Tax and HNWI

The British General Election saw a plethora of proposals to raise more taxation from the “rich” which is not surprising given the atmosphere of austerity. Some of the proposals were poorly thought out in how they interacted the rest of the tax system – the Green’s proposal for a wealth tax would have (combined with income tax) taxed a professional who owned a house in London, had a pension fund and above average salary at close to 100% on an annual basis – something which even Denis Healey failed to achieve in the 1970s.

As part of my contribution to the ICRICT   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 focus on the top 1% 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.

There is one obvious structure which needs sensible review – charitable giving. What is the policy reason for giving a tax reduction for charitable giving? How much does it cost globally? With regard to the super rich, why should they receive a tax deduction to fund their well publicised philanthropy? Would they stop without the tax deduction?

© Chris Lenon and www.green-tax.co.uk  2014-2015. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Chris Lenon and www.green-tax.co.uk with appropriate and specific direction to the original content.

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