For many months now Cayman Finance has spoken about the law of unintended consequences as it relates to overseas legislation on tax issues. Today, a news report by the Times Online “City broker will relocate staff to avoid supertax” clearly validates both that warning from Cayman Finance and the need for tax competition globally.
As governments around the world feel more pressure to raise revenues in an increasingly lopsided battle with their national debt and future obligations it is vital that there be some kind of counterbalance to protect people from sudden and violent swings in tax rates.
The article, by Robert Lindsay, focuses on a single Broker firm, Tullett Prebon, which provides special brokering services for investment banks and employs 700 brokers and staff in London. But the facts apply broadly. A new UK ‘supertax’ that will take 50% of bonuses over £25,000 awarded to banking sector employees is being implemented and is set to run until ‘at least’ next April. Quite naturally few people believe the new tax would not be renewed in subsequent years.
As a result many of Tullett’s broking staff have reportedly expressed an interest in moving away from the UK. And competing firms overseas are using the occasion to aggressively recruit brokers away from London firms.
This could just be the thin end of the wedge as tax ‘grab’ policies encourage the highest income earners, those in the highest tax bracket that pay the most in both income and consumption taxes, to leave their home jurisdictions in search of places with equal standards of living where they can keep a larger percent of earned income. The end result is higher tax policies leading to lower government revenues.
And this is exactly why tax competition between jurisdictions is necessary. Without it, nations become empowered to target sectors, businesses, or even individuals with punitive taxation measures and there would be less incentive for the economy to grow earnings. We believe that you have to risk capital to earn profits and the potential return has to justify the decision to put your capital in harms way. Unrestrained taxation skews this natural process and actually constrains growth.
The difficulties facing the UK and US raises the question of whether the recent G20 focus on Offshore Financial Centres with low tax rates was really focused on the stability of the global financial system, or has the true goal been the elimination, or at least minimization, of tax competition globally? Given that the root causes of the financial crisis were decisions made in G20 nations regarding bank lending and the failure to regulate we believe the answer is clear.
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