Tax Break

Who said tax is boring?

Archive for the month “June, 2012”

Waltz or requiem?

Trust? Yes I could set you up one of those for a suitable fee

I was in Vienna last week for a European tax conference. Inevitably, the Eurozone crisis loomed enormously large but, in addition to the crop of European experts, there were speakers from China, Africa and the US to remind participants that Europe is not an island. Throughout the two days there was one word that refused to lie down. It kept popping up in just about every speech or comment. That word was “Trust”. The need to restore trust between nations in Europe. The need to restore trust between governments and their electorates. The need for trust in forming companies’ tax policies. The need for trust between tax authorities and taxpayers. The keynote speaker was a brilliant financial journalist, highly prominent in her field, with a PhD in Social Anthropology who set the tone for the entire conference.

Overall, the vision was remarkably optimistic. Faced with economic armageddon in Europe, EU nations from North and South will understand that they need to cooperate. With the stampede of government changes at the polls voters will regain confidence in the executive branch. Faced with the nagging protests via social media and Occupy the World movements companies will abandon over-aggressive tax planning and adopt ‘moral’ tax strategies. With the prospect of never-ending tax disputes and lack of certainty companies will come forward and expose themselves to real time tax audits while tax authorities will be put on a leash to stop them going for the taxpayers’ throats.

And they will all live happily ever after.

Not quite.

All men are created equal – but it doesn’t mean they are the same

In what I can only put down to western Europe’s post Holocaust obsession with, what itself can only be euphemistically referred to as, ‘political correctness’  everybody ignored the elephant in the room – and that elephant was cultural diversity. Different cultures have varying views on what constitutes the truth, fairness, morality – you name it. The only speaker I heard touch on the subject was the Chinese guest who suggested that companies’ approach to national tax authorities should depend on the nature of the executive, judiciary and tax authority in a particular country- but then until two years ago it was politically correct to be executed for tax evasion in China.

You can talk until the cows come home about building trust vertically, horizontally or three dimensionally – but, to put the matter in perspective, I would have happily challenged any of the speakers to convince the average Greek in the Street that he has a moral obligation to pay tax. For crying out loud, one of the  speakers was the geezer who wrote the Liechtenstein Tax Code which, although I have not yet set aside the 5 minutes  required to read it (rumour has it that he wrote it while traveling in an elevator), must surely be full of trust and  love to all men. Another guest was a former finance minister of Greece (I understand there have been quite a lot of them)  who, on the odd occasion he was coherent, expressed absolutely no remorse for anything that had happened and looked forward to  being bailed out by Germany, despite the fact that successive governments lied about their statistics.

Stunning! But Mozart must have turned in his grave

If, to survive, the Eurozone needs to look for a single European cultural standard, then surely Austria should lead the way. Austria, of course, is a synonym for culture. It is, simply put, a cultural paradise. What nation could be more appropriate?  A quiet economically strong country, its people are the epitome of politeness. From the minute I boarded the Austrian plane my ears were massaged with Strauss’s Blue Danube Waltz. The service was perfect. Viennese architecture is absolutely breathtaking and, as an American colleague commented to me while  we admired the Throne Room of  the Hofburg Palace , “We don’t get this in Miami”. Precisely. And the natural beauty, of course, only starts in Vienna.

Waydamminit!

Good bye! By 11am on November 11, 1918 the number of deaths had shot up from 2 to around 16,000,000.

While I sat last Tuesday in my hotel room thoroughly enjoying England’s richly undeserved win against the soccer representatives of the Thugdom of Ukraine (from which my grandparents fled a century ago), my mind wandered elsewhere.  While Ukraine is receiving much coverage for proudly co-hosting Euro 2012, didn’t Austria, in living memory, proudly co-host a slightly bigger competition- namely the Second World War? And for that matter, might the Austrians be responsible for that little contretemps attracting the title “Second World War”, since arguably if it wasn’t for them there wouldn’t have been a first one. And wasn’t it their president, the upright one-time Secretary General of the United Nations who was discovered to be a little too enthusiastic member of the Wehrmacht? And not one word of remorse from him or the country.  Even in the field of international taxation, in their own quiet way they have historically had one of the most brutally favourable holding company tax regimes in the developed world, grabbing what they could from the competition.

Greek workers taking a clandestine 5 hour lunch break

In short, Austria suffers from cultural schizophrenia. And maybe – just maybe – that is PRECISELY what Europe needs just now. And that is why the choice of Austria to stage the conference this year was so appropriate. Perhaps the other  members of the European Union – ignoring  Britain which surely won’t be there ten years  from now-  need to accept publicly the credo of German economic ethics while maintaining their own differing cultures at home.  They could take their cue from the Marrano Jews of Spain who chose conversion to Christianity over the auto-de-fe during the Spanish Inquisition but maintained their Jewish traditions at home in secret (although a cautionary word – that option did not work for the Jews in the 1940s). Alert readers will have spotted that this idea essentially represents Virtual Occupation. Given the history of the Continent, if the European project is not saved, Virtual Occupation may well be preferable to the alternative.

Next year’s conference is in Berlin.

Raising the energy bar

Ancient artefact circa 1968

In my salad days, apart from holding down a regular job as an elementary school student, I had some house jobs. Returning home in the freezing dark each winter’s eve, my chafed thighs burning from the cold, I would make straight for the soot encrusted scuttle standing guard outside the kitchen door. Carrying it across the yard to the squat  bunker opposite I would scoop coal into the scuttle and then return it to its post ready for an older pair of hands to commit the contents to the boiler that spread warmth around the house.

…and another

In the mornings, after breakfast, when the teapot was empty, it was my task to take it into the garden and spread the tea leaves around the roots of the rose bushes to help them grow.

Every day, before the empty milk bottles were washed and returned to the doorstep for collection by the milkman, I used to gather the silver and gold metal tops. When I had a sufficient quantity, I would post them to the BBC Television Centre and await the following Monday’s Blue Peter programme when they, along with millions of others,  were transformed by the wonders of alchemy into a Guide Dog for the Blind. The dustmen (oldspeak for “city cleansing department”) only had to come once a week.

All innocent stuff you might think. But judged by modern standards it is not clear to me whether, on balance, I was an ecological saint or a child soldier pressed into service  by the Lord’s Resistance Army as an Earth Murderer. Fossil fuels do not get a good press these days.

I would love to meet the joker who invented the word

In the last few months alone we have had Australian legislation against carbon emissions, EU legislation over airline polluters, Canadian protests against shale gas fracking and British centralization of future power policy.

Dealing with the greenhouse gases that lead to global warming is, of course, not a new concept. The main “incentives” to reduce the release of carbon dioxide (the main culprit) into the atmosphere have been carbon taxes and cap-and-trade schemes.

Crime against humanity?

Carbon taxes are quite simple in that the social cost of a specific measure of carbon emissions is estimated and emitters are taxed accordingly. There are two main problems with this system . Firstly, while university professors may have had a field day devising the concept, nobody has the foggiest idea how to objectively calculate the social cost – so prices vary madly. Secondly, it is impossible to predict how much effect the tax will have on reducing emissions. In addition, there is the philosophical (and, if you happen to be poor, highly practical) problem that the tax is regressive. That means that if affects the poor more than the rich because, on the assumption that the cost is passed on to consumers, they  are hit comparatively higher. On the other hand, as long as a government applying the tax (as Australia this year) undertakes to ensure that the tax is dished out to lower income households as subsidy or tax break as well as supporting industry’s efforts to reduce emissions, this last problem is mitigated.

Cap and trade schemes, in contrast, control the reduction of carbon emissions by setting limits and the government issuing permits for those emissions. That is where the fun starts. Schemes have tended to start with “grandfathering” the permits free of charge to emitters on the basis of past emissions. They are then free to trade these permits. The concept is that a market price will be reached where those emitters who can most cheaply reduce emissions will do so.  This has produced windfall profits for some of the biggest culprits while there is little government revenue to aid the lower income sufferers of price hikes.  A more morally acceptable  (but less politically practical ) scheme is to auction the permits and use the revenue in a similar manner to the carbon taxes.

And now to the real world. Both types of scheme do not appear to be working too well. Carbon taxes have been set too low and permits have been distributed too freely.

While both systems, especially the cap and trade, appear quite clever on paper, both lack bite. When you take into account the countries that do not play ball, the potential leakage as companies move operations elsewhere is positively frightening.

Perhaps it is time to take a look back at the world before the Industrial Revolution when  the only greenhouse gases emitted came from the extremities of grazing cattle.

Hanging maybe. But drawn and quartered?

In those days there was a lot of lawlessness. As today, many only respected the law to the extent it was enforced but then society was not sufficiently organized to ensure its enforcement. So, what did the authorities do? They terrified the population. If you stole a sheep you were hanged. If you deflowered the wife of the heir to the throne you were hanged until you were half dead, dragged through the streets and then forced to watch yourself being disemboweled, castrated and quartered before being sent off to meet your Maker at a number of addresses around the country.

Where greenhouse gases are concerned, we are back in the good old days. Nobody (hmm..) would suggest executing factory owners for spewing out a bit too much smoke but, instead of making all those nice academic calculations to establish the fair cost of these heinous crimes, carbon taxes should be set at punitive rates (lets call it what it should be – a fine) and cap-and-trade permits made more scarce with a minimum price in the primary market. The revenue raised should principally be returned to the pockets of those in lower income brackets as well as being employed to assist companies to reduce carbon emissions.

Do you think he separates his wet and dry rubbish?

Coming downstairs one morning about a month ago without my glasses I noticed, stationed outside every house in my street, an absolutely motionless heavily tanned sentry. After turning on the radio with the expectation of being greeted by martial music but instead having my ears harassed by yet another castrato Bee Gees song in tribute to the late Robin Gibb, I found my specs and realized that the sentries were in fact brand new standard issue chocolate coloured slop buckets. The green revolution had finally come to my home town and we were to split the dry rubbish (green coloured bin) and the wet, rotting, stinking  rubbish (poo coloured bin).

After drinking my early morning mug of tea I decided to christen our new acquisition and went out to deposit my teabag. We might not have any rose bushes but we do now have a bloody ugly brown bin littering our doorstep.

Teaching Mrs Merkel German

How many times in one reign does a monarch have to listen to Tom Jones singing Delilah?

Nostalgia ruled for most of last week. While the British indulged in a House of Windsor love fest, the world delighted in snippets of the Queen over her sixty year reign. It was Prince Charles, the King-in-Waiting, who stated the obvious at the Buckingham Palace Doorstep Concert noting that for many people this was the third jubilee they were enjoying along with the Queen (who, frankly, did not by that stage look like she was enjoying anything very much).

My memory leapfrogged over the Golden Jubilee and sprinted straight for the 1977 Silver Jubilee. That was a very different occasion – the generation which, back then, we called middle-aged had lived through the Second World War and brought an old camaraderie to the festivities, as opposed to today’s middle-aged who brought Stevie Wonder, Tom Jones and Paul McCartney.

Maybe it was just the glasses, Jim. Or maybe not

But, Silver Jubilees aside, I was reminded that 1977 was an annus horribilis (as, indeed, was much of the decade but my Latin does not stretch that far). Britain was governed by a minority Labour Government which, in turn, was governed by the Trade Unions who kept bringing the country to its knees.  James Callaghan, the hapless Prime Minister being fattened  for the slaughter by Mrs Thatcher, had swept into No 10 a year earlier with the slogan “Jim Won’t Fix It”. This was a play on the title of a popular TV show and branded him immediately as totally incompetent.

 Meanwhile, across the pond the Americans put a Georgian peanut farmer into the White House who, apart from claiming to have been attacked by killer rabbits, let his team spread compost over US diplomacy. At one diplomatic function Chief of Staff Hamilton Jordan (another Georgian) was reported to have told the Egyptian Ambassador’s wife that he had always wanted to see the pyramids, while fixing his gaze somewhere well south of her eyes.

Jack and Bobby Kennedy. Or maybe not

From the economic viewpoint  the world was down the tubes. The collapse of the Bretton Woods exchange rate system  early in the decade followed by the Arab Oil Crisis had led to rampant inflation – or to be more specific – stagflation. This state of affairs was the nightmare of every adherent of the  school of economic thought that had ruled since the 1930s – it broke the rules of Keynesianism. Inflation together with slow growth and steadily high unemployment was not to be found in Lord Keynes’s song book.

It was no wonder, therefore, that a radically different breed of economist managed to insinuate itself into the frontal lobes of the world’s politicians and the world was presented with Monetarism in the UK and Reaganomics in the US while the French elected the rabid socialist Francois Mitterand just to prove a point. That should have been the end of history, but it wasn’t. Things started going visibly pear-shaped towards the end of the century and neo-keynesianism ( a potpourri of everything that had come before) has been on the ascendant among economists, if not politicians, ever since.

Sadly, since the financial crisis hit in 2008 all we have heard from European leaders (until the French played their usual “driving the wrong way down a one way street card’  in electing a socialist president) is austerity, austerity, austerity. The Eurozone has to collectively tighten its financial belt, balance its budget (well, almost) and keep within very low inflation targets.  Bung up taxation, slash public spending, pay off your loans. And, meanwhile, let the continent  burn.

Strange. I always thought Paul was born around the same time as Beethoven

Leading this bloody crusade is none other than Europe’s Supreme Leader – Angela Merkel. Locked into a  mindset of classical economics and simple housekeeping Frau Merkel, along with all the other European big chiefs  other than M Hollande who has yet to prove that he is not a left wing nutjob,  is missing something fundamental. And that something was observed by a German – Georg Wilhelm Friedrich Hegel.

Frau Merkel should ask the Queen about Hegel’s “Zeitgeist” . She should ask her about her 60 years of regular meetings with her prime ministers from Winston Churchill to the current young boy. The Queen would doubtless tell her that the spirit of the times  has changed.  Beethoven could not have written the Ode to Joy in 1967 London and Paul McCartney would have had trouble with Yesterday in 1827 Vienna. So why is there an assumption among political leaders that, because something did not work in 1977 it will not work in 2012 OR that something that did work  in 1982 will work in 2012?

Did I say at any cost? Maybe not

Back in the 1970’s inflation had got out of control  and – let’s make no mistake – reasonably stable prices are a sine qua non (Latin again) for a stable economy. Stagflation was a reality. Unions were at their most powerful. People’s expectations were at the bottom of the pit. It was critical to bring order to the money markets and bring the unions in line, at whatever the short-term cost, to facilitate a basis for nations to move on. It was left to  Thatcher to tame the Coalminers and Reagan the air traffic controllers.

The European crisis of the last few years is against a very different historical backdrop. Inflation and the unions are not a major threat. The financial crisis is precisely that and not a crisis of economic fundamentals (with the exception of Greece which will soon be sent on its way to Hades). It is the handling of the crisis that threatens to upset the applecart.

Any fool can see that, by everyone getting their house in order at the same time demand just deflates (Paul Krugman has pointed out that  you cannot use the analogy of a spendthrift household that needs to tighten its belt when referring to an entire country because the spendthrift household can rely on demand being created by responsible households as opposed to the entire country where demand just disappears).

Should I buy ingredients for another cake or pay off the mortgage?

Krugman, like Keynes, has no problem with  balancing budgets when the economy is booming. However, when the economy is in recession it is time for increased government spending. It is clear that, whilst in the long-run governments may be highly inefficient participants in the economy, in the short run they will spend much more freely than private households concerned about the future. This supports the contention that taxes should not  be reduced in a recession if that means less government spending. Alongside all this there should be quantitative easing (basically, central banks injecting cash into the economy) and increased targets for inflation.  Balanced Budgets would  still be sought but over a much longer period. Within the Eurozone they will need more banking unity and some form of joint eurobonds to protect weaker economies that cannot devalue their currency to increase competition.

Angela, go with the flow!

It is not an exaggeration to state that the next few months are going to be  critical for the future of the European Union. If Mrs Merkel prefers not to battle with the stark prose of her fellow German, Mr Hegel, she might prefer that nice Mr Shakespeare’s Julius Caesar (not in Latin):

There is a tide in the affairs of men.
Which, taken at the flood, leads on to fortune;
Omitted, all the voyage of their life
Is bound in shallows and in miseries.
On such a full sea are we now afloat,
And we must take the current when it serves,
Or lose our ventures.

God save the queen from taxes!

She is the one in the top right-hand corner

The Queen (there is only one “Queen”) was often lampooned in the  1980s TV series “Spitting Image” . It starred a bunch of incredibly elastic, outrageously exaggerated latex puppets. My favourite sketch had the Queen at her desk, surrounded by her totally dysfunctional latex family, writing Christmas cards to foreign countries. Completing the last card  she announced “Right, I’ll just put the stamps on” and proceeded to turn her latex head sideways and thwack it down onto a giant inkpad on the desk followed by a further wallop of the head onto an envelope, producing a passable impression of her profile.

Truth be told, there is nothing strange about this. The Royal Mail is Her Majesty’s postal service and it would be absurd for her to pay for delivery.  And before I get placed in the stocks by members of the loony left – sorry lads, this is not about “primus inter pares”; HER prime minister is “first among equals”. The Queen is not one of us. She is not part of our democratic tradition. She is  the Mothership. 

“She is driving home. They can’t book her”

Forget petty things like the Royal Mail – the Queen is even above the law. Put simply, the courts belong to her.  If she fancies, she can go through the Green Channel at Heathrow Airport carrying 2 bottles of whisky and 400 fags – and nobody can stop her. If she is wandering around Windsor Tescos and decides to pocket a  six-pack of Heineken and a packet of  smoky bacon crisps, the police officer called to the scene of the crime will just unctuously genuflect  while waiting for an unmarked car to whizz round from the castle and bundle her in. If she has one over the eight on Christmas Eve and takes the Landrover out for a drunken winding tour of Sandringham (Christmas might be Balmoral) the local constabulary sirens will remain impotently silent.

In fairness this all sounds extremely strange to 21st century western man (or woman). But, if it wasn’t that way she would not be the Queen but just another Reality TV star.  I imagine she does not even have a passport. Nowadays, we are all stuck with that ubiquitous burgundy creation of the EU, but the wording on the inside cover of the British version still reads: “Her Britannic Majesty’s Secretary of State  requests and requires in the name of Her Majesty…to allow the bearer… to pass freely without let or hindrance…” What would she have had on her passport? “Don’t mess with me. I’m the Queen”?

The British don’t like their queens third-hand (or with bulbous noses)

Of course, it is not quite as extreme as I have described. Suspension of the British (or previously English) Constitution has always been an option. When King Richard III got a bit too trigger happy (at least according to Shakespeare) he ended up wandering around a battlefield offering his kingdom for a horse before being conveniently slain by his successor. And then there was that poor chap Charles I (for the benefit of non-native English speakers the “I” is pronounced as it is spelt – “The First”)  who, on a cold day in January 1649 was left without a head upon which to wear his crown and replaced for a few years by a boring republic. Indeed, if Her Majesty was feeling a bit gung-ho she need only look at the fate of her grandfather’s first cousin (not to mention his poor family) who copped it good and proper in the Russian Revolution. Meanwhile, minor misdemeanours like sharing the royal prerogative with married women (for clarity, this one refers to kings) could be dealt with by the government proposing early retirement, as was the case with the Queen’s uncle Edward VIII (pronounced Duke of Windsor, spit, spit).

However, there is one gaping hole in the consistency of the system. Since 1993, the Queen has paid income tax and capital gains tax. The Queen cannot be liable to  tax. Taxes are collected by Her Majesty’s (that’s her folks!) Revenue and Customs. And before some bright spark mentions (I really wish people WOULD add comments below) that, as sleight of hand, she pays the tax and takes it back in government funding – let’s get the record straight.

Kings and Queens used to be self-financing. For historic reasons – normally murder, rape and pillage – successive generations of the monarchy have succeeded in accumulating vast fortunes. By the time James II fled England in the Glorious Revolution, Parliament had had enough and his successors (the husband and wife team of William and Mary) were the first monarchs to have the Crown’s peacetime revenue fixed by Parliament with a sum to defray the costs of running the Royal Family and Civil Government (civil service, judges, ambassadors etc.) – the Civil List.

Since 1789 America has had 44 presidents and Britain 9 monarchs. The Watergate break-in occurring a few weeks before Edward VIII’s death, there has been 1 abdication apiece

When George III (the one that lost America) came to the throne in 1760 it was decided that he should surrender the income from the Crown Estate (with the exception of the Duchies of Lancaster, Cornwall and other bits and pieces) for the period of his reign in return for an updated Civil List that no longer included responsibility for civil government. And that has been  the situation ever since. (As an aside, it is interesting to note that in the 252 years since Georgy-Porgy bit the bullet,  3 monarchs have covered almost 75% (George, Victoria and Elizabeth) of the period.)

But to celebrate 250 years of the glorious Civil List system, the government announced its abolition in 2010. With effect from 2013, in place of the Civil List and specific grants for certain expenditures – there will be a new single Sovereign Support Grant. While this sounds like a welfare payment (“We will give this old age pensioner an extra  million quid for Christmas to cover her heating costs”),  it is indeed a radical new system in that it is based on a percentage – initially 15% – of the revenue from the Crown Estate. Anti-monarchists should note that if the Monarchy was abolished peacefully the Queen would presumably get all her income back from the Crown Estate. So, apart from the loss of  tourist revenue that would accompany a republic, the Treasury would be down just based  on the simple arithmetic.

So, why on earth is she paying taxes? In 1993, following a major fire at Windsor Castle for which the government had to foot the bill,  the Queen “announced” that she would voluntarily pay tax on her private income (not the Crown Estate that , going forward, is going to be taxed at an effective rate of 85% – high even by Francois Hollande standards). This was, effectively, to silence the mob – ie the British public who could not comprehend why they should pay for the repairs.

The best way to describe this policy is populist and potty. The Queen cannot pay taxes for one simple reason – because the Queen cannot pay taxes. If they want to tap her for a few bob why not just reduce her new Support Grant by a percentage of her private income (which just happened to be at the current personal tax rate)? That would be a legitimate sleight of hand and the sort of creative accounting some accountants used to like in the good old days  before Arthur Andersen got its comeuppance.

Sixty years of devoted service

This weekend marks the official celebration of the Queen’s Diamond Jubilee. As a constitutional monarch she reigns but does not rule. Perhaps one of her most  endearing qualities is that she does not exploit her privilege. Here is a true story never told in print before. Several years ago an old acquaintance, turning a London corner in his Jaguar, was inadvertently caught up in a Royal Cavalcade. Worse, he rear-ended the Queen’s car. Now, in every civilised country when you rear-end somebody it is your fault and, if it happens to be the Head of State you are probably going to wish you were not born. In the event, an aide got out of the Rolls, strolled over to the Jag, presented the driver with a card and told him to bring the bill for his repairs to the tradesmen’s entrance at Buckingham Palace where he would be (and was)  fully reimbursed. End of story. That is class. God save the Queen!

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