Tag Archives: taxation

Six Maxims for Fairer Taxation

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In our recently published book, Flight of the Golden Geese[1] (co-author David Lesperance), we describe the requirements for a Smart Region, that is any nation-state/state/area/town/suburb that is optimized to succeed in the globalized and networked world of the twenty-first century. The Smart Region is right-sized, and is particularly attractive to both major corporations and high net worth individuals.

The importance of these regions is a recognition that age of mass production is over; success in the twenty-first century requires a specialized and focused production facilitated by talent workers, not a semi-skilled and unskilled workforce, or by a bloated public sector. And yet it is the preferred voters of these three groups that self-indulgently drive the political imperative, and insist on `fair`, that is excessive taxation of the wealthy.

The blatant behavior of tax authorities to treat the minority of hard working wealth creators as ‘taxation in waiting’ is a sure and certain sign of a country on the slide. Greed over an excessive tax-take blinds their political masters to the long-term consequences of their actions. Because the targets of taxation will no longer remain passive, as the country reaches a tipping point.

Consider today’s USA where there are nearly twice as many `workers` in government (22.5 million) than in all of manufacturing (11.5 million)[2]. In 1960, there were 15 million in manufacturing, and only 8.7 million paid by government. The IRS is driving out America’s super-rich. Three thousand Golden Geese left their shores last year because of taxation[3].

The unsentimental words of the nineteenth century philosopher Friedrich Nietzsche come to mind: “Many too many are born. The state was devised for the superfluous ones”[4].

Of course any real world incarnation of the Smart Region will always fall short of perfection, but hopefully by not too great a margin. In order to be attractive to wealth creators, the smart region should implement policies, particularly tax policies, that expand its critical mass of scientific, technological and commercial expertise, underpinning it with an effective education system, and highly selective immigration policy that regenerates and/or develops a top quality human resource.

Most importantly the tax policies must be attractive, and fair to all (including the wealthy). The problem is that the commonly accepted definition of ‘fair’ among populist politicians is usually totally unfair to the rich – in many countries even the thought of being fair to the rich is met with derision. “Don’t tax you, don’t tax me. Tax that fellow behind the tree.”[5]

The prevalent political rhetoric moralizes about taxation. How easily they forget Learned Hand’s famous words : “over and over again courts have said that there is nothing sinister in so arranging one’s affairs as to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere can’t.”[6]

Of course “Taxes are what we pay for civilized society.”[7] Also “The power of taxing people and their property is essential to the very existence of government.”[8] Although my old colleague at the London School of Economics Ken Minogue[9] would probably have phrased this differently: “The purpose of government is to raise taxes to pay for government.”

The questions remain: who pays? how much? and in what way? A Smart Region will be right-sized, with the taxpayers outnumbering the tax-takers. In that way taxes will stay low. Their rnlightened governments avoid getting involved in anything that doesn’t concern them. A shrinking government means shrinking deficits. But of course there has to be some taxation.

Nothing has changed. Colbert[10] was clear about this way back in seventeenth century France, “The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers, with the smallest possible amount of hissing”.

If the hissing reaches a cacophony, then as we predict in Flight of the Golden Geese, these globally mobile group of disillusioned taxpayers will fly away. This one percent of the population regularly pays over a third of personal taxes. If they feel that the taxes are prices worth paying in return for the benefits that accrue, then they will stay, all is well, and the economy enters a virtuous circle. If they resent paying, then they will opt out, and a vicious circle beckons.

As Thomas Jefferson explained: “Merchants have no country. The mere spot where they stand on does not constitute so strong an attachment as that from which they draw their gain.”[11] So how does the state ensure a strong attachment? By developing a taxation model that is appropriate to all, and not just to its vocal majority.

To answer the question of an appropriate level of taxation, what better place to start than with Adam Smith’s Wealth of Nations[12]. In Book Five, Chapter 2, paragraphs 25–28, Smith outlines his four maxims for fair taxation. These can be summarized under the headings: equanimity, certainty, convenience, and economy. I would add two more: simplicity and necessity.
• Equanimity: every citizen/company in the jurisdiction should contribute, but in proportion to their respective abilities to pay; those in similar positions should pay similar amounts.
• Certainty: there should be no arbitrary taxation; and the mode of the tax demand, and the timing of collection should be predictable.
• Convenience: tax should be easy to understand, clear in application, easy to calculate, and payment easy to collect at a time appropriate to the payer.
• Economy: the cost of collection should be as low as possible, utilizing the fewest officers and inspections, and the scale taxation should not distort the economy or discourage enterprise and effort.
• Simplicity: part of the problem with taxation is the cost of compliance. By making the tax rules as simple as possible this waste of time and money can be reduced, all promoting a virtuous circle. The taxes coming out of Westminster and Brussels are seen as a denial of service attack on business.
• Necessity: tax will go to pay only the government expenditure that is absolutely necessary. Charity begins at home. Vain politicians must not be allowed to preen and posture on the world stage, and involve the state in vastly expensive foreign (mostly military) misadventures, and the doling out of largesse to preferred voters.

Sadly few modern nation-states conform to these simple rules, and everywhere vainglorious government are squandering scarce resources, and placing their tax base at risk. Because globalization has changed the nature of trade. Today’s transnational company has decentralized and distributed itself around the globe, becoming a ‘virtual enterprise’ – project-based, and networked around global information systems. Consequently, companies have access to a billion new unskilled/semi-skilled workers, and so will choose to subcontract the requisite labour rather than employing it in-house. Thus labour has become a commodity despite all the denials coming out of the OECD, and so must compete on price; hence the rush to off-shoring of production jobs from the US and other developed countries. Consequently, the impending curse of mass unemployment will affect every unprepared nation-state. Taxation will be part of the equation.

Innovative firms and entrepreneurial individuals will cluster in smart regions, the very concentration acting as a magnet for established innovators and a spur for new enterprise. “Spectacular growth comes from these self-perpetuating hot-spots that thrive on their own energy. This energy drives a rapid, almost uncontrolled diffusion of technological techniques and knowledge. The hot spot itself fuels the engine of endogenous growth by delivering innovation. But only within a network of trust relationships, where only invited talent is allowed to join in an institutional environment that both mobilizes the intellectually gifted, and promotes and finances entrepreneurial activity by delivering the right incentives.”[13]

The Golden Geese (their wealth and companies) are indifferent to, and unhindered by (national) boundaries and barriers. They identify only with regions that serve their particular interests, and then only temporarily; they will walk away from a region just as easily as they entered it. The Smart Region uses its tax policies to make itself commercially and socially attractive to the migrating Golden Geese, who are transnational and relocate physically, fiscally and electronically to where the profit is greatest and the regulation/taxation least.

Ian O. Angell

REFERENCES
1. Angell I.O. & Lesperance D.S. (2015), Flight of the Golden Geese, Bullhorn Press, Boston, MA.
2. S. Moore (2014), `We’ve Become a Nation of Takers, Not Makers`, WSJ April 1.
3. https://www.federalregister.gov/quarterly-publication-of-individuals-who-have-chosen-to-expatriate
4. Nietzsche, F. (1969), Thus Spake Zarathustra, translated by Hollingdale, R.J., Penguin Books, London
5. Russell B. Long (1948-1987), U.S. Senator for Louisiana.
6. Billings Learned Hand (1872-1961), U.S. Judge and judicial philosopher.
7. Oliver Wendell Holmes Jr. (1809-1894), U.S. Supreme Court Justice.
8. James Madison, the 4th President of the United States.
9. Emeritus Professor of Political Science, London School of Economics.
10. Jean-Baptiste Colbert was French King Louis XIV’s Minister of Finances from 1665 to 1683.
11. Thomas Jefferson to Horatio G. Spafford, 1814. The Writings of Thomas Jefferson, Memorial Edition, (Lipscomb and Bergh, editors) Vol. 14:119.
12. Adam Smith (1999), The Wealth of Nations, Penguin Classics, London.
13. Flight of the Golden Geese (ibid.) www.flightofthegoldengeese.com

Non-Dom Bashing

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So it’s no more pretending. In his latest outpouring, Ed Milliband is clear that Labour Party policy is the unfettered politics of envy. Whenever the word `fair` appears in their propaganda you can be sure they are pandering to the petty, mean-spirited and vindictive among the electorate. Will they ever listen to Abraham Lincoln’s profound words: “You cannot help the poor by destroying the rich.You cannot lift the wage-earner up by pulling the wage-payer down”.

So it is with Milliband’s determination to end non-dom status in the UK, irrespective of the damage it would cause to the economy. Be sure these high net worth individuals (HNWIs) will leave, just as we describe in Flight of the Golden Geese (www.flightofthegoldengeese.com), taking their spending power, their innovation, and their creation of employment with them. Furthermore, if these HNWIs sell up, then property values will drop across the board, eventually hitting sterling.

The simple fact is that these people don’t need to be here. HNWIs are made to feel welcome most places in the world. They are no cost to the state, and they are bringing `free` money into the economy. No doubt there will be many whingers who will say `good riddance` when they pack up and leave … just like they said in France. And look at the mess they are in.

Far from raising billions in taxes, this programme is likely to see a fall in tax revenues, as the taxes HNWIs do pay will cease, and unemployment will increase in the service and entertainment sectors.

There is no such thing as Newton’s Law of Taxation: where to every action (that is an increase in tax rates) there is an equal and opposite reaction (namely everybody pays up in full). According to politician’s simplistic arithmetic logic, tax creates a revenue stream, and higher tax levels make for a larger stream. Not in the non-linear world of consequences, of the Laffer Curve, it doesn’t.

The only law the Revenue should consider is that of Diminishing Returns. Taxing is disturbing. There is an uncertainty principle at play here. The act of taxing disturbs and changes the attitude of the persons being taxed, and those doing the taxing. Keep increasing tax levels, and the tax-base collapses. And when the tax-base collapses, so does the economy, and ultimately so does the country. Death by taxes – a lesson that every socialist state eventually learns.

Unfortunately the rate of tax needn’t even be that high – the mere introduction of a new tax is interpreted by HNWIs as a statement of intent, a signal of more to come. And be sure these Golden Geese will fly away.

Accident prone Boris

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In our upcoming book, Flight of the Golden Geese, we have a chapter on what we call Accidental Americans. Around the globe hundreds of thousands of unsuspecting individuals are totally unaware of their tax obligations towards the American state. Most Accidental Americans do not hold, and have never held an American passport. Not that that means anything. Most US citizens don’t possess a passport. More than half of the members of the Congress in Washington do not hold a US passport; they have never left the ‘States’, and have no intention of ever doing so.

So who are the Accidental Americans? There are a number of categories. The most obvious group is the children of South Americans, Arabs and Chinese. Nervous of the hospital facilities in their own countries, families have paid for highly pregnant mothers to fly to the US so that their children can be delivered in state-of-the-art American hospitals. With a healthy child, and mother recovering, they fly home at the first opportunity, not registering the birth with US authorities. There are also the children born to international businessmen and women while working in the US. Some of these children grow up to become successful in their own right, possibly never visiting the USA again, and certainly never claiming citizenship. They may not realize it, but they are Accidental Americans, and according to US tax law liable for US taxes.

Then there are all those who have at some point held a ‘green card’, even if those cards have expired. They too are Accidental Americans for tax purposes, albeit without any of the benefits of citizenship. Although they may no longer be allowed to get a job in the US, the IRS can still call on them anywhere in the world.

Most Accidental Americans are blithely ignorant of their status. Some will have chatted in passing to their accountants/lawyers about their US experience, only to be told ‘of course you don’t have US tax liabilities. It doesn’t make sense. It wouldn’t be fair.’ Fairness! International tax laws are extremely complex, and unless the persons advising are experts, then trust us, they don’t know what they are talking about.

London Mayor Boris Johnson is one such high profile Accidental American, who was recently forced to settle a large tax claim from the IRS. Johnson actually holds dual citizenship, having been born in New York, not that he has ever made use of the US status. He left the United States with his parents when he was 5. Not thinking any more about it, he kept both U.K. and U.S. passports. He should have given up the US document, but didn’t because the procedure was expensive and time consuming. Accident prone Boris thought it didn’t matter, that is until a huge tax demand from the IRS landed on his doormat late in 2014.

In 1999 Johnson and his wife purchased a house in Islington for £470,000 and sold it in 2009 for £1.2 million, a gain of £730,000. Because it was his principal residence, no UK taxes were due. However, in the US a 15 percent capital gains bill was owed, over and above some base figure. Johnson had not been resident in the U.S. for over 40 years, and there was no question of domicile – but the IRS pounced.

Of course once he appeared on the IRS radar, he was now liable for tax on, to the IRS his `foreign` salary, earned `abroad` in home country of England. He earns £144,000 a year as mayor, and another £250,000 as a columnist for The Telegraph. Add in royalties and appearance fees and the total far exceeds the foreign earned income exclusion (of around £60,000), and so tax is owed on the balance. Then of course there was his filing obligations on any `foreign` British bank account, as well as the implications of the Foreign Account Tax Compliance Act.

Last November Johnson spoke out of his outrage at the tax bill and the inconvenience, but nevertheless he paid up. Otherwise he faced arrest whenever he entered the US.

Another Day, Another Tax

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I opened the newspaper today and immediately two new tax stories popped out.

First, the European Union is recommending that the UK increase taxes on property and land in order to … wait for it … boost economic growth in Britain. The EU doesn’t do irony.

Furthermore they said ‘To assist with fiscal consolidation, consideration should be given to raising tax revenues through broadening the tax base.’

Meanwhile the Labour Party is planning a ‘big idea’: to add another 1% increase to National Insurance Contributions to increase the budget for the National Health Service (for non-Brits that’s a tax on employment masquerading as payment for social benefits including the NHS). The tax is paid both by the employed and their employers … a tax on jobs to subsidise non-jobs. Employers organisations warn that any increase in ‘contributions’ (I love these euphemisms for theft) will cause job losses: The Oxford Economics study concluded 91,000 fewer jobs.

Clearly Labour is the Party for losers, intent on dragging even more of British society into that category.

What is it with the French political elite?

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Thomas Piketty talks bo***cks in his book ‘Capital in the Twenty-First Century’. President Hollande’s idiotic policies are driving away France’s Golden Geese from its shores in droves. Just ask Gerard Depardieu.

Now Christine Lagarde, the French managing director of the International Monetary Fund, is following suit in her recent address to the Inclusive Capitalism Conference. She doesn’t see the irony in the IMF promoting social equality. See http://www.imf.org/external/np/speeches/2014/052714.htm .

She says that persistent ethical failings among bankers, together with rising inequality, are undermining growth and financial stability. “The industry still prizes short-term profit over long-term prudence, today’s bonus over tomorrow’s relationship.” She may well be right about the banking industry, but to say that rising inequality is a barrier to growth, and could undermine democracy and human rights, is pure ideological cant.

Listen to her words: “One of the leading economic stories of our time is rising income inequality, and the dark shadow it casts across the global economy.” She quoted Oxfam’s claim that the world’s richest 85 people control the same wealth as the poorest half of the global population of 3.5 billion people.

“We must recognise that reducing inequality is not easy. Redistributive policies always produce winners and losers. Yet if we want capitalism to do its job – enabling as many people as possible to participate and benefit from the economy – then it needs to be more inclusive. That means addressing extreme income disparity.”

This is not rational economic theory, rather mere sentimentality. Her options to address inequality include more progressive taxation and greater use of property taxes. In other words Capitalism must stop being Capitalism. Risk takers must subsidize the risk averse, and the political elite will sort it all out. Just like Hollande in France? What arrogance! Jesus understood that “the poor you will always have with you …” Mathew 26:11.

How can the boss of the IMF fail to grasp both the moral jeopardy in her proposals, and that inequality is the engine of wealth creation? Redistribution is just interference by incompetents, knaves and the naive. The winners in Redistribution she refers to are the parasites in the political elite.

I’m not saying that “Greed is Good”. However, we should never lose sight of the fact that there is a Calvinistic morality in profit. The alternative, the slime mould of collectivism, will always create a dependency culture that ultimately destroys innovation, precipitates the entry of organized crime into business, and undermines the ability of trade to generate wealth.

And in the words of that great American vaudeville singer and philosopher, Sophie Tucker: “I’ve been rich and I’ve been poor. Believe me, honey, rich is better.”

Biblical Tax Collectors

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David Lesperance and I need to get a move on with publishing The Flight of the Golden Geese. Many of the predictions in the book are coming to pass even before it sees the light of day.

One particular prediction is already happening in the UK. We say that the popular political rhetoric of squeezing the rich ‘until the pips squeak’ is total bunkum. There simply aren’t enough wealthy people around. Taxing them at 100%, or even confiscation, would not generate sufficient funds to cover the waste of profligate politicians. The target for tax collectors has always been the hard working middle classes and upper working classes. Our prediction is that the situation will get even more critical when the mobile rich, the Golden Geese, fly away from increasing tax demands, leaving those suckers with an even bigger tax bill.

Today in the UK, Her Majesty’s Revenue and Customs (HMRC) are experimenting with bully-boy letters sent to a thousand higher rate tax payers demanding to know why their self assessments require the payment of less tax than persons with similar earning profiles. No checking if the assessments are valid and the avoidance of tax is legitimate. A threatening letter was sent to an elderly widow who had made a large charitable donation, thereby legally reducing her liability.

By definition roughly half of tax payers in any profile will be paying less than average. People will end up paying more than they need just for the taxmen to go away. Over the last year the HMRC has been very successful in intimidating more money out of people with this ‘guilty until proven innocent’ approach. Soon we can expect to see these threatening letters rolled out across the whole country.

The HMRC is behaving like their counterparts in the Bible, and like in those times, tax-collectors will become pariahs in society.

France: economic suicide by socialism

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France is dead, only the French haven’t realized it yet. It died on 6 May 2012, when the turkeys in France voted for Christmas. In the final runoff in the election for President of the Republic, socialist François Hollande with 51.63% of the vote defeated Nicolas Sarkozy with 48.37%. France had a new President who was reported to have once said “I hate the rich”.

In his campaign the victor had promised a socialist assault on the rich, by increasing the tax on incomes over €1m, temporarily (where have we heard that before), to 75%. After a raft of tax increases that were intended to raise an extra 30 billion euros in 2013, the Court of Auditors, which oversees the county’s accounts, tell us that the amount raised in a mere 16 billion. And at what cost?

Despite being elected on a anti-austerity platform, Hollande has been forced to implement spending cuts, saying France “cannot live with such heavy debt”. The end of 2013 saw unemployment hit a record high of 11%. There was zero growth in the first three months of 2014, and a significant number of the wealthy are jumping ship – so less taxes will be collected in future.

Just as we say in our upcoming book ‘The Flight of the Golden Geese’, the politics of envy doesn’t work. The state ends up collecting less taxes, and in the process the economy is destroyed.

Happy Tax Freedom Day

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Wednesday May 28 is Tax Freedom day in the UK … the day the average Brit stops working for the government, and start working for themselves. That’s 148 days a year. Or so I’m told by the Adam Smith Institute. It is April 21 in the USA.

According the Adam Smith Institute “It is calculated by comparing general government tax revenue with Net National Income (NNI). The total of all government tax revenue – direct and indirect taxes, local taxes and National Insurance contributions – is calculated as a percentage of NNI at market prices. This year it comes to 41.09%. That percentage is then converted to days of the year, starting from 1 January. The first day of the year that Britons work for themselves rather than the taxman is Tax Freedom Day.”

For the wealthy and for the poor it is a lot earlier. For us suckers in the middle it is a lot later of course. The idea that when it’s all added up (including VAT, petrol tax, National Insurance) it comes to just over 40% is simply laughable. The word ‘average’ of course is where the deceit lies. It is sobering to remember that half the UK population gets more from the government than they put in.

Then there’s the Cost of Government Day — the day the government stops spending money — a more realistic figure of nearly 50% … this year it will be 26th June.

And as they say, ‘even the Mafia doesn’t charge you 50%’.

Contract signed

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David and I have finally signed the contract for Flight of the Golden Geese with Oyster Point Press. We expect the book to be available around September. Between now and then we have the job of getting the marketing started … informing all our contacts in the press and media in order to maximise the impact of the launch. I would be grateful to all the readers of this blog for any help in this endeavour. Please ask any of your contacts in the press and media who would like to know more about the book to send me a message on the Contact page of this website, which will guarantee they reach me.

The streets of London are paved with Golden Geese

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According to the Sunday Times 104 billionaires with a combined wealth of £301billion now live in the UK. London alone has 72 billionaires (39 of whom were not born in the UK), more than any other town: Moscow (48); New York (43). They have bought property, employ staff, and spend money – all of enormous benefit to the British economy. Be quite clear these people disperse huge sums in the economy.

They must not be taken for granted. Or despised for their wealth. They are after all, Golden Geese, and they can fly out as easily as they entered, to the benefit of other economies. But what do the Labour and LibDem politicians want. To introduce a mansion tax, and plan all sorts of other snide taxes to “squeeze them until the pips squeak”. Not that the populists in the Conservative Party are much better.

Of course the visiting super-rich can afford to pay what is to them a drop in the ocean. However, what they see is not a tax grab, rather that they are being treated with contempt, or worse that they are seen as beneath contempt by the politicians who are playing to the masses in order to drum up votes. These are proud people, and be quite sure they will move on. Then the great unwashed, who as in France scream ‘good riddance’, will find themselves having to make up the shortfall in tax revenues.