Tuesday, 18 January 2011

Taxes are for the Little People

DOZENS of super-rich immigrants are to be lured to Jersey with the promise of lower taxes under plans being drawn up by the Treasury. Senator Philip Ozouf is hoping to attract 15 tax exiles to Island shores a year by lowering the amount they have to pay on their worldwide income. However, in return for the more generous tax rates, they would be required to pay at least £125,000 in income tax a year and 20 per cent on their Jersey income. It is hoped that the lower rates will increase the cash coming into Island coffers, because more 1(1)ks would be bringing more of their money to be managed in Jersey - thus creating jobs and other indirect sources of income. (1)

Part of the disquiet on reading this headline is the lessons of the past. Last year, it was revealed that some 1(1)ks were paying less that £10,400 a year in tax, because the minimum liabilities in the 1970s and 1980s were set at between £5,000 and £10,000. That would have seemed substantial at the time, but the pace of inflation has eroded it over time. The same would clearly happen with the £125,000 - it seems a large figure now, but in 10 or 20 years time, we will be back with the same kind of situation as before. The only way to avoid this is to  build in some kind of indexing with inflation, so that the threshold can increase over time, and a sudden leap would not be necessary.

Philip Ozouf comments on the 1(1) ks that  "We have been fairly unsuccessful in attracting 1(1)ks recently. We were uncompetitive and that is why Senator Le Sueur changed the rules in 2005. That has meant we have been more successful, but that has had. the effect of limiting people's contributions. They have managed their affairs to cap their contributions."

Does he not think it likely that managing affairs to minimise contributions can somehow be prevented? 20 per cent on their Jersey income sounds fairer, but how much of their income will be available for local taxation, and how much can be structured out into other jurisdictions? What counts as world-wide income? If a Delaware company, for instance, owns assets in Jersey and receives income from those, which is remitted (perhaps via a trust or another company) to the 1.1(k) in the form of dividends, do they pay on just the dividends or are these overseas income? I am sure there are more sophisticated means of moving funds around, such as onshore and offshore "tax wrappers", the use of offshore trusts etc. and all those nice forms of "private client tax planning", as a brochure that's just landed on my desk proclaims.

Nicholas Shaxston's book "Treasure Islands" on tax havens noted how financial affairs of the 1.1(k)s could be negotiated and structured so that the minimum necessary local tax was payable. An example of what he found is given below:

A retired property developer who did not want to be identified said, I pay a quarter in tax terms of what the guy who collects my bins does. I  play golf all day while he probably can't even afford to pay for the house he lives in. Living in Jersey is like that: if you've got the money, you get the cream'." (2)

An example from the UK of how tax can be restructured so that individuals pay little in their resident locality is Sir Philip Greene:

Let's look at an example of somebody David Cameron thought was doing it so right he appointed him to an official role advising the government: Sir Philip Greene, Britain's sixth richest man. He runs BHS, TopShop, and Miss Selfridge. These businesses exist on our streets. You can see them every day. Yet for tax purposes, they are "registered" in a small building next to a dentist in Jersey, and with Greene's wife in Monaco. So he avoids more than £250m a year that you and I have to pay instead. It adds up pretty quickly. (3)

The carrot to the local population, already struggling under the burden of 20 means 20, and GST, is that income from 1.1(k) will mean less revenue will needed to be raised from the ordinary taxpayer. That's true. But is it right that some people in the Island receive special tax privileges? Is it right that, as the notorious billionaire tax fraudster Leona Helmsley said, "taxes are for the little people."  Taxation  is  an economic issue, but it is also a moral issue. Effectively 1.1(k) is Jersey's own version of non-domiciled status in the U.K, where individuals who are resident are treated for taxation purposes as if they are not. Should all who are resident be treated equally with regard to taxation?

Dan R. Ebener, looking at the State of Iowa, comments on a situation which seems depressingly familiar with Jersey:

Part of the problem is that our states are involved in a race to the bottom - the race to the bottom of tax rates for corporations so that we prevent our corporations from moving out of state. And a race to the bottom of tax rates for wealthy retirees so that we keep our retirees in the state and they keep their tax payments in our state.  It's an unhealthy competition where the rich win, the common good loses, and the states feel forced to compete or lose competitive advantage with neighboring states. (4)

Which sounds very much like what Philip Ozouf is saying, except he doesn't see anything wrong in this race to the bottom - we have to reduce the demands for 1.1(k) because they will go elsewhere with their money if we don't, and we won't compete well with other jurisdictions. But is it right? Is it fair?  Economics is not moral analysis; at best, it's information. It is not a substitute for moral analysis. And that, at the present, is what we sadly lack.

Ye friends to truth, ye statesmen, who survey
The rich man's joys increase, the poor's decay,
'Tis yours to judge, how wide the limits stand
Between a splendid and a happy land.
Proud swells the tide with loads of freighted ore,
And shouting Folly hails them from her shore;
Hoards, e'en beyond the miser's wish abound,
And rich men flock from all the world around
Yet count our gains. This wealth is but a name
That leaves our useful products still the same.
Not so the loss. The man of wealth and pride
Takes up a space that many poor supplied;
Space for his lake, his park's extended bounds,
Space for his horses, equipage, and hounds;
The robe that wraps his limbs in silken sloth
Has robb'd the neighbouring fields of half their growth,
His seat, where solitary sports are seen,
Indignant spurns the cottage from the green;
Around the world each needful product flies;
For all the luxuries the world supplies:
While thus the land adorn'd for pleasure,
all In barren splendour feebly waits the fall.

Oliver Goldsmith, 1770

(1) http://www.thisisjersey.com/2011/01/17/plan-to-attract-more-tax-exiles/
(2) Treasure Islands: Tax Havens and the Men Who Stole the World by Nicholas Shaxson, published by The Bodley Head, price £14.99.
(3) http://www.johannhari.com/2011/01/17/you-pay-your-taxes-or-go-to-prison-unless-you-are-super-rich-or-a-corporation
(4) http://woodstock.georgetown.edu/resources/articles/taxation-and-the-common-good.html


James said...

Tony, the other point to bear in mind is that having more rich people around is not an unmixed blessing. Rich people consume disproportionately more than poor people, and when this concerns finite resources (like land for housing or agriculture), the beneficial effects on the economy are severely tempered.

TonyTheProf said...

Hence the poem by Oliver Goldsmith that I ended by!

Quite right - also when 1.1(k)s become involved in the local economy, they often have a distorting effect, especially as landlords of numbers of commercial properties, where they can sometimes decide to leave the property empty if there is not a taker.

The number of shops that have been and gone at Quennevais Parade because of extremely high rents (and rental increases) is one example.