12th March, 2017

Clobber the rich with too much tax and we’ll all suffer

What have the following people got in common: Sir Richard Branson, Guy Hands, Lady (Tina) Green, Sir Stelios Haji-Ioannou, Jon Moulton and Lewis Hamilton? Answer: they are all tax exiles.

They and hundreds of other wealthy individuals — perhaps thousands —have chosen to reject their obligations as citizens, and reside in low-tax locations such as Guernsey and Monaco.

Most keep a deliberately low profile, for fear of being named and shamed, although I did know one former estate agent who made many millions from Britain and then threw a leaving party announcing his move before jetting off to Bermuda for good.

The irony is that all these people are rich enough to pay the tax — and stay put. After all, if you are forking out so much tax that you feel the need to go into exile, you are making enough after tax to enjoy a splendid life. But tax exiles have decided they would rather move from their homeland, and sometimes be parted from their family, in order to legally avoid paying what they consider to be excessive amounts of tax.

I’ve been to a few tax havens — Guernsey, Luxembourg, Dubai and Monaco. I would never choose to live in any of them in preference to London, my home city.

In some respects, though, it is easier to do so than ever before. Communications and air travel in the 21st century mean that effective mobile working is feasible from tax havens almost anywhere — from the Caribbean to the Channel Islands. Of course, the reasons I would never swap London for Monte Carlo are not about work but family, friends, culture and community. They are what make existence worthwhile — whether you are a billionaire or penniless. And those vital relationships are free — so even if your tax bill is monstrous, it doesn’t have an impact on emotional ties such as love and friendship. I doubt either happiness or health is improved by fleeing one’s native country for the sake of a bank balance.

Moreover, “preserving wealth” (the euphemism used by tax experts when selling their avoidance services to the rich) is a hollow pursuit. All fortunes turn to dust over time. Surely the objective is to live life to the full, in the thick of it, not isolated and detached from your roots and community.

I once attended a dinner party thrown by a tycoon who announced at 10.30pm that he had to flee to Northolt aerodrome before midnight to fly off on a private jet, so avoiding breaching the 90-day rule for tax exiles. In my opinion, people who do that sort of thing have lost the plot.

Frequently the excuse is inheritance and providing for one’s children. But we all know the havoc that unearned riches can cause — so often, they destroy any work ethic in the next generation. For the striving is all; free money is a terrible narcotic that annihilates ambition and imbues those who receive it with destructive values.

I have just read Beer Money by Frances Stroh — a tragic tale of the downfall of her family and their brewing empire. Stroh’s was once America’s third-largest beer company, but, like its home town of Detroit, the business fell apart. The story is a salutary lesson in the perils of handed-down privilege.

I hope it doesn’t sound as if I feel pity for tax exiles or inheritors, but they matter because we need the rich to pay lots of money to the state. For good or ill, our tax system is more and more dependent on an ever narrower base of high earners. For example, the best-paid 3,000 people in Britain pay more income tax than the bottom 9m.

Those who believe fervently in redistribution may rejoice at this statistic, but it means tax revenues are increasingly volatile and they depend too much on the super-wealthy— who might one day decide to become tax exiles.

Once it is felt that taxes punish success, they become counter-productive. They discourage initiative and risk-taxing, and scare away investors.

The Laffer Curve, an economics theory, demonstrates that lower rates of tax often generate more tax revenues through greater compliance and the expenditure of greater effort by taxpayers in order to earn more. This is not a moral issue; it is practical national economics. In specific areas such as capital gains, a rate that taxpayers feel is too onerous inhibits activity and overall receipts fall.

A recent example of a punitive tax on the rich that is clearly backfiring is the 12% stamp duty on homes costing more than £1.5m. Transactions have slumped 40% or more as buyers go on strike, and the state’s proceeds are collapsing. It is a classic case of a political “envy” tax that is actually hurting all citizens, not just those it was designed to penalise.

More intelligent tax policies can keep the rich onshore and lead to a higher standard of living. A tax model too focused on squeezing the rich is self-defeating and impoverishes rich and poor alike.