DISCOUNT THE REVOLTING RICH AT YOUR PERIL / THE FINANCIAL TIMES COMMENTARY & ANALYSIS ( VERY HIGHLY RECOMMENDED READING )

September 9, 2011 9:07 pm

Discount the revolting rich at your peril

By John Plender

It used to be the peasants who revolted against repressive taxation. Now some fear that the rich will revolt, notably the 20 economists who wrote to the Financial Times this week to call for a reduction in Britain’s 50 per cent top rate of income tax. With popular concern about bankers’ bonuses still rankling with the electorate, this was bold stuff indeed. David Cameron quickly demonstrated – surprise – that he was not the politician to grasp so poisonous a nettle. Yet the curious thing about the debate on tax in Britain and elsewhere is that there is little visible evidence that the rich really are in revolt.


In the US, Warren Buffett, the Sage of Omaha, has complained that he pays much less in tax as a percentage of his income than his employees and wants the government to ask the rich for more – a revolt in reverse. The people who are genuinely revolting against higher taxes are the hotheads of the Tea Party movement. Unlike the originators of the Boston Tea Party, who wanted no taxation without representation, these bourgeois revolutionaries object to taxation with representation and are bothered neither by the highest degree of income inequality since the 1920s, nor by absurd bonuses paid to greedy bankers. In France, meanwhile, Maurice Lévy, head of Publicis, the French advertising group, has been joined by Liliane Bettencourt, the L’Oréal heiress, and Christophe de Margerie, head of the oil group Total, in urging fellow plutocrats to pay more tax as a gesture of national solidarity.

These calls give a whole new meaning to Edmund Burke’s famous dictum that “to tax and to please, no more than to love and be wise, is not given to men”.


The Buffett-Lévy protest hardly amounts to a mass movement – not that there ever could be a mass movement of the rich. More to the point, modern tax revolts are hard to pin down when compared with their predecessors. The 14th century Peasants’ Revolt against poll taxes was noisily physical and the outcome for Wat Tyler and his fellow leaders was violent. That was equally true of the English civil war, when a proximate cause was the ship tax; even more so of the French Revolution when tax was again a key cause of discontent.


Today, in contrast, tax revolts are largely silent. The rich can respond to high taxes by working less. (Few do.) They can spirit away their money to Switzerland. They can engage in legal tax avoidance, a particularly fruitful avenue in the US where the fiscal system is riddled with myriad concessions and exemptions won through lobbying and special pleading.


They can also try to reduce upward pressure on taxation by lobbying for constitutional constraints on excessive budget deficits – something the eurozone will hear more of as it rethinks its fiscal framework in the light of the sovereign debt crisis. Or, in extremis, people and corporations can evacuate to more benign tax jurisdictions. The point about all these forms of revolt is that the consequences are almost impossible to quantify, which means that those who have criticised the 20 letter-writing economists for not backing their warning with evidence are being a mite disingenuous.


This is not the parochial 1970s when a British top marginal tax rate of 98 per cent drove few rich people out at a time when private capital flows and cross-border labour mobility were negligible. With globalisation the threat of tax-inspired evacuation is real.


Of course, Britain can afford to lose the odd hedge fund manager to Geneva. The more dangerous threat is a revolt by rich corporations. It is admittedly too costly for multinational corporations already based in Britain to move out lock, stock and barrel. The issue is rather where they place new investment in plant, research and development and where new would-be inward investors take their internationally mobile projects. And there is no question that Britain’s earlier change in the tax regime for non-domiciled people, together with the 50p top income tax rate, has a symbolic importance for these footloose international folk. It is ominous, as the 20 economists noted, that Britain has slipped from second to fourth place as a destination for inward investment.


These silent tax revolts also pose a more general threat because they erode the tax base, which reduces the effectiveness of states. As Niall Ferguson noted in The Cash Nexus , his peroration on money and power: “The history of Britain’s rise to great power status is also, and not coincidentally, the history of a rising tax burden ... One reason Britain was able to mount such an effective military challenge to her larger neighbour was her higher rate of taxation. As a percentage of gross national product, total taxes were nearly double what they were in France in 1788 (12.4 per cent compared with 6.8 per cent). If France had only been able to raise more tax, her fiscal crisis might have been averted.” Maybe the Tea Party people should bear that in mind as the US confronts the challenge of a rising China.


A narrower, but no less important, economic concern is the impact of the erosion of the tax base on levels of sovereign debt. The population of southern Europe is notoriously reluctant to pay tax, so governments have to borrow from the voters instead. As a result, public sector debt as a percentage of gross domestic product has ballooned beyond sustainable levels, most notably in Italy, where the €1.6bn (£1.4bn) debt stock is now more than 100 per cent of GDP. This silent tax revolt through evasion could end up contributing to a chaotic reshaping of the eurozone. The lesson of history is never to underestimate the power of tax dissidents to change the course of history.
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Copyright The Financial Times Limited 2011.