money they were given).
“Two wrongs do not make a right” – bailing people out was wrong (either by open bailout of by Central Bank trickery), but yet higher taxes (and yet more regulations – on top of the thousands of pages of regulations that already exist) are also wrong.
By the way, for those who do not remember, Nigel Lawson’s policy was known at the time as “shadowing the D. Mark” – i.e. trying to rig the exchange rate by increasing the money supply whenever it seems that the Pound was going to increase in relation to the German currency.
I wonder what Sir Simon’s opinion of this policy was at the time.
Thanks to Deep Lurker for saying more pithily what I was sort of winging, and then editing myself imperfectly in a hurry for extra huh?-value.
The point I was trying to tease out is just to make my suggested mechanism a bit more explicit, and what I meant to say in all that blather was something like:
Lower taxes -> Greater revenue; less incentive for popular disobedience; less chance of populace forcing a faction-change in top management.
BUT: greater opportunity for popular disobedience; more power for populace to dissolve or forcibly remodel the whole enterprise.
Higher taxes would then represent politicians’ collectively sacrificing relatively minor short-term advantages in favour of securing major long-term ones. They don’t all have to know they’re doing this. They do have to be adapted to institutions that get it done.
The greatest danger in any struggle is the assumption of the opponent’s stupidity…
Thanks for the heads up Kev. I checked the tax rate now and from 2010 all foreigners will pay a flat tax of about 16%. More than zero but appealing nonetheless! Tax for locals is progressive but the highest rate (above about £45K pa) is 35%. There is also a bunch of deductions you can make.
Somewhat off topic, but good to know.
@ JP.
I have always said government spending, and hence taxes are far too high. I have always said that LVT should be a replacement tax for other taxes (starting with Council Tax, Stamp Duty and Inheritance Tax). I would take these as a given.
And as to HK, they don’t have LVT as such, but the government raises revenue by selling long leaseholds. This is a great source of income and enables them to keep income tax to 20% or 16% or something (and they don’t have VAT either, The Worst Tax Of All).
But as you well know, the value of long leaseholds goes up and down much like the value of freeholds, so while it is a good source of revenue generally, it does not dampen property price bubbles. Merely pointing that out is not an argument against LVT.
And I have always said that deepening state control over property on the basis that will increase liberty is feudal madness.
HK used to have a flat rate tax of 10%; I don’t know what it is now, though.
Asset taxes are govt’s way of telling you that you don’t own your property. As such, insofar as the govt purportedly supports freedoms and right to own property, they should be abolished.
I’m not persuaded by LVT either, but I wonder if asset taxes are really always a deeper intrusion than the transaction kind. (Landed) asset taxes are one of the State’s ways of telling you don’t own your property – it’s not like there are no others, what with eminent domain on the one hand and an Englishman’s home becoming his open-plan office cubicle on the other – but transaction taxes are too. You can’t make any sort of deal or exchange with anybody without telling the State, and handing over part of the value of your property as it leaves you? That’s as intrusive as renting you out your own land is insulting!
In practice the whole question is moot, since the chance of LVT’s replacing other taxes rather than augmenting them is currently about half of femtobuggery.
Mark, I stand corrected: I thought Hong Kong was a poster-boy for LVT. I have seen it referenced by a number of Georgists. Hmm.
I must say that if we could have a John Cowperthwaite running the the UK Treasury, I’d be a very happy man indeed. (He used to be one of the top colonial administrators in HK, for those who have not heard of him).
“The thing is that the tax rate that maximizes the power of politicians is higher than the rate that maximizes the amount of tax revenue.”
A very perceptive comment; I hadn’t thought about it in quite that way before.