Death & Taxes

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The views and opinions expressed in this article are those of the authors. CdR Capital Ltd is authorised and regulated by the Financial Conduct Authority. This article is for professional clients and eligible counterparties as defined by the FCA only.

Point of No Return

“For a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle” ― Winston Churchill

To tax or not to tax? This is not the question. How much to tax (and whom), is going to drive the global political agenda for some time. Central banks and inter government agencies are all signalling that we are entering the stage where monetary policy is to be replaced by fiscal policy mainly as a way to right the world’s still-raw post-crisis ailments.

Fiscal policy of course has two broad tools: government spending (on infrastructure, for example) and tax policy. But the modern state is a fragile thing. It reposes on a mountain of debt that needs to be serviced and renewed.

Global government debt to GDP ratios in advanced countries has jumped from 69% in 2007 to 105% in 2017. In US dollar terms, global debt of governments, corporations and households has grown by $72 trillion since 2007 and of this government debt stands at $60 trillion, according to McKinsey Global Institute’s report How secure is the global financial system a decade after the crisis?

The ability to finance this debt, in turn, depends to an extent on the view that the government is an efficient collector of taxes. After that, it depends on the government’s ability to repay.

Witness Greece, whose decline and recent turnaround (in bond yield terms)¹ can be explained by the change from a state with no efficient tax collection apparatus (and where some of their most productive industries, such as ships and shipping were, ipso facto, tax exempt) to one who at least attempts to persuade citizens to contribute to their collective wellbeing.

And, to continue with lessons from Greece, the Scylla and Charybdis of tax collection is that too little is not enough and too much is self-defeating. The famous Laffer Curve tells us that beyond a certain point of total tax the state’s ‘take’ actually declines, and is therefore also sometimes used as an argument for cutting tax rates to increase total tax revenue.

Whilst the percentage seems to be around 70%, there appears to be an additional psychological element, where the total state take can rise well above the inflection point, if taxes are numerous and disguised by different nomenclatures.

Take National Insurance Contributions in the UK and even speeding fines, these are all in different ways, taxes. France—which overtook Denmark as the most taxed OECD country in 2017—is the champion in this respect, inserting the word ‘solidarity’ into its most over-reaching and divisive taxation legislation on wealth².

As populism emerges as the most powerful force in global affairs, and as both globalisation and capitalism are perceived to have failed a significant part of the population, the incidence of politicians using Jacobin rhetoric in a bid for office is on the rise.

Look at the US, the race for the 2020 Democratic party nomination at the start of the year started to look like a contest to see who would tax the rich the most, with Alexandria Ocasio-Cortez pushing for 70%. Yet, despite the inevitable ‘pivot’ to more centrist views once nominated, they speak to a global trend.

Ironically, President Trump’s historic corporate tax cut from 35% to 21% in 2017, aimed at increasing the annual household income in the US by $4,000, has largely gone unnoticed by all but the already rich CEOs, many of whom did not return the savings to the employees in the form of wage rises.

Most tax systems mimic the wealth pyramid. Less than 1%, equivalent to 47 million people, have 43.9% of the global wealth, according to Credit Suisse’s 2019 Global Wealth Report. So, tinkering aggressively with the ‘big contributors’ carries risks.

Take the UK. A recent analysis by the Institute for Fiscal Studies showed that 43% of adults do not pay income tax, up from 38% in 2010, but the more striking figure is that 1% of the top earners are now paying 27% of the nation’s income tax.

A potential big hit to the UK’s public purse if those 1% leave in the wake of Brexit. Not ideal then that Britain’s richest man and Brexit supporter Sir Jim Ratcliffe and his two lieutenants are moving to Monaco to save $4 billion in tax, while fellow Brexiteer James Dyson is moving his business base to Singapore for similar reasons.

What this does show is that in an increasingly mobile global world, large tax payers, whether corporate or individual, can simply move if they don’t agree with tax rates or process. These moves cost jobs and revenue and so are politically-charged.

There is talk that a business-friendly ‘Singapore Scenario’ is Boris Johnson’s ultimate post-Brexit agenda. European states already seem to be engaged in a merry-go-round where one state’s tax exile is another’s ‘golden visa’ tax immigrant. Hardly the ‘community’ approach that Europe’s founders hoped for.

But tax collection has always been a socially charged affair, as the Sheriff of Nottingham would know. Robin Hoods spring up when the tax process is deemed either arbitrary, retrospective, regressive or simply plain unfair.

Legislation that gives the UK’s HMRC wide powers of debt enforcement that can sequester bank accounts and levy penalties, appears to reverse the most basic of human rights: innocent until proven guilty.

But the controversial loan charge introduced in April has back fired. Sole traders, such as locum doctors, IT contractors, oil and gas workers and social workers that took out loan-based ‘disguised remuneration schemes’ have had to pay tax on up to 20 years of income in a single financial year, leading to a number of tax suicides³ and the HMRC recently reporting itself to the police watchdog over them.

Ultimately, the good scenario for an investor buying any government’s bonds is a productive workforce with a sustainably high tax take and with enough public confidence that you get-what-you-pay-for in terms of public provision of healthcare, education and public transport.

It’s not clear that taxpaying citizens care much about military capabilities, which is where the US, which spends 15% of federal taxes on defence, China, Saudi Arabia, India and France that together accounted for 60% of global military spending, allocate a significant portion of tax revenues.

Even better, from the investor and the state’s perspective, is if the citizen dies a short time after their economically productive work life ends. But longevity is the state’s key challenge. Not only are we living longer, but in the main also better lives. This then means that we have longer retirements from economically valuable (and taxable) activity.

Whilst the world continues to accept that the capitalist model is the least bad option available, incorporeal corporations will see their tax rates fall. Although, for now, despite President Trump cutting repatriation tax on the estimated $4 trillion of US corporate earnings not in the US, the majority are keeping their money offshore.

But for the individual citizen, the price you pay for an on average longer life is an increasingly rapacious tax inspector.

 

¹ Greece joins club of negative-yielding debt issuers, Financial Times (9.10.2019)

² French govern opens door to wealth tax concession, Financial Times (5.10.2018)

³HMRC reports itself to watchdog over tax suicides, Financial Times, (1.10.2019)

 

Photo: © Niki Natarajan 2019

Artist: Alec Monopoly

 

The views and opinions expressed in this article are those of the authors. CdR Capital Ltd is authorised and regulated by the Financial Conduct Authority. This article is for professional clients and eligible counterparties as defined by the FCA only.