September 4, 2011 5:40 pm

Rich look set to escape higher tax burden

Most people would say that a good tax is one paid by those richer than themselves, so calls by members of the global wealthy elite to pay more tax have come as a bolt from the blue.

However, early signs are that the “tax me more” campaign by some of the prominent rich, such as Maurice Lévy, chairman and chief executive of the French advertising group Publicis, is unlikely to gain traction.

Last week, Italian parliamentarians rejected raising top income tax rates and the introduction of a wealth tax. Spain also steered away from a wealth tax. In the US, Republicans have taken a dogged stance against higher taxes.

In the UK, one of three countries to have raised its top income tax rate since the crisis, alongside Spain and Greece, George Osborne, chancellor, insists the level is temporary and has established a review to examine its pros and cons. The expectation in political circles is that this review will provide justification to scrap the tax before the next election.

According to Jeffrey Owens, head of taxation policy at the Organisation for Economic Co-operation and Development, although governments across advanced economies have sought to raise more revenue by taxes, countries have not reached a tipping point of squeezing the rich for more money.

While during the 1970s and early 1980s, governments would impose very high taxes on the richest in society and often turn a blind eye to avoidance by means of the liberal exploitation of large deductions and allowances against tax, the tendency since has been to lower headline rates on the rich.

In advanced economies, top central government income tax rates were commonly 70 per cent in 1981, but had fallen almost everywhere to about 40 per cent by the start of this century. The effect, according to Mr Owens, has been beneficial to the rich, especially because initial attempts to reduce avenues for tax avoidance alongside lower rates gradually diminished. “Tax systems have become less progressive in terms of design than they were in the mid-1980s,” he says.

The trends in income taxes have been replicated by other taxes affecting the rich. Corporate tax rates have fallen rapidly; in 2011 only three countries in the OECD operate a wealth tax, compared with 15 countries in 1995 and 10 in 1976; and taxes on the transfer of assets – inheritance and gift taxes – have also been scaled back.

Top central government interest rates

Competitiveness is generally the justification for lower headline rates of tax on corporate and personal incomes, profits and wealth. Finance ministers today do not get credit for squeezing the rich to aim at more equality, but seek political gains from forming more efficient tax rates.

Measuring such efficiency is notoriously difficult, however. A UK study by the Institute for Fiscal Studies suggested recently that 40 per cent was likely to be the revenue-maximising rate of top rate income tax and so the 50 per cent rate might not raise any new cash for the exchequer. Stuart Adam, economist at the IFS, however, notes that this estimate is extremely imprecise and the institute could be confident only that the maximising rate was somewhere between 33 per cent and 65 per cent – a huge difference in political terms.

Before the rich celebrate that their incomes are safe from the taxman, there are two reasons for them to be fearful.

First is a new attack by the revenue authorities on tax expenditures, the deductions from income that do not count in tax calculations. Mr Owens sees that in some OECD countries – particularly France and the US – authorities seek to reduce the generosity of these expenditures in an effort to raise revenues.

Second, cross-border evasion has become more difficult as offshore locations seek to avoid being blacklisted as uncooperative tax havens. Many have signed agreements to share information with large economies, while Switzerland and Liechtenstein have agreed to levy charges on foreign bank accounts.

These avenues might increase the tax burden somewhat on those with the highest incomes, but there is no sign of tax systems going back to the high rates of a generation ago. As well as enjoying more rapid growth of incomes than the rest of the population of advanced economies, the rich can still feel reasonably safe in tax systems that are unlikely to squeeze them dry.

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