The Daily Mail and HNWI tax

Today’s Daily Mail has the following quote in an article about the tax paid by HNWI in the UK:

“More than 2,000 individuals – each worth at least £20million – are suspected of dodging almost £2billion between them.

But only one has been successfully prosecuted – and that was back in July 2012. The HM Revenue & Customs unit is also racking up a £15million annual wage bill. MPs said today’s report from the National Audit Office showed the wealthy were often let off the hook while families and small businesses were hounded.”

The tone of the article is consistent with the Mail’s increasingly Trumpian rhetoric about the elite being treated in a different way to the rest of society. That this position unites the Mail with the current Labour party leadership indicates how far this position has become accepted in the UK and the challenge for policy makers in dealing with it.

In a previous blog   “I suggested that the most significant tax policy issue at present is the taxation of the world’s wealthiest 1%. Estimates of the % of global wealth held by the top 1% of the world population vary. A report by Oxfam in 2015 presented at Davos “shows that the share of the world’s wealth owned by the best-off 1% has increased from 44% in 2009 to 48% in 2014, while the least well-off 80% currently own just 5.5%.” (Source The Guardian – UK). This probably distorts in that the distribution of wealth within the top 1% is skewed towards the top of that cohort.

As a result, the forms within which this wealth is held, and their tax treatment are key in ensuring that this wealth is taxed appropriately. While corporations comprise a significant portion of this, other organisational forms will also be important. Tax auditing seeks to correctly assess income and gains, but from a policy perspective the taxation of the income and gains of HNWI is the key driver to the efficiency of tax systems and the way in which they are perceived by taxpayers. HNWI individuals will receive dividends from the post-tax earnings of corporations and make capital gains on the shares in those corporations – while both the dividends and capital gains are taxed at a lower rate than other forms of income there will be an incentive to maximise the returns within corporations from the perspective of shareholders and management of those corporations.

Other vehicles for HNWI wealth need to be scrutinised as well.

The problem with taxing the rich is of course their influence and each country struggles in its policy given the mobility of the rich. Again during the (UK) election there were various warnings that the targets of new taxes would just leave when faced with new taxes. The only way to address this issue is to have a consistent approach between countries on how the rich are taxed (but not the rates at which they are taxed). As such the BEPS project only addresses a part of this issue – the taxation of publically held corporations. What might make more sense is to expand this project to address how much tax the top 1% pay and the structures within the international tax system which facilitate the reduction of the tax they pay.”

So what is the philosophy behind personal tax and spending policy in the UK? One might suspect that tax policy was directed towards helping the rich and penalising the poor. But in many ways Chancellor Osborne was a distributive Chancellor although somewhat schizophrenic.

The top 1% of earners pay 28% of Income tax – that’s not a 28% rate but 28% of income tax collected. The top 10% pay over 50% of income tax. Given this contribution to tax receipts, getting the figures right is a significant issue for government income and spending.

In part that is down to measures which Osborne has introduced. A glaring example of this is the clawback of personal allowances which starts when income exceeds £100,000. For some this creates a marginal tax rate of 60% which is the highest national tax rate in the EU. But what this also illustrates is the complexity of the design of tax laws in the UK. Against this is the very favourable treatment of capital gains, private equity and non doms of more recent vintage.

The challenge for Chancellor Hammond going forward will be to shape policy to respond to this issue of fairness for the Top 1%. In PR terms this is unlikely to succeed on a purely policy basis, the alliance of the Mail and Labour Party will want some blood in the form of prosecutions of wealthy tax avoiders and given new rules evaders.

In the international sphere, what the OECD and other multilateral organisations need to do is address how much tax the top 1% pay and the structures within the international tax system which facilitate the reduction of the tax they pay.

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