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Bash The Rich! - By Kitty Miv, Editor

Kitty Miv, Editor
20 October, 2011

Bash the rich! That's the cry all over the world as debt- and deficit-ridden governments become increasingly desperate to collect yet more tax, the streets are full of striking workers or protesting unemployed, and statistics show an increasing divide between rich and poor.

You can prove anything with statistics, especially if you're a left-wing think-tank, and in this case it's a case of a rising tide lifting all boats: if worker A earned 1,000 dollars in 2009, while worker B earned 10,000, the difference in their pay is 9,000. Now suppose they both earn 20% more in 2010: the disparity is 12,000 - 1,200 = 10,800, which you can, if you wish to be parsimonious with the truth, portray as a 20% widening of the rich/poor divide.

What is more true is that worker B will have paid a great deal more tax than worker A. Suppose that worker A pays a marginal rate of 10%, while worker B pays a marginal rate of 45%: worker A will pay another 20 dollars, while worker B will pay another 900 dollars - 45 times as much.

When was the last time you saw a headline: rich pay 4,500% more tax than poor people? It would be truer than the rich/poor gap propaganda. There are, however, quite often, statistics that show how much more richer people contribute to a country's tax take. This week, German figures showed that the top 1% of earners paid 25% of all income taxes.

And that's just the tip of the iceberg: you must also allow for VAT (rich people buy more), higher car taxes, inheritance tax, corporate taxes and the tax paid by employees who wouldn't have jobs if it weren't for the entrepreneurial efforts of businesspeople.

But in political debate, inevitably highly polarized, 'the rich' are stigmatized and penalized, whereas economic logic says that they should be recognized and rewarded.

The very expression 'the rich' evokes images of yachts, mansions and the rest; but the truth is that most of that 1% of 'rich' Germans (about a million people representing 3% of the population once you allow for their families) are 'rich' because they have successful businesses. They belong to that famous German 'Mittelstand'. The truly rich live in Monte Carlo, of course, and they have nothing to do in life but count their euros. Presumably they don't pay tax at all, and they aren't included in the statistics.

So do governments recognize the value of the hard-working entrepreneurs who generate such a high proportion of incoming taxes? Like hell, they do! In most 'advanced' countries governments torment SMEs with avalanches of regulation, apart from the vicious taxes that undermine SMEs' ability to grow and invest.

Economists are unanimous in condemning high marginal tax rates as counter-productive. But in the UK, for instance, there is currently much debate about the top, 50% rate of tax. How can there be any debate about something so obviously harmful? It's not 50%, anyway, it's 63%, allowing for social taxes, and of the remaining 37%, if it is spent, 20% will go in VAT. So the true marginal rate is around 70%, and you'd better not die, or they'll take another massive chunk of what's left.

Now imagine you are a UK business-person running a successful e-commerce operation, and you can see that you will make GBP500,000 profit this year. Your children are at uni already, and your adviser tells you that you can move yourself and your business to the Mediterranean and pay a maximum of 20% tax on your 'drawings' while remitting the profits tax-free to a holding company in the BVI. All perfectly legal, as long as you more or less close down your UK existence, and your name isn't Gaines-Cooper. The kids are 100% in favour: they can bring their friends out on Easy-Jet and stay in the back part of your villa (soundproofed).

Why wouldn't you do it? And why doesn't the government try to stop you by making your life a little bit easier?

So you go, and make your ten staff redundant. Loss to the UK treasury: GBP350,000 less tax from you; GBP150,000 less tax from employment. And two deducted from the net inward migration figure, so in reality the government is probably quite pleased.

Ciao, Kitty


About the Author

Kitty Miv, Editor

Kitty was born in Argentina in 1960 to a Scottish cattle rancher and his Argentine wife. Educated in Edinburgh and at Princeton, Kitty worked for the World Bank as an economist, where she met and married an emigre Iranian banker. During her time with the Bank, Kitty worked in a number of emerging markets, including a spell in the ex-USSR as a Transition Economies Team Leader. Kitty is now a consultant in Brussels and has free-lance writing relationships with a number of prominent economic publications. kitty@lowtax.net


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