Against the idea of a 100% inheritance tax

There are arguments in favour of a 100% inheritance tax. For example, we could look to John Rawls and the argument from behind the veil of ignorance. If we didn’t know where we would arrive in that lucky sperm club lottery wouldn’t we prefer a society in which starting points were equal? So, tax inheritances at 100% and then distribute that wealth as a starting grant perhaps.

However, the idea does seem to fail on two points. The first is that while it’s true that we can’t take it with us, therefore this could be seen as a “fair” tax, that people will fight, struggle and even lie to be able to provide an inheritance to their children does rather militate against the idea that people do see it as a fair tax. Peoples’ actions do seem at odds with that particular result of that particular blend of moral reasoning.

But much more importantly we’ve evidence that such a system is not efficient. For we’ve had societies that did effectively have 100% inheritance taxes: and those societies failed precisely because they did.

Both Mamluk Egypt and the Ottoman Empire worked on the basis that whatever was accumulated during the lifetime of the elite (with the Mamluks, generals, with the Ottomans, Pashas) in the way of property, businesses, land and so on, was theirs for life and only for life. When they popped off those estates, however grand or vast they were, were distributed to the next generation of generals and pashas. With the Mamluks the children of the generals were, as they had not been recruited as military slaves from the steppes, specifically barred from even attempting to join that next generation of the elite.

This led to a certain short termism in how such properties were managed: having reached the top there would be, at most, a couple of decades to enjoy the wealth. Nothing could be passed down to the next generation. Thus, don’t invest in anything, simply extract. Societies in which we do have 100% inheritance taxes therefore seem to become extractive ones, not investing ones. With all of the obvious connotations for the living standards of the subsequent generations. To say nothing of the current living standards of the peasantry being extracted from.

Whatever the philosophy here we have tried it as a species and it really just doesn’t seem to work.

An interesting supposition

And one that may well have a measure of truth to it. That supposition being that there’s only so much tax that you can pull out of an economy:

While raising taxes was “easier” for a future chancellor to do than shrink expenditure, Dame DeAnne added: “My personal view is that this country is hitting rates of marginal taxation that are pretty close to the ceiling of what you can expect to actually get to work for you by getting increasing revenues by increasing rates.” Dame DeAnne suggested that spending cuts were the only solution,

She used the example of Labour’s pledge to restore the 50p top rate of tax to illustrate her point. The Institute for Fiscal Studies believes the policy is unlikely to raise more than £100m, after the Coalition’s decision to cut it to 45p cost the government around the same amount, according to official studies.

“It’s difficult to see where you can get substansial additional revenue from the tax side unless it’s through broadening the VAT base, which both parties have said they are not going to do,” said Dame DeAnne. “Anyway, that’s a politically difficult thing to do.”

Mr Plenderleith agreed. “There are a range of views as to what the optimal tipping point is and it seems to me that we’re quite close to that,” he said.

We do not say that this is absolutely true. But that it is generally true seems to us to be an intriguing thought. That there’s a rough amount of the economy that you can tax out of it. That rough amount changing over very long periods of time perhaps, and over different countries, but each place having its own natural rate. Outside true emergencies like all out war no one’s really managed to get much more than 35% of the British economy in tax. The American Federal system never seems to manage more than 19 to 20% for anything other than a couple of years. Yet the tax burdens in other countries can and have been for decades rather higher.

This is also true whatever the tax system actually is. Whether it’s all largely consumption based, or income, or they try to nickel and dime us to death with imposts on this or that, some cultures will accept higher tax burdens than others. For we’ve tried different variations of the tax system over time and those amounts that we can collect don’t seem to budge all that much.

all of which will be something of a disappointment to Polly Toynbee of course. For as she’s fond of pointing out we Brits seem to want Scandinavian style services with American style tax rates. The analysis here leading us to the conclusion that it’s the taxes that are the immovable object: meaning that it’s the services that have to be cut to fit that, not just the tax rates raised to provide that chicken in every pot and a pony.

Don’t campaign against tax havens: they are good for us

Thanks to faulty headline-grabbing propaganda, most people think tax havens are outrageous places in which tens of billions of pounds are being stored offshore, denying UK citizens valuable tax revenue that could be used on public services like schools, health care and roads. Nice idea. But like many nice ideas, it veers far from the truth.

First off, what of the complaint that if the money stays in the private sector in tax havens then UK citizens are being robbed of vital tax revenue? To answer this, consider if the money stays in the private sector in a tax haven, who else benefits from that apart from the person with the money? On the one hand that money is invested, which generates plenty of jobs and lots of economic growth. On the other, if a British billionaire keeps £500 million in a tax haven then all the time he’s not spending it he makes everyone else in the UK better off in terms of more resources and lower prices. This is because money earned but not spent is like conferring a gift to the UK taxpayers. Moreover, it’s important to remember that the primary contribution high earners make to society is not in the taxes they pay, it is in the goods and services they produce.

When it comes to tax havens, what is also being missed by a lot of people is that tax havens actually make us better off in another way, in that they provide vital competition to tax rates in the UK. A popular view from the left is that because of tax havens governments have to increase our taxes to make up for all the tax they are not getting from money stored in places like the Cayman Islands. In actual fact, the opposite is true – tax havens keep our UK taxes lower not higher.

To see why, suppose there is just one quite expensive Bakery in town (call it Bakery A). Along comes another Bakery in competition (Bakery B), offering townsfolk lower prices for bread. The very worst thing that Bakery A could do in response would be to raise its prices even more. Their best response would be to try to out-compete Bakery B for custom. This is the nature of competition, and how it lowers prices and improves efficiency.

Similarly, tax havens are like Bakery B: their more competitive tax rates place competitive pressures on governments that might be tempted to tax us highly. Competition for prices occurs with tax just as it does with bread, laptops and cars. Governments must be competitive with their tax rates, otherwise more and more money will be stored in places with lower tax rates. Tax competition is a key driver of economic growth in the world, as this incentivises politicians to keep taxes on savings and investments low. When tax rates are excessive, there is less economic growth. Tax havens provide the necessary competition to militate against this happening.

Finally, tax havens can claim to have some of best standards of living and economic growth in the world. That’s precisely because low taxes stimulate economic growth and better standards of living, as the qualities of the free market predominate over party political interests. Instead of calling for politicians to tackle the grave injustices of tax havens, campaigners should be calling for a more fruitful tax system here, based on lower rates, reduced complexity and bureaucracy, and increased market freedom.

There is no such thing as tax avoidance

You don’t have to go far through the public prints to find all sorts of blood curdling tales about how the Treasury is being ripped off by varied forms of tax avoidance and even aggressive tax avoidance. And yet the truth is that as a thing tax avoidance doesn’t actually exist. So it isn’t as we’re told in the Telegraph, that tax avoidance is actually a good thing, it’s that it just doesn’t happen:

Successive governments have left us with a tax regime so complex it verges on chaotic.

Which is exactly why we should be suspicious of politicians who talk imprecisely about “tax avoidance” and “tax evasion” – or who muddle the two terms, or use them interchangeably.

There is nothing wrong with tax avoidance.

Tax avoidance is what everyone does, not just the wealthy. It’s what we do when we save in Isas and pensions, or in Junior Isas for our children.

There’s no doubt at all that there are attempts to avoid tax. Sticking your money in an ISA or simply not declaring millions in income are both attempts to avoid tax. But we have a system which decides which of those plans is successful in doing so. That system being HMRC in the first line, the various tax tribunals in the second and then on and up to the European Court of Justice as both Vodafone and Cadbury found out. The end result of this system of adjudicating upon attempts is that there’s no room left for tax avoidance to actually happen in. For, obviously, once the courts have had their say either whatever is going on is obeying the law of the land or it isn’t. And when it is decided that it isn’t that’s tax evasion. And when it’s decided that it is according to said law that’s not actually avoiding anything, is it? It’s paying, in full, one’s dues as Parliament has decided you ought to.

There really isn’t anything called tax avoidance. There’s only obeying the law and not obeying it.

Multinational taxes: what do politicians know?

This election has ratcheted up the calls for Starbucks and other multinationals to pay more taxes on their British revenues.  Politicians give no indication of how they will achieve that; one suspects their silence is based on ignorance.

This blog is a brief explanation of why multinationals are fully entitled, under present laws, to push profits into lower tax regimes.  If the UK wants to change, it may need multinational legislation.

If a brand owner in one country sells to a distributor in another, they split the total profit between them.  If the companies are independent, the presumption is that the split is “arm’s length” and that is accepted by the tax authorities in both countries.  The game gets tricky when both companies are owned by the same group and the brand ownership is switched from one country to another.

The practice began with Bailey’s Irish Cream which was launched in 1972 to accept the Irish Finance Minister’s offer that any export profits for a new Irish agriculture-based brand would be free of tax for 10 years.  The brand became a huge global success and, come 1982, the ultimate brand owner, Grand Metropolitan, was about to be hit by a sharp jump in taxes.

By coincidence, the concept of “brand equity” as a marketing asset which could go on a balance sheet was also being developed in the 1980s.  Why not move the brand equity from Dublin to the Netherlands which was, then anyway, offering low taxes on Dutch earnings by foreign-owned assets? Why not indeed?

As you can imagine, the British and Irish tax authorities were less that thrilled with that and Grand Metropolitan had to justify that the Netherlands company really was marketing the brand globally.  In effect, the distributor company is renting the use of the brand equity asset from the brand owner and has to pay for that.  If the transfer price is “arm’s length” it is all perfectly legitimate so, for two companies both parts of the same group, what exactly is “arm’s length”?

The multinational can count on the support of the tax authorities in the brand owning country.  Their take decreases by the amount of profits switched to the distributor (or franchisee) country.  And if the brand owning company can show it sells, on the same terms, to (or franchises) companies which are not part of the same group, the case for “arm’s length” is strengthened.

HMRC has spent a huge amount of time and money on this issue.  Whilst it is possible they have not been tough enough, it is much more likely that the law is not on their side.  It is also likely that any unilateral action by the British government would lead to even more expensive legal costs on appeal.

With corporation tax down to 20% the UK is closing the low tax gap, but unless politicians can show they understand the game, and come up with a credible big stick, HMRC is going to have to settle for goodwill payments by the multinationals.