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Taxing the Wealthy Is Not So Easy

28 March 2013   (0 Comments)
Posted by: Author: Conrad De Aenlle
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Source: Conrad De Aenlle

The French have been making the rich pay since 1789. But when a 75 percent tax rate on incomes exceeding €1 million was deemed unconstitutional before it could take effect, it seemed that there was a limit to what could be severed from a wealthy citizen.

Americans were spared an unpleasant fate, too. A last-minute compromise in Congress averted a dive off the "fiscal cliff” and annulled severe tax increases that had been scheduled on earned income, dividends, interest and capital gains.

If taxpayers take these near misses as signs that their burdens are easing, they may be disappointed. The French ruling in late December was based on a technicality, and the government has vowed to tweak the law and try again. As for the deal in Washington on New Year’s Day, it did not let everyone off scot-free; an estimated three-fourths of all taxpayers received an increase of some sort, most through the expiration of a payroll tax reduction.

The two-year payroll tax break of two percentage points was intended to stimulate economic growth, as were various tax concessions enacted in Europe during the financial crisis. They, too, are being rolled back by cash-strapped governments, creating de facto tax increases. The moves indicate that while officials continue to declare that the rich are their primary target, their sights are shifting to the comfortable and to the multitudes just getting by.

"If you look at the middle class, they’re paying the bill at the moment,” said Marnix van Rij, a partner at Ernst & Young who is its head of global personal tax services. "All over Europe we saw huge stimulus plans. Governments tried to keep expenditures at a certain level, while introducing tax incentives to keep consumption and investment going. They have canceled all of these temporary tax incentives and at the same time started to increase rates and broaden the tax base. It’s really a time of austerity here.”

The need to extract more from the middle class is a matter of simple arithmetic. A wealthy taxpayer has more money than someone of modest means, but there are far fewer wealthy taxpayers to tap, and doing so is not easy, as the recent episode in France shows.

The Constitutional Council, which serves a role similar to that of the U.S. Supreme Court, struck down the bill mandating the 75 percent rate on the ground that it applied to individuals instead of households, as French law requires. A bigger problem with enforcing such a heavy tax liability, as President François Hollande discovered, is that many rich taxpayers literally will not sit still for it.

Wealthy French are taking up residence in Britain, Belgium and Switzerland; some are also seeking foreign citizenship, including high-profile figures like the actor Gérard Depardieu and the luxury-goods magnate Bernard Arnault.

Mr. Hollande’s government intends to rewrite the law in a way that withstands constitutional scrutiny, but Michael Graetz, a professor at Yale University Law School, wonders whether it will happen. The exodus of wealthy taxpayers and the prospect that more will choose to leave than pay a 75 percent tax present "a deeper conundrum than many people realized,” he said.

Ian Shane, a tax lawyer at the New York firm Golenbock Eiseman Assor Bell & Peskoe, predicts that little additional revenue will be generated even if the high rate goes into effect, but as he sees it, that may suit the French authorities just fine. He finds the law to be a matter of public relations as much as public policy.

"They’ve got to be seen to hammer people who are rich,” Mr. Shane said. "Governments know that to get real money, they have to tax people at the bottom of the pyramid, but they have to make a play at taxing the rich while they’re really mugging the poor.”

Some policy specialists contend that a new European tax on financial transactions accomplishes that feat. It is aimed at banks and financial speculators, but it could end up being borne by ordinary account holders.

The tax — one-tenth of 1 percent of the value of stock and bond trades and one-hundredth of 1 percent of the value of derivative trades — is to be implemented next January. It is expected to apply in 11 of the 27 European Union countries, including Germany and France but not Britain.

The tax is promoted as a way to curb volatility in financial markets and bring in annual revenue of about €35 billion, or $45 billion. Critics say it will shift trading elsewhere, to London and New York, for instance, and therefore be less effective than hoped and a financial and bookkeeping burden to banks and asset managers.

As for the other 16 member states that said "no thanks” to the tax, officials are peeved that they will be forced to collect it on transactions in their jurisdictions that involve residents of the 11 participants. They contend, moreover, that savers and investors ultimately will have to pay the tax rather than banks, hedge funds and other wheeler-dealers. In fact, they say, the little guy could get hit twice, for the actual tax and for the added cost of collecting it.

"We don’t think the tax is a very good idea,” said Georges Bock, chairman of the Tax Technical Committee of the Association of the Luxembourg Fund Industry. "Neither the European Commission nor European politicians are being honest here. They want institutions to make a fair contribution to resolving the crisis, and they want to discourage bad behavior, but it asks private persons to contribute their private savings. Officials make believe that just banks are paying it.”

A bit of theatricality has been detected in the displeasure that the British prime minister, David Cameron, recently expressed toward multinational businesses that he thinks are not paying their fair share of tax in his country. He singled out the coffee purveyor Starbucks, which structures its business, perfectly legally, to record more profits in jurisdictions like Switzerland and the Netherlands and fewer in less tax-friendly places like Britain.

Mr. Cameron’s tactic seems to have worked. Starbucks pledged to make voluntary additional tax payments in Britain over the next two years, but according to The Telegraph, the managing director of the company’s British operations also asked for a meeting with the prime minister and threatened to cut investment in Britain if the government did not back off its criticism.

Mr. van Rij at Ernst & Young, who also serves as chairman of the Dutch Association of Tax Advisers, finds Mr. Cameron’s outrage somewhat hypocritical and at odds with what he sees as Britain’s quite reasonable policy of offering tax concessions to foreign businesses that set up shop there.

"David Cameron is clinging to a moral dimension in this discussion,” Mr. van Rij said. But while the prime minister berates companies for legally minimizing their tax liability, "the U.K. is positioning itself as the most attractive destination in the E.U. and doing it with all kinds of tax incentives.”

Another strategy that some tax policy specialists view as politically motivated is to try to keep individuals and businesses from benefiting from keeping money abroad, especially in offshore territories considered tax havens.

A bill proposed in the United States by Senator Bernie Sanders, independent of Vermont, would limit the ability of American businesses to shelter overseas income from taxation back home. It would also make it more difficult for Americans to escape tax liability by using offshore corporate entities.

Spain is taking steps to limit its citizens’ use of offshore centers, too, at least without full disclosure. Beginning April 30, Spaniards will have to report details of foreign assets or face stiff penalties, according to the advisory firm Blevins Franks Financial Management.

Countries are seeking more information from one another, too. The accountancy KPMG reports that data-sharing agreements have been reached this year between Canada and Uruguay and between Argentina and India.

Offshore centers are feeling pressure from Britain to disclose information about clients who might be using accounts in their jurisdictions to skip out on obligations to the Exchequer. The government has asked the authorities in various territories to provide information about British account holders.

The rampant inquisitiveness is an extension of a trend begun with the passage in the United States in 2010 of the Foreign Account Tax Compliance Act, or Fatca, a law seeking similar information about U.S. citizens. Initial indications were that foreign governments would not comply, but Mr. Graetz notes that attitudes have changed.

"I think there’s going to be a lot more transparency,” he said. "When Fatca was enacted, I had conversations with people at the European Commission about whether they were going to cooperate. They said they wouldn’t, but that has been reversed in the last couple of years. Fatca has created something of a revolution in the exchange of information.”

The law’s success encouraged Britain’s undertaking of what some financial professionals have dubbed "son of Fatca.” So far, though, results have been mixed.

The governments of Guernsey and Jersey, in the Channel Islands, issued a joint statement in December that they would not comply with Britain’s request until the authorities there "make clear the steps they are taking to promote the adoption of automatic exchange of information worldwide to ensure that a level playing field is achieved for all finance centers.”

The Isle of Man has been more forthcoming. It has agreed to comply with Fatca, and John Spellman, director of financial services for the island, said the government was in "the final throes of negotiation” to disclose information to Britain. All that remains, he said, is for safeguards to be put in place to protect account holders’ data from other prying eyes.

"We don’t think it’s an unreasonable request to release information to combat tax evasion,” he said.

"What we have seen is that when we’ve agreed to release information, the impact has been almost negligible” on business, he said. "We see the world moving to more automatic exchange of information, and we’re happy to embrace it.”

Mr. Shane has observed the same development, and he envisions other countries’ joining the United States and Britain in seeking and offering personal financial data.

"In the last few months many countries have started to say they’re interested,” he said. "This is the first step in a global tax database. For now they’re just handing information over, but it’s only a matter of time before there’s a database started in the U.S. and used by other countries.”

Mr. Shane predicted that "offshore centers as we know them are going to disappear.”

Mr. Graetz did not speculate on their longevity, but he anticipates big changes in how customers use them.

"There may continue to be legal avenues for reducing taxes, particularly by running business income through tax havens,” he said, "but in terms of high-income individuals’ being able to sock away money in some low-tax jurisdiction, those days are coming rapidly to an end.”


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