It must be pretty obvious that the 50% top rate of income tax, which will take effect next year, and which the Tories have no intention of scrapping, makes the UK a less attractive place for high earners (which is why it is highly doubtful whether the increase in rates would increased overall tax revenues - it only requires a small increase in people emigrating and a small reduction in the number of people immigrating for it to lead to a fall in revenues).
Add to that the loony regulations on hedge funds that our benighted government has proposed as part of the strategy of "deflecting the blame from ourselves by bashing the banks", which will exacerbate this with regard to hedge funds in particular.
Lo and behold, hedge funds are relocating to Switzerland en masse, no surprises there. This Guardian article mentions a canton where the personal income tax rate is only 18%, which is highly misleading, as there are federal, cantonal and local income taxes, although according to Wiki "The total rate does not usually exceed 40%."
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When Uncle Vince came up with his modest Mansion Tax proposal a couple of weeks ago (half a per cent on the value of homes that exceeds £1 million), the landed gentry started bleating that this would drive high earners abroad as well. Now, remember The Golden Rule that taxes are borne by the least mobile factor of production, which in a very literal sense means land and buildings (but also the lumpen proletariat, who cannot just flit abroad), so while the fifty per cent income tax rate has this effect (and over-regulation is like a hidden tax), the Mansion Tax doesn't.
How can we "prove" this? Well, you can never "prove" anything (especially to an audience who do not want to believe it), but the rule is illustrated by the fact that in Switzerland they still have Schedule A taxation (i.e. you pay income tax on the notional rental income of property you own, even if you live in it) and they have a fairly modest wealth tax as well, which means the overall average tax burden on property is about one per cent of its market value (or rather more than twice as much as the "Mansion Tax").
People thinking of moving to Switzerland aren't perturbed by this, as the tax acts like a higher interest rate, i.e. the capital cost of buying a property to live in is reduced to balance out the higher tax burden - the whole thing is no worse than part-funding the purchase with a compulsory, interest-only, non-repayable mortgage with an interest rate of one per cent, a notional loan that is waived when you sell the property again.
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Even more interesting is the fact that property prices in the affected parts of Switzerland are going up, because these higher earners are prepared to pay a premium to live there to escape the additional ten per cent income tax in the UK (in the long run, the value of the premium = the net present value of the tax you can avoid by moving there), which is Ricardo's Law Of Rent in action on an international scale.
Put On Your Big Boy Pants, Maybe?
3 hours ago
6 comments:
"the whole thing is no worse than part-funding the purchase with a compulsory, interest-only, non-repayable mortgage with an interest rate of one per cent"
Well up to a point, Lord Copper.
That point being the point at which you've paid off the mortgage and retired. But guess what, the State still wants its pound of flesh - and you no longer have an income with which to pay.
Hard luck. Hand over your property.
What's that? You'll end up on the street? And your problem is? Don't you realise that everything belongs to the State anyway?
How does it go - "Tutto nello Stato, niente al di fuori dello Stato, nulla contro lo Stato". Yes that just about sums it up.
A higher effective "real" interest rate on houses might even allow a lower interest rate on business investment.
Weekend Yachtsman, why are you planning to have an expensive property and no income when you retire? Would you not be better to put less money into your own property and more into economically productive assets (shares, bonds, BTL, your own business, whatever)? I would have thought that if you want to keep the yacht when you retire, a substantial income would be necessary.
Also, what are you expecting the State to provide for you in your retirement? State pension, NHS, police protection, free bus pass etc?
Hard luck. Hand over your property
No, sell your property and pay off the tax you owe (perhaps with interest+some late paying penalty if appropriate). Assuming the tax was 1%, you would then be keeping 98%+ of the sale price (minus normal sales fees), with which you can buy somewhere cheaper and have some cash over to spend, remembering of course to allow for the future 1% tax on the value of your new smaller property.
About a year ago, my ear was bent by a bloke banging on about the Crash and the Hedge Funds. I pointed out that the hedge funds had nothing to do with it - the problem lay with the banks and the government. He gave me one of those but-I-believe-everything-I-read-in-the-Guardian looks.
For argument's sake - and only for argument's sake - let's concede the advantages (and lack of disadvantages) of LTV. The practical argument against the introduction of a thorough-going LVT (and which is - IMHO - insuperable) is the extreme improbability that LTV would become - or remain - the major sole means of raising tax. LVT would, in practice (politicians being, well, politicians), be imposed in addition to not in place of existing income and other taxes. We would get the worst of both worlds: the oldies would be expelled from their homes and thus the communities where they have lived for probably decades (a significant decline in non-monetised welfare for them and a destabilising factor in society generally) while being taxed on their pension and income from their investments.
Just a thought: I seem to remember - and my memory may be faulty here: it's some time ago - in the 60s my father avoiding (or severely reducing) paying any tax under schedule A because he deducted costs of household repairs and maintenance (+ buildings insurance?) against the deemed income from his house. Was this possible? Would this be allowed under any proposed Wadsworth-inspired LVT regulations?
D, the hedge funds themselves had nothing to do with it, but (some of them) borrowed money from banks, which was a bit naughty.
U, "...the extreme improbability that LTV would become - or remain - the major sole means of raising tax"
I never said the sole means, I have always said use it to replace C Tax, Business Rates, Stamp Duty, Inheritance Tax, Capital Gains Tax & the TV licence fee etc.
"... would, in practice (politicians being, well, politicians), be imposed in addition to not in place of existing income and other taxes."
That's the clever bit. We live in a democracy. The fact that in-your-face taxes are less popular than stealth taxes means that "they" would only get away with increasing it if there were significant tax cuts elsewhere.
"the oldies would be expelled from their homes"
That is nonsense, it simply wouldn't and doesn't happen, I'll deal with it in my next post.
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