75% tax for the UK?

Pieter Brueghel the Younger, 'Paying the Tax (The Tax Collector)' oil on panel, 1620-1640. USC Fisher Museum of Art

Francois Hollande has announced plans under the austerity drive sweeping across Europe to create a new super tax within France, with earnings over 800K taxed at 75% and those over 120K at 45%. The tough new budget designed to reduce France's deficit to 3% next year from 4.5 percent this year, and bring in 30 billion Euros has already attracted strong criticisms from businesses and large corporations including L’Oreal.

The chief executive of the cosmetic giants said in an interview with the Financial Times, “If there is such a new tax rule, it's going to be very, very difficult to attract talent to work in France, almost impossible; at a certain level, of course”. It has been suggested that there are further downsides to the increase, such as tax avoidance immigration, evidenced by Bernard Arnault’s application for Belgian citizenship earlier this month*.

With the Liberal Democrats currently plugging the new ‘mansion-tax’ proposals, the decision taken by the French government to impose a wealth tax gives us all something to think on. With the official reports stating our current budget deficit to be around £31bn, support for implementing such wealth taxes here is on the rise. However, with the Conservative government unlikely to vote in favour of a proposal that would have a negative impact on their voters and indeed the majority of their party members, the Lib Dems seem to be fighting a losing battle.

 In Boris Johnson’s words, “I like Nick Clegg but he can’t be serious. These proposals are a non-starter. He knows it. I know it. The idea of a mansion tax is crazy. The idea of a mansion tax by the back door through vastly inflated council tax bills is nonsense. These taxes will disproportionately hit London and Londoners, penalising people simply because of circumstance, trapping people who in many cases are cash poor. London is the motor of the UK economy; kicking it hard makes no sense at all.”

 The upper limit of 50% tax rate on earnings over £150k in the UK already has its downsides, with Mark Giddens (partner at UHY Hacker Young) stating that “The tax rate on people earning more than £150,000 a year, combined with increases in national insurance, has undoubtedly made the UK less attractive to high earners.” The French scheme however seems an approach that would be more welcome within the UK, with the truly ‘super rich’ paying the higher proportion of tax, with those earning between 120K and 800K paying the lower rate of 45%.

Examining this as a viable solution to our deficit however, reveals several risks. Primarily, as predicted by L’Oreal under the new French budget and in the above statement, it is likely that such a rise in taxes on the super wealthy will lead to an increase in the already prevalent cases of expatriation. As we often see in the media many high profile (and undoubtedly high income) celebrities and businesses have left the UK to avoid taxes. For example figures such as the Formula 1 driver Jenson Button, Easyjet founder Stelios Haji-Ioannou and Topshop businessman Philip Green have all retreated to the popular tax-haven Monaco to take advantage of the 0% income tax policy. Figures produced for PCS by the Tax Justice Network show that £25 billion is lost annually in tax avoidance and a further £70 billion in tax evasion by large companies and wealthy individuals (pcs.org.uk).

The benefits in raising income tax on the wealthy are clearly visible: with the risks and realities of public sector spending cuts, it is the poor who will be worse off unless the government finds new sources of income. With Tory efforts to reduce the deficit seemingly hitting those worse off in our society (VAT increases, benefit reductions and reductions in public spending), it is clear that despite the risks associated with introducing higher tax levels, it may be a necessary risk in order to prevent those at the bottom becoming worse off.

 *Arnault, head of the Louis Vuitton Moet Hennessy group has denied this has any relation to the impending super tax, instead stating that it is merely a highly unfortunate coincidence.