Wednesday, February 20, 2008

Speaking of Blowback

Speaking of Blowback, it looks like our friends in the U.K. have decided it was time to play Russian Roulette - with a 9mm auto:

U.K. Will Miss Non-Dom Residents When They Leave
by Matthew Lynn

Feb. 20 (Bloomberg) -- It has taken 30 years for London to build its reputation as a haven for the world's wealthy, and as a financial trading hub.

And how long has it taken to damage it? Less than 30 weeks.

In October, Chancellor of the Exchequer Alistair Darling announced a plan to introduce an annual levy of 30,000 pounds ($58,000) on the ``non-doms,'' as non-domiciled tax residents in the U.K. are known.

Since then, the plan has come under fierce attack from the financial establishment. Even Trade Minister Digby Jones said it has hurt the country's appeal to foreigners.

The consequences of Darling's plan may prove disastrous.

Targeting the "non-doms'' in the U.K. would be like Germany attacking the car industry or Venice banning tourists. One of the U.K.'s most lucrative industries is servicing the rich. There is nothing to gain by trying to change that now -- and much to lose...

Sometimes it seems like those in power - be they corporate managers, coaches or policy-makers - try to go out of their way to sh*t on an idea, just because they like the smell. The U.K. doesn't make many things anymore. The U.K. doesn't have a world-class biotech or pharma or mining industry. North Sea oil has gone into depletion. They sold off Westinghouse Nuclear just as new plants were about to be built.

(In the interests of full disclosure - I actually am managing a project where we are using a U.K. firm as our primary contractor to manufacture nuclear material shipping packages, so they are not bereft of manufacturing infrastructure - it's just that there is not enough to power the country.)

The only thing they have left is a reputation for a stable government and, up until recently, policies that encouraged wealthy foreigners to live in Britain and manage their money there.

Paraphrasing a concept I read about in The Sovereign Individual a decade ago, what is the marginal cost for a millionaire? Certainly not 30,000 pounds per year. The U.K. should be making it MORE attractive for foreign wealth to plant itself on her shores. Instead, and I assume this is some sort of response to populist pressures, they have decided to take an axe to the Golden Goose.

The Goose won't die immediately, of course, but the U.K. has now given an opening for other competitors to move in. What if Monaco reworked her tax laws and financial infrastructure? Or Slovenia? We may look back ten years from now and be able to say that this was a key tipping point in the economic life of modern Britain.

An Analogy

We'll end with a parable. This is not meant as some anti-tax screed - just as a reminder that humans respond to incentives. Plus, the numbers are off. Using 2006 tax data, Man #10 would be paying 65%, but why quibble:

Suppose that every day, ten men go out for beer and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this:

The first four men (the poorest) would pay nothing.
The fifth would pay $1.
The sixth would pay $3.
The seventh would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest) would pay $59.

So, that’s what they decided to do.

The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve. “Since you are all such good customers,” he said, “I’m going to reduce the cost of your daily beer by $20.” Drinks for the ten now cost just $80.

The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected. They would still drink for free.

But what about the other six men – the paying customers? How could they divide the $20 windfall so that everyone would get his ‘fair share?’

They realized that $20 divided by six is $3.33. But if they subtracted that from everybody’s share, then the fifth man and the sixth man would each end up being paid to drink his beer. So, the bar owner suggested that it would be fair to reduce each man’s bill by roughly the same amount, and he proceeded to work out the amounts each should pay.

And so:

The fifth man, like the first four, now paid nothing (100% savings).
The sixth now paid $2 instead of $3 (33%savings).
The seventh now pay $5 instead of $7 (28%savings).
The eighth now paid $9 instead of $12 (25% savings).
The ninth now paid $14 instead of $18 (22% savings).
The tenth now paid $49 instead of $59 (16% savings).

Each of the six was better off than before. And the first four continued to drink for free. But once outside the restaurant, the men began to compare their savings.

“I only got a dollar out of the $20,”declared the sixth man. He pointed to the tenth man,” but he got $10!”

“Yeah, that’s right,” exclaimed the fifth man. “I only saved a dollar, too. It’s unfair that he got ten times more than I got”

“That’s true!!” shouted the seventh man. “Why should he get $10 back when I got only two? The wealthy get all the breaks!”

“Wait a minute,” yelled the first four men in unison. “We didn’t get anything at all. The system exploits the poor!”

The nine men surrounded the tenth and beat him up.

The next night the tenth man didn’t show up for drinks so the nine sat down and had beers without him. But when it came time to pay the bill, they discovered something important. They didn’t have enough money between all of them for even half of the bill!

And that, ladies and gentlemen, journalists and college professors, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.

For those who understand, no explanation is needed.

For those who do not understand, no explanation is possible.


Anonymous said...

This is a ridiculously facile analogy, presupposing that everyone receives the same benefits from taxes, and that there isn't more power afforded to the wealthy. Does the message still ring true if the guy who pays the bulk of the tab owns the bar? If the others are his employees? If he requires them to drink at his establishment? If the charges are for necessities rather than drinks? What about if the charges are for vaccinations that will inhibit the spread of disease, and everyone needs to take it if it's to work for anyone?

When Warren Buffet thinks it's silly that he's taxed at a lower rate than his administrative assistant, I wouldn't be so glib about this simple little fantasy story.

Flagg707 said...

Facile? Perhaps. Indicative of how incentives will shift the flow of capital and talent? In my opinion - yes.

Analogies are slippery beasts at best. And any analogy dealing with taxes, religion or political candidates are fraught with peril. All I was trying to say was that capital, investment (and thus the wealth to fund the very needed and often effective social safety net programs) do depend on how they are treated in whatever country they are deployed.

I'm not saying it's always right. I'm not defending wealth and privilege that uses the mechanism of the State to keep it wealthy by erecting barriers to competition. I'm just saying that countries that make it hard on business also will make it hard to generate the massive tax revenues necessary to fund worthy programs.

Anonymous said...

Gosh, your point gets a lot stronger when you're willing to couch it in less black and white terms.

Nicely stated. Peace.

Anonymous said...

As they were unable to pay the bill, they decided to check up on the rich guy. They found that he lives in a house built on land that his great great grandfather took from their great great grandfathers, before he forced them to work in the factory/mine etc that the great grandsons now work in (or got laid-off from). The rich guy now owns that bussines, but ofshored most jobs, depriving those currently unemployed of means of support, and forcing those still available to find work to agree to work for less. He was buying them beer (what a lovely and suitable analogy) and other distractions so that they wouldn't notice he was FUCKING THEM IN THE ARSE! So they got a bit miffed, strung him up from his art-deco chandelier, and took back their stuff. Now they don't have a factory to work in, because none of them knew how to run it. But now, with the breaking of financial bondage each one has a bit of land or a small craftsmanship-based bussines, and they make their own beer. And the dried out corpse of the rich guy serves as the pub sign, reminding the pubmaster not to fuck with the customers.