As the exodus of France’s millionaires shows, high taxes make societies more equal, but also poorer
France’s richest man, Bernard Arnault, is shifting his fortune to Belgium. Gérard Depardieu, the country’s greatest actor (figuratively and literally) is moving to Russia. And, if rumours are to be believed, Nicolas Sarkozy is planning a new career in London.
That’s the problem with very high taxes – they don’t redistribute wealth; they redistribute people. It’s easy to say, as François Hollande did during the 2012 French presidential campaign, that the rich should hand over 75% of their income. But the rich don’t sit around waiting to be taxed. Friendlier jurisdictions are just a Gulfstream flight away, and many financiers can open their businesses abroad simply by opening their laptops. The result of a hike in tax rates is thus often a fall in tax revenue – which means, of course, that the rest of us end up paying more to cover the share of the departed plutocrats.
In Davos, David Cameron has called for international action against what he calls legal but unethical tax avoidance. The trouble is that there will always be countries seeking to attract tax exiles. In any case, for a minister to decide subjectively which forms of legal behaviour are unacceptable is surely the definition of arbitrary government. If they want the rich to pay their share, western governments – including our own – should render avoidance purposeless; they should make taxes lower, flatter and simpler.
The complexity of a tax system is every bit as damaging to competitiveness as the overall tax rate. The more convoluted the tax code becomes, the more time we have to take off work to comply with it. Tolley’s Tax Handbook is now 11,500 pages long, twice what it was when Gordon Brown became chancellor, and the number of tax lawyers has increased commensurately. There isn’t a small business in the land that doesn’t need an accountant.
The very wealthy, who can afford ingenious tax advisers and high upfront fees, turn this complexity to their advantage, sheltering their assets in various pockets unintentionally created by government schemes. Again, the rest of us then have to pay more to make up their portion.
One way to think of the tax system is as a massive Swiss cheese. Each hole is an exemption created by a chancellor in pursuit of good headlines – a hole waiting to be filled by the clever accountants who work for Starbucks or Jimmy Carr.
If we were to compress the cheese, collapsing all the holes, its overall height would fall substantially. In other words, scrap all the special incentives, rebates and waivers, and you can cut the basic rate. We should, for instance, close the loophole that allows the super-rich to avoid stamp duty by putting their Chelsea mansions in their companies’ names. We should end the bizarre exemption from capital gains tax enjoyed by non-doms. Time spent on legal avoidance would instead be spent productively. Revenues would increase. It works every time.
Between 1980 and 2007, the US cut taxes at all income levels. Result? The top 1% went from paying 19.5% of all taxes to 40%. In Britain, when the top rate of income tax was lowered to 40% between 1988 and 2010, the share of income tax collected from the wealthiest percentile rose from 14 to 27%.
Ah, you say, but that’s because the rich are earning more. Well, yes. And, as a result, taxes are lower for the rest of us. You might, of course, agree with Roy Hattersley, who once said that he’d rather have 5% more equality than 10% more prosperity. That is a respectable position, but at least be honest about it. Wealth taxes create more equal, but poorer societies.
Flatter taxes, by contrast, make Starbucks-type dodges both pointless and impractical. I’ve never really understood why the idea isn’t more popular across the political spectrum. Cut everyone’s rates and you’ll make the rich pay more.