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Ireland: Moving the Faberge egg abroad is why wealth tax won't work

17 June 2014   (0 Comments)
Posted by: Author: Thomas Molloy
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Author: Thomas Molloy (Sunday Independent)

A levy on the super rich often only scares away the people who create jobs and wealth.

What do Alex White, Sinn Fein, the Bundesbank and Warren Buffett have in common?

Answer: they all support a wealth tax on the super rich.

Alex White surprised many of the Labour Party's dwindling band of well-off supporters the other night when he floated a wealth tax during the first leadership debate with Joan Burton. The idea seemed to have been plucked out of thin air but the notion of a wealth tax has been in the ether for decades.

Here in Ireland, Sinn Fein has often called for a tax on the super rich and Francois Hollande has introduced one in France creating tax exiles out of well-known French citizens such as Gerard Depardieu, members of the Peugeot family or Chanel's owners. 

Earlier this year, the Bundesbank and the International Monetary Fund joined the fray when they both called for some sort of one-off wealth tax in countries, like Ireland, which effectively went bust. Indeed, in the Cyprus bailout there really was a one-off tax on anybody with substantial bank savings; a precedent likely to be repeated in future bailouts. 

Capital in the Twenty-First Century, the unexpected US bestseller by Thomas Piketty is only the latest in a long line of economic tracts to offer some sort of intellectual argument underpinning wealth tax.

In the last century, wealth taxes were also popular with economists as varied as Joseph Schumpeter and John Maynard Keynes although the latter changed his mind in later life. 

A wealth tax is clearly a popular and populist notion. This newspaper's annual rich list shows there is a lot of money around and rich people tend to pay a much smaller percentage of their income in taxes than the rest of us and most of us tend to believe this is unfair.

Warren Buffett, who is one of the richest men in the world, has complained that he pays a lower rate of tax than his secretary and argues that America needs a minimum rate of taxation to force billionaires like himself to pay their fair share. Perhaps inevitably, Buffett has the support of the Obama administration but is strongly opposed by Republicans in Congress. 

So if a wealth tax is such a good idea, why do most countries not have one?

Part of the answer is undoubtedly the fact that the rich tend to write the tax code. But it is only part of the answer. After all, we have pretty tough inheritance taxes here and in the United States.

The problem with a classic wealth tax is that it is very difficult to police when goods are so mobile. That's what makes a property tax a good idea.

While it is impossible to move your house from Shrewsbury to Belize, it is very easy to pack a €10m painting, stamp collection or Faberge egg into a suitcase and move it overseas. The same goes for yachts, cars and horses. 

Valuation is also difficult. Rich people own unusual things. Most people struggle to put a value on their home – think how difficult it is to value a cellar of Chateau d'Yquem, a stallion or first edition of the Gutenberg Bible. Having said that, what the owner has insured their assets for is often a decent start. 

Ireland is a particularly small and open economy. We also have a much more mobile population than most European countries and far less bureaucracy which makes it particularly difficult to keep track of where people are. A wealth tax pre-supposes that we start living in the sort of police state that France, for example, has always been. 

Another reason why we don't have a wealth tax is that it raises much less money than you'd suppose.

President Hollande's punitive 75 per cent tax on salaries of more than €1m is a case in point. 

The tax is only expected to hit about 470 companies and a dozen soccer clubs and is forecast to raise a measly €210m a year. If you adjust for the size of the French population, that is about €16m in Irish terms. 

That is small when one considers how Hollande alienated entrepreneurs and foreign investors. 

We don't know what sort of tax Alex White would like, but he is unlikely to be much more radical than Sinn Fein's proposed tax which is itself far from radical when you read the small print and see how many exemptions it includes, from farmers to small business owners. 

With so many ways to circumvent a wealth tax, perhaps the only sort of tax that could really work would be a surprise tax introduced overnight by a finance minister who could somehow assure us that it would never be repeated. 

Michael Noonan attempted this trick with his outrageous swoop on private sector pensions but it is far too early to know whether the theft of people's pensions will lead many to stop saving or put their savings out of reach. 

Any other sort of wealth tax is likely to bring in very little money as the cash moves overseas at warp speed but is guaranteed to scare away many of the people who create wealth and jobs in our society.

A wealth tax is one of those ideas that works well in theory but badly in practice.

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