Okay, this one is about tax. Not the most exciting subject usually. But it’s important to understand that the way rich people, and international companies, can reduce their taxes is good news for everyone.
Most developed country governments desperately need more tax income. This is because the political elite have finally bankrupted their countries by continuously buying votes with borrowed money, over many decades. Corporations and the rich are soft targets for politicians.
What do these two statements have in common, except that they are both about taxation?
- Low tax offshore tax havens are unfair because rich people use them to reduce their taxes.
- Global corporations are immoral because they use complex offshore corporate structures to pay less tax.
You guessed it…both statements are 100% wrong! Yet the way politicians and the mainstream media talk about these issues make them sound as indisputable as the law of gravity. Done and dusted. A sure thing. In the bag. People and organisations that want to pay less tax are bad to the bone!
Since politicians and the media play to their audience – for votes or sales – it’s a fair bet that most ordinary people feel the same way. All of them are looking for scapegoats for their economic crises. Rich people are small in number, so have little influence at the polls, and companies don’t vote at all and are meant to be run by greedy “fat cats”. So both are easy targets.
Only a lunatic would volunteer to pay more tax if they had a legal way to pay less.
Yet the reality is something completely different. Let’s look at the first issue – about the rich sheltering money in offshore tax havens. Well, first of all, good luck to them! Only a lunatic would volunteer to pay more tax if they had a legal way to pay less.
But the real issue here is more subtle. The very existence of low tax countries and offshore locations keeps the parasitical governments of higher tax, onshore countries in check. They know that if they increase tax rates too much then rich people will flee the country. They would take their money, investment capital, spending and businesses (including the jobs they provide) to more fiscally attractive climes.
Of course politicians are occasionally stupid enough to forget about this. The current example is France, where the socialist government is attempting to soak the rich with excessively high income and wealth taxes. The top rate of French income tax is now 66%, although the government wanted a 75% rate until it was blocked by the courts.
Add to that the French wealth tax of up to 1.5% of total assets and it’s got to the point where many actually paid more in tax last year than they earned in income. Oh la la…as they might say in Paris or Cannes…
Many wealthy French people are quite sensibly moving overseas if they can – often to London (England is a tax haven for “non-domiciled” foreigners, which helps explain inflated London property prices).
Some are even moving to Russia, where the top rate of income tax is just 13%. That compares with 45% in the UK (recently 50%) and 39.6% in the USA. That’s the federal (central government) rate only. It excludes state income tax which is as high as 11%, to be added on top.
It sounds like the Anglo-Saxon capitalists have forgotten how things are supposed to work. Who’d have thought Russia would become a relative tax haven two decades after the collapse of the Soviet Union? It’s such a pity the language is so hard to learn and the winters are so cold in Moscow…
Why it’s good news when the rich pay less tax
Putting it all another way, if the rich had nowhere to go in the face of a tax onslaught, governments would have free rein to increase taxes as much as they liked. And this wouldn’t just apply to the rich. It would apply to everyone.
All of us would be at the government’s mercy, and forced to pay higher amounts of tax. With the rich out of options to flee to, the screws could be tightened on all people, whatever their resources. In other words the voting masses should be careful what they wish for. If competition from low tax jurisdictions didn’t exist, it’s a sure bet that most countries would have even higher tax rates than they do today.
Developed country governments are even more desperate for income than usual. This is because the global political class has run their countries’ finances…
Tax competition keeps the tax policies of overspending governments in check. This is why they are putting the squeeze on tax havens. Developed country governments are even more desperate for income than usual. This is because the global political class has run their countries’ finances into the ground, with excessive spending financed by a mountain of debt. (See more on how to get out of the mess here.)
What about those immoral global corporations? Are they dodgy too? Obviously not, if they’re acting within the law!
In fact any management team that doesn’t try to reduce (legally) its company’s tax payments should be fired. They are employed to generate profits for the private owners of the company, not to fund public sector waste.
Senior managers from big companies like Google, Apple and Starbucks have been put on public trial recently by politicians and the media in the USA and UK. They’ve been locked in the wooden stocks of public opinion so that grandstanding politicians and inept journalists could chuck rotten fruit at their usually privileged heads. Newspaper headlines display mock outrage and the mob is baying for more blood. The poor suckers don’t have a clue…
It’s clear to us at OfWealth that this is not a moral issue, it’s a legal one. If governments want more tax from companies then they can change the law. Simple. But don’t think you wouldn’t pay for it if they do.
If corporate taxes rise then product prices have to rise as well, to protect net profits and returns on capital. So we’d all pay more to consume things we like. Companies that manage to pay less tax charge us, the customers, less for their products. We benefit from international corporate tax planning.
Governments should stop whingeing and think a bit harder about getting their own houses in order. Stop wasting our money, stop sucking excessive resources out of the wealth creating private sector, and stop digging your countries into ever big debt holes. The real issue is not about insufficient government income. It’s about excessive government spending.
In the meantime, don’t be one of the suckers, and remember that you benefit when companies and the rich pay less tax.
Until next time OfWealthers,