No ‘magic money tree’ – but a massive pot of gold in tax havens

One of the right’s favourite put-downs of any argument against spending cuts is ‘there’s no magic money tree‘. On Twitter, on blogs, on Newsnight, Question Time and any other forum for discussion of deficits, spending, economics and austerity, you’ll hear this phrase trotted out with wearying regularity. It’s usually accompanied by a condescending smile that implies that the speaker is living in the ‘real world’, while his/her opponent is some poor, deluded idealist with no idea of what’s really going on in the big bad world.

Well, a very interesting article in The Guardian showed just what is going on in the big, bad world – and it’s really very bad news for the pro-austerity, pro-tax-cut, anti-welfare brigade. That is, if the majority of people ever understand just what it means. Of course, the above-mentioned brigade is rich and well-funded enough to spend a lot of money trying to obscure the truth so that people don’t understand what it means. But that won’t stop me and others from trying to get the word out.

The Guardian’s article exposes that there is an estimated £13-20 trillion in funds banked in secretive tax havens like the Cayman Islands and Switzerland by ‘mega-rich’ individuals. Of course, because they’re so secretive, experts can only estimate what’s there. It’s highly likely that that the real figure is far higher.

But let’s go with that range for now, and then let’s play with the numbers a little to get some kind of grasp of what they really signify.

The lower end of the estimate, £13 trillion, is almost exactly 10 times the GDP of the UK. That’s right – at least 10 times what our whole country generates in a whole year is sitting in secret, untaxed bank accounts. Now, that’s a lot of money – and it’s sitting in the hands of a tiny number of people. According to the article, around half of that total is owned by only 92,000 people. 5 times the annual income of the whole of the UK owned by a population of a medium-sized town.

Because the banks holding the funds are so secretive, we don’t know how much of that wealth is owned by people who should be paying UK tax. But let’s be cautious and say 5% – £650 billion. Now let’s be generous to those UK ‘taxpayers’ and assume they already paid 10% tax on it as they ‘earned’ it (the super-rich often pay much less than 10% because of slick tax dodges – remember, the rich but not super-rich Jimmy Carr only paid 1%!). That means if they’d been forced to pay the current top rate of UK tax as they amassed that wealth, a staggering further sum of £260 billion would have been paid into the UK treasury. To put that into context, the total UK national debt at the moment is around £850 billion. So instead of being at 66% of GDP, our national debt would be sitting at a healthy-looking 45% – purely from properly taxing a tiny number of people.

Of course, these are putative numbers – but they give an idea of the scale of the pot of gold sitting at the end of the rainbow in these sly and secretive tax havens that have grown wealthy from protective the riches of the ‘ultra-elite’.

And remember we’re only talking about a tiny percentage of mega-wealthy individuals here. Add in the vast corporate incomes on which only nominal taxes are paid, and the incomes of the ‘merely’ super-rich and extremely wealthy, and one thing is very, very, very clear.

In spite of the vested-interest protestations of the tax-avoiders and the politicians they pay to protect those interests, there is no lack of cash to fund a just and decent society that protects the vulnerable and upholds what is right. The money is just in the wrong hands and the wrong places.

We don’t need a ‘magic money tree’. We just need a fair and properly-enforced tax regime and what we know and feel is the kind of society we should be building and protecting is not only possible. It’s easily affordable.

18 responses to “No ‘magic money tree’ – but a massive pot of gold in tax havens

  1. I’m loving this blog! It’s like being in a socialist sweetie shop – there’s so much to have a crack at and all of it’s bad for you.

    Question: why has no Labour administration since WW2 ever managed either to balance the budget or clamp down on tax avoidance?

    Labour always wants to spend others’ money but doesn’t trouble itself to collect it first. So they end up sticking the bill on the population which pays more in tax than it takes (the middle classes in the private sector) and then wonders why its vision is not a compelling voting proposition with the payers in the system.

    What’s your fair and properly enforced tax regime look like?

    • You won’t find anything in this blog that suggests dumping the tax burden on ordinary people. It should be borne by the companies and individuals who’ve got rich by avoiding taxes.

      Read the other posts and you’ll find some of my ideas on what a better tax regime would look like. I don’t have to do your work for you.

      If you raise some good points and behave civilly, I’ll engage with you as much as time allows. If you behave like a troll, I won’t feed you. It’s bad for both of us.

      • Not intentional to dump the tax burden in this way, but that’s what it does.

        The very rich and very poor don’t pay any tax, at least not in nett terms. Ergo, the middle ends up paying it all. Unintended consequences maybe, but that’s what’s happening.

        I’m not trolling. Use my real name, and I know no socialists at all (live in the Home Counties, run my own manufacturing business – none in my circle) so your views are an interesting novelty to me.

        My style is direct and often sarcastic: I will toneit down so as not to be misunderstood.

      • Thank you, I appreciate it. There will be ways of improving the tax contribution of the very rich, and of corporations. For example, I’ve advocated a state auditing dept that would assess a company or individual’s legitimate income according to a vastly simplified tax legislation and tax has to be paid against the assessed amount. Dodges & loopholes eliminated.

        I’d also have the tax rate on a sliding scale against income. If very rich people, or corporations, don’t feel like pursuing additional income because they’ll only bank (for the sake of argument) 30% of it, then someone else will step up – the law of supply & demand kicks in and someone will always exploit an opportunity.

        We’re too afraid of the rich and their threat to take their ball home. Countries should be run, and laws made, free from the influence of wealthy & powerful interests.

      • Interesting. We agree the current system is too complicated. Also agree the uber rich avoid tax pretty much altogether.

        You want the state to audit companies which would be a considerable burden considering there are three million small firms alone in the UK. Maybe you only mean large firms – say over 500 staff?

        The French tried something similar with companies of 50 or more in the 70s, but it didn’t work. Bigger firms simply split into smaller divisions, the 49ers, to get round it. So you’ll probably need to audit all firms to beat this. That’s a lot of work, and expensive too.

        Progressive tax I’d expected you to posit. We’ll see how Hollande gets on with that in France and whether the rich do indeed leave. Thats going to be a fascinating watch – a developed country going socialist. It’ll be interesting to see who steps in to fill the economic gaps, or whether those gaps simply go unfilled.

        In the end, the problem is that money is mobile. In my business I come across many very wealthy clients, and almost all live overseas for a significant part of the year. I know some would not think twice about leaving the uk, but ironically, if we calmed down a bit on tax they’d spend more time here and contribute more tax and demand into the economy.

        I cannot see how what you propose is going to ensure the rich actually pay more tax though. You accept that at a high level they will probably stop earning, and you’ll have a massively expensive audit which will is unlikely to be rigorous enough to beat a company of any scale, so show me the money.

      • It would be cost-neutral, since it would be paid for by the audited company.

        I’d also – which might be nearer your heart – introduce tax concessions based on the number of people employed, probably relative to turnover to make it fair on smaller companies, to incentivise companies to employ more people rather than aiming always to get the most done with the fewest. More employment, more demand, better for the economy and for companies.

        You might find my post on the Laffer curve interesting. Tax-cut advocates always use it as an argument for tax-cuts, of course, and put the revenue peak very low on the tax axis. But even those economics experts who believe the Laffer principle applies put the peak at around 70% – in which case President Hollande has it about right with his top-rate plan.

        But in fact, the evidence is that it’s a straight-line progression – higher tax rates mean more revenue, if not up to 100%, then certainly well past the point that small-state lovers claim.

        And if the rich want to leave, let them. If they’re not paying full taxes, they make minimal contribution to society. Far better for them to leave, and so leave room for someone else to make their money who’s less greedy and more committed to the welfare of their whole country.

  2. Skywalker, I’m curious, how would you feel about scrapping the tax system altogether, raising people at the lower end out of tax altogether and simply taxing anything about say £20k at maybe 30%? Several countries, Poland, Hong Kong, Singapore etc have a similar system, very little in the way of tax avoidance because the system is so simple and people tend not to leave to avoid tax as it’s fairly pointless.

    As an aside on France, the rich are already leaving, there’s plenty of anecdotal evidence already, from my own clients looking for jobs in London to London estate agencies registering far greater numbers of French people looking for a London home through to hedge funds already heading East. I’d argue though that although they may not pay as much tax as you’d like they certainly contribute to the economy by spending money. The rich tend to spend more than the poor and it’s worth keeping them around for that alone.

    • “It would be cost-neutral, since it would be paid for by the audited company”.

      It’s not cost neutral – you’ve just got the companies to pay for it – not the same thing at all! Based on the few thousands it used to cost for an audit each year, even for a very small company like mine, you’ve just sucked several billion out of the economy into the state sector for your audit scheme. Nothing has been produced for that money – no goods to sell or value added. Just pure overhead. And remember, you’re assuming this will raise revenue (presumably this is where your angle on the cost-neutral bit comes in?) but what if it doesn’t? Either way, if your scheme works, several billion more will be extracted in tax or spend on audits. It’s the wrong direction of travel IMHO.

      You’re also relying totally on the auditors being efficient, honest and capable. In my considerable experience of state bureaucracy, this is almost never the case (dealings with HMRC bear this out all the time). Sad fact is the best accounting talent doesn’t work for the state because said talent can earn far more in the private sector, often dodging the rules the state desperately puts out each budget to try to catch up. It got so bad that Gordon Brown insisted the companies actually tell the Revenue what schemes they’re running, and still we get Jimmy Carr! That’s not a institution that should be running anything, as the Vodafone accounts team will attest.

      Your comments on the Laffer curve are very interesting, and I’ll try to read your postings on it. Your assertion rather invalidates the whole conclusion Laffer made, so I’d be glad to see the evidence for it. Certainly, as everyone knows, when Ronnie Reagan cut the top rate of tax in the early 80s, his take went up significantly, whether he meant it to or not. Given that I suspect you and I are the same age (March ’64 for me) then you probably recall Dennis Healey excitedly vowing to squeeze the rich until the pips squeak. They left! Remember the “brain drain” of the 70s, when anyone with prospects or existing wealth left for the USA? It happened, and much as the left wish it wouldn’t, it will again.

      Care to bet that France has fewer wealthy citizens registered for tax in a year’s time, and that the additional revenue prized from the remainder has more than been lost to the leavers. Paris’ loss will be London and Geneva’s gain.

      What say you?

      • Companies pay for audits all the time anyway – to companies with vested interests and demonstrated ‘lapses’ of judgment when it’s in their interests, as the recent revelations about bank audits by the big auditing firms show. Far better for that cash to be paid for state auditing – so it goes to people who can be held to account, and the funds can be used for better purposes than fattening already obese coffers of big auditors.

        Getting money from the private sphere into the state is exactly what the ‘money tree’ post was about, so you should know I don’t consider that a bad thing at all. State provisions aren’t unaffordable, just underfunded because of inadequate taxation.

        State auditors will be fallible, like anyone. But if companies are paying for their services instead of those of private auditors, then the better accountants etc can be paid enough – and we get the brains working on the side of a fair system instead of against it.

        With regard to Laffer, read the post (as you’ve said you were about to, I see) – it’s fairly well-referenced, I think, so you can check the evidence for yourself.

        As for the revenue increase under Reagan, it’s a convenient fallacy. This is a far more rational reading:

        As for a brain drain, some will leave. I’ll wave them goodbye. If they’re not paying their taxes, their negative impact on the situation far outweighs any spending. And like I said before (fairly sure it was to you!), their departure will leave a vacuum others will rise to fill. Supply and demand again – especially if backed by laws that prevent the rich simply moving out but then operating and profiting remotely.

    • actuarialchris: very interesting post.

      I think you’re spot on, but then I would, wouldn’t I !!

      Off to read SKW’s Laffer stuff now.

    • Flat taxes disproportionately penalise lower earners, whose cost of essential living expenses represents a much bigger proportion of income. Tax should be progressive, because the rich have a far lower cost of living relative to earnings, so disposable income is higher.

      Some rich people may leave France. France won’t really miss them. Rich people spend money, but a far lower proportion of what they earn than a poorer person. A billion pounds shared among a million poor people will recycle into the economy FAR faster and more fully than a billion given to a rich person, because poor people HAVE to spend all they get, just to get by.

      Frances economy might, or might not, grow more slowly – but if it does, and what growth there is benefits more people than would happen under a faster but less equitable system, it’s anything but a problem. It means more solid growth that actually does everyone good, as opposed to rapid growth which all goes into the pockets of the few. Under a neoliberal-type recovery, most people don’t benefit much or at all. My post refers to the same.

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  5. Interesting – plus the comments. I would like to respond to the debate in the comments about the rich spending in the economy. The fact that they are hiding so much offshore would suggest they’re not spending in the local economy, they’re hoarding it offshore – hence they’re not spending anyway. Taking money out of the economy is bad for growth and causes austerity for everyone else. The lower middle incomes can’t afford to hoard, they spend pretty much everything they earn and they do it in bulk and often overspend – private debt is enormous in Britain so the foreign owned banks are raking it in. When austerity hit, the super rich just sat on their money – slowing growth, but if they were properly taxed the money would be filtering back into the economy through public spending. Governments don’t save, they spend and invest. They invest in infrastructure and people. Good education, training and equal opportunities lifts people out of poverty and creates earners. Short waiting lists on the NHS & health education gets people back to work quicker, good infrastructure (transport/fibre-broadband/mail) is good for business, sustainable energy & basic amenities, is good for everyone. Low middle income families spend, and they spend locally in the economy. They can’t afford to save. Super rich hoard offshore and don’t contribute much and take opportunities from other that do. For example coffee chains paying zero tax, when independent business can’t compete as they’re paying taxes. Really, I’ll not miss the chains if they leave Britain, but I think it would be unlikely they’d leave as Britons tend to pay more for everything than any other country. Quite often I notice the prices are the same in the US stores as UK making a 40% mark-up plus in Britain these corporates pay no tax. It’s crazy. Everyone is welcome in Britain as long as they pay the going rate of tax. The truth is, if everybody was taxed more equally, the tax bill would come down for EVERYONE. Tax avoiders are just parasites who eventually kill the host and move on. Taxing them will either move them on without killing our country or they become a productive part of it. Sitting on vast wealth will kill an economy based on growth. Austerity shows an economy is not healthy, it’s restriction in the arteries, showing the economy is possibly heading for a fatal heart attack.

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