Wealth doesn't trickle down – it just floods offshore, new research reveals

[breadandbutterfly]

www.guardian.co.uk/business/2012/jul/21/offshore-wealth-global-economy-tax-havens

""These estimates reveal a staggering failure," says John Christensen of the Tax Justice Network. "Inequality is much, much worse than official statistics show, but politicians are still relying on trickle-down to transfer wealth to poorer people.

"This new data shows the exact opposite has happened: for three decades extraordinary wealth has been cascading into the offshore accounts of a tiny number of super-rich."

...In fact, some experts believe the amount of assets being held offshore is so large that accounting for it fully would radically alter the balance of financial power between countries. The French economist Thomas Piketty, an expert on inequality who helps compile the World Top Incomes Database, says research by his colleagues has shown that "the wealth held in tax havens is probably sufficiently substantial to turn Europe into a very large net creditor with respect to the rest of the world."

In other words, even a solution to the eurozone's seemingly endless sovereign debt crisis might be within reach ? if only Europe's governments could get a grip on the wallets of their own wealthiest citizens. "

Sorry to delay getting back to you - have had my day thrown off kilter my an email from HMRC timed at 08:16 this morning, summoning me to a meeting with HMRC and HMT at 10:00 to discuss the proposed new General Anti-Abuse Rule, which I mentioned above...

Anyway, to answer Rabbitstew and Edam, the argument I'm trying to make in my cack-handed way is this:

1. In my view (which I'm happy to debate, of course), the big inequality between rich and poor has very little to do with taxation. It's caused by wage inequality in that the disparity between the average salary in any given company and the pay of the highest paid employee (almost always one of the board, except in banks where it's often one of the traders). I would like to see legislation that caps the maximum multiple between average salary and highest salary.

1. Tax is not a good mechanism to level the playing field. There are 2 main reasons for this. The first is that you do not collect an extra 1% of tax if you add 1% onto the tax rate - this is because increasing taxation changes taxpayer behaviour to the point where people either stop bothering to earn more, or move activity away from the UK, or enter into tax avoidance. There's some evidence that the 50% income tax rate represents a tipping point and hence does not actually raise money but does drive economic activity away (the jury's out on that one, HMRC is due to report).

The second reason is that tax is only every a percentage of salary so if you want to create greater equality between rich and poor it takes longer to achieve via taxation than via salary caps for the rich directly.

This is why I think the fight that matters is to culture-shift to a more egalitarian society, rather than to increase taxes on the rich.

1. Given our starting point - with disproportionate wealth at the top - then it does matter whether that wealth is held onshore or offshore. This is because onshore wealth gets spent here, and hence does stimulate our economy. Take, for example, the height of decadence - owning a race horse trained in a UK stable. The training fees are VATable, so contribute to HM Treasury's coffers. The yard has to employee a stable lad or lass, so contributes to employment (and PAYE/NIC). The yard has to buy straw, feed, saddlery, etc. The race courses have to be maintained. It's better for all that activity to be here then elsewhere.

1. The report had made some fairly grave errors (again, in my view) when it comes to calcuating how much wealth has been transferred offshore. The economic analysis is flawed.

1. Given its flaws, we shouldn't waste our time and effort protesting against largely non-existent problems around tax havens. We should be fighting against wage disparity.

Well I agree on that, CinnabarRed - how to tax people isn't the problem, it's just a symptom of the problem. But how do you shift the culture in a country which courts the super rich and works hard to make them feel good about their wealth?

But Cinnabar, no reason why it has to be either/or as in your no 5 - wage inequality and taxation levels and onshore/offshore and tax evasion are all important, interrelated issues.

You argue (maybe due to your perspective working in tax?) that raising taxes specifically acts as a disincentive to people to earn more or earn in the UK - but I can see no reason why you should believe that yet not believe that if we reduce wages at the top, that won't have the same effect. Personally, I'm happy for some of the very greedy but not obviously efficient people at the top to bugger off abroad - if lots of perfectly bright graduates can do good graduate-level jobs for say 50K a year, or even 100K a year, I simply do not believe their peers at university are actually 'worth' ten or 100 times that (or more), just for managing a large company (not starting a new one off say, which I can see requires a level of inititiative that is unusual and does deserve an appropriate reward). I don't think if top bankers were paid 100K instead of 20 million they'd perform any worse - quite possibly better.

I recommend you read the fantastic:

www.newscientist.com/article/mg21028071.300-the-bonus-myth-how-paying-for-results-can-backfire.html

which points to research showing that actually, far from high bonuses encouraging workers to perform their task better, they actually undermine workers' intrinsic motivation to do the job properly for its own sake, and lead to (surprise, surpise!) cheating and short-termism.

There are certainly many well-off people who object to high taxes but (yourself aside), they tend to be those who also object to wage equality. So if we want to ensure that 'we really are all in it together' then it is surely easier to reduce wage inequality via taxation than by legislation that some people are just not 'allowed' to earn much, which I think would go down even worse with the rich than higher tax rates (esp if these measures cannnot be avoided).

After all, higher levels of taxation are the norm in many of the world's most successful and happiest countries - Scandinavia and Germany for example. I see no evidence that higher taxation in these countries has led to a brain drain or had anegative effect on the economy - far from it. Likewise, tax havens rarely produce much else of value (maybe Switzerland aside) or have notable economies in other ways.

www.newscientist.com/article/mg21028071.300-the-bonus-myth-how-paying-for-results-can-backfire.html - sorry.

3rd time lucky!

www.newscientist.com/article/mg21028071.300-the-bonus-myth-how-paying-for-results-can-backfire.html

Sorry!

the old "if you make me pay taxes I'll go away" ploy is fairly unconvincing, but lots of people think it's worth a try.

That doesn't mean the rest of us have to believe it.

It is especially untrue in the case of banks and other financial services trades.

I agree, breadandbutterfly, that there does tend to be a considerable overlap between the people who dislike high taxes and the people who don't see a problem with huge wage inequality. And then there are all the lawyers rubbing their hands together with glee at the thought of defining a "wage."

Don't we already suffer from rampant wage avoidance?

OK OP, I'm happy for us both to work to tackle the same problem but approach it from different angles!

All I'm really saying is let's not focus on where the wealthy shove their cash once it's in their hands, let's focus on stopping so much of the cash ending up in their hands to start with. I'll campaign for greater wage equality and you can deal with taxation.

May I just make one final, personal, point on high taxation? I am not opposed to higher taxes personally, or in principle. I have never sought to avoid tax, and neither has my DH. As a household we are squeaky clean! I do, however, subscribe to evidence that shows that raising taxes by 1% does not necessarily increase tax revenues by an extra 1%. It's called the Laffer Curve effect, after the economist who first recognised that every society has an optimal level of taxation hardwired into it's fabric. The Institute of Fiscal Studies has done some interesting work on identifying where the UK's tipping point comes. Unsurprisingly, it's lower than in, say, Sweden where taxation is higher but equally more expenses are met by the state so individuals have to finance fewer costs personally.

I actually think (and this is way off topic now) that our geography also plays a part here in the UK. Land is expensive, we have a culture of home ownership and it follows that we have less free cash for discretionary spending. Unfortunately, some view tax as discretionary.

Doesn't the percentage of tax people are willing to pay link with the amount of inequality in their society that they are willing to live with? ie don't countries which tolerate higher tax rates also tend to have less wage inequality? ie wage inequality is also hardwired into our fabric...

Not really hardwired - as the articles in this week's fascinating issue of the New Scientist make clear, these attitudes towards inequality are not innate and for large parts of recent history were damped down. The extreme growth in the fortunes of the top 1% the rest of us are pretty recent - hence the Occupy movement's focus on that.

www.newscientist.com/article/mg21528753.400-an-appeal-for-fairness-in-society.html

www.newscientist.com/article/dn22071-inequality-why-egalitarian-societies-died-out.html

www.newscientist.com/article/mg21528752.100-inequality-who-are-the-1-per-cent.html

and the graphs/data in this:

elsa.berkeley.edu/~saez/saez-UStopincomes-2010.pdf