Tax Break

Who said tax is boring?

Archive for the month “December, 2012”

We’ll take a cup of kindness yet

Newspaper reporter after one too many beers

Newspaper reporter after one too many beers

I have never been one for beer or pubs. Boasting one Scottish parent, my tipple has always been whisky – my interest stretching back to long-forgotten Hogmanay parties  when, as we rang in the New Year, a relative would knock on the front door and “first foot” carrying a piece of coal in one hand and a quart bottle of the golden nectar in the other.

In London two weeks ago (as I have already reported), I spent two hours hugging a single half-pint glass of warm beer in a hole-in-the-wall-semi-deserted pub on Fleet Street. The company was excellent but the place was miserable, looking like it had last been decorated (and cleaned) circa 1955. Back then, at the epicentre of world journalism,  it would have been permanently full of Trilby hatted  hacks lubricating their brains and fingers to facilitate their daily masterpiece which, following a short detour with the editorial staff, would be with the typesetters across the road and ready to roll quicker than most of them could say “Another pint please, love”.

By the time the first Royal Christmas Message to be broadcast in 3-D was shown at 3pm, most people could not tell the difference

By the time the first Royal Christmas Message to be broadcast in 3-D was shown at 3pm, most people could not tell the difference

Judging by what happens to newspapers in the season of goodwill, journalists must reach such a state of inebriation (now in purpose-built squeaky-clean concrete monstrosities in East London), that their brains and fingers part ways resulting in the regurgitated nonsense they spew out . In fairness, this is not entirely their fault. As world leaders are similarly sozzled, nothing much happens. I followed the BBC World Service News on Christmas Day. The headlines were the Pope’s speech in St Peters’ Square, the Queen’s speech to the Commonwealth (with a joint age of 190, I had difficulty containing my excitement) and a running commentary on the day in Bethlehem which, apart from being the birthplace of Jesus, is today a predominantly Muslim city in which nothing much happens.

With the notable exception of The Economist which sensibly skips Christmas week entirely, we – the public – are being subjected to re-heated, repackaged fare from the 2012 archives. It reminds me of school dinners where Friday’s meal was always meatloaf unquestionably produced from all the slops of  the rest of the week.

So, we are confronted with endless “Reviews of the Year” and “The Best of 2012”. We discover that a cocky bike rider is the greatest UK sports personality of the past 52 weeks  and that Lord Seb Coe has become a living legend performing the Churchillian task of leading his country to victory over the Chinese, Greeks, Australians and everybody else since 1896 in  Olympic pyrotechnics.

It really does no credit to the intelligence of any nation to ponder this kind of nonsense. Why not just hang up a sign saying “Normal service will be resumed as soon as possible” (which is precisely what ITV’s News at Ten did on one occasion several years ago when newscaster Reginald Bosanquet was too pissed to even read the teleprinter) and go into hibernation until January 2?

Do people really want to be reminded about all those hardly remembered Republican candidates for President of the US who picked proposed corporate tax rates out of a hat on the basis of such sound economic thinking as “17.5% is half the current rate” or “12.5% is what the Irish charge – and it works for them”? And what about the French who merrily ditched Mr Bling only to embrace a kamikaze socialist who has so incensed the wealthy classes with his 75% tax rate that they are willing to escape to Belgium (Belgium!!)? And talking of kamikazes, did you hear the one about the Japanese Prime Minister who committed political suicide by insisting on doubling the VAT rate for the good of the country!? Then there was the Indian Government which finally lost an outrageous withholding tax claim against Vodaphone in the Supreme Court and promptly announced it was introducing a law retroactive to 1961. And the bankrupt Greeks who, with a backlog of 170,000 tax fraud cases managed to bring a case within 4 days against a journalist who blew the whistle on 2000 potential tax dodgers. Meanwhile, the Italian tax authorities came up with a novel idea for getting people to pay tax – a government sponsored programme for calculating how much tax you need to pay to fall beneath their radar. The Channel Islands threatened independence from the UK sometime in the next 500 years for being caught encouraging VAT fraud and Starbucks was royally roasted for  paying tax in the UK at an even lower rate than Mitt Romney (who?) in the US. Meanwhile, the Prime Minister of the zero-tax Cayman Islands quickly backtracked on a proposal to impose taxes exclusively on foreigners  and, following his subsequent resignation, I understand he is helping the police with their enquiries.

A penny for his thoughts

A penny for his thoughts

And, while I receive quite a few offline comments (why not, online?) there is the question of whether anybody really cares about what I think about this Blog. The fact is that, of the 60 (sixty!) posts over the last year, the one I had the most fun writing, by a whisker, was the last one (I, incidentally, love Marmite) followed closely by the Dickens bicentennial (Hard Times, Great Expectations).

Nobody really wants to know all this so I shall be more responsible than the Fleet Street pros and shut up.  The other day,  my Welsh neighbour and I watched helplessly as  the cork of a newly opened  15-year-old Glenlivet tragically disintegrated into the bottle. After a difficult few moments, we determined that we had better finish it quickly. That is my current project and I am presently comfortably numb. Evelyn Waugh once defined Hogmanay as “getting sick on Glasgow pavements”. See you in the New Year, if I don’t stumble under a bus before then.

And so this is Christmas

Exhibit A

Exhibit A

In London for a client meeting last week, I decided to take in the Oxford Street Christmas Lights on my way to the airport. While, back in the smog-filled Decembers of my childhood,  the lights adorning the length of Britain’s premier shopping street carried fairy tale themes of Hans Christian Andersen and the Brothers Grimm, this year Londoners were treated to a cosmic display of Marmite. “Merry Christmas from Marmite. You either love it or hate it”  was beamed at shoppers every few hundred yards.

At first, I thought it was a rather honest piece of marketing for a product the colour of crude oil with the consistency of vaseline and the taste of raw seaweed marinated in saltwater – a fit example of traditional English cuisine along with Pigs Trotters, Tripe and Toad in the Hole. Then, as I tossed the caption around  in my cynically-wired brain, it occurred to me that, maybe, it was not Marmite that people either loved or hated but, rather, Christmas.

Looking about me at the smiling and laughing faces of families and young couples carrying bag loads of gifts it was hard to justify that conclusion. Then I descended into the bowels of Oxford Circus Underground Station. In the concourse, a talented group of middle-aged carol singers was performing a capella version of  “Comfort and Joy” accompanied by  a pleasant Women’s Institute lady jiggling a collection box for Homeless Children. I deposited my modest sum in the slit, suspecting I heard the echo of the coins hitting the bottom, and tarried for some minutes thoroughly enjoying the informal concert. It is fair to say that at least 200 commuters passed the spot while I was standing there and NOT ONE inserted a single coin in the box. Fresh from my visit the previous day to the newly refurbished Charles Dickens Museum, not to mention a freezing walk up Shoe Lane close to where Fagin and his boys had their lair,  I thought of Ebenezer Scrooge’s exchange with the two portly gentlemen collecting for the poor. Satisfied that there were enough prisons and Union workhouses he sent them on their way suggesting that, if the poor would rather die than enter a workhouse “they had better do it, and reduce the surplus population.”

Even the National Health Service is better than this

Even the National Health Service is better than this

Of course, that is a very harsh and – in the cool, cold light of day – unfair comparison. Britain, and much of the rest of the world, is an infinitely better place to live in than in the times of Dickens. According to  blurb on the Underground advertisements, the Homeless Children are not alone in the world sweeping street crossings like poor Joe in Bleak House but they are forced to live in depressing, ever-changing temporary accommodation. Add to them the lonely elderly  who, although not condemned to the workhouse, have to get by on subsistence level state pensions, it is easy to imagine Christmas, with  its message of peace, love and goodwill to all men, as an utterly miserable time for the less fortunate.

 In the  urban, neighbourless modern world, much like Scrooge, people expect the Government to deal with the social wants of society. That is not necessarily a bad thing. The problem is that the vehicle for achieving that goal – the tax system – lacks communal ownership. That needs some explaining.

At the start of the financial crisis in 2008, the, soon-to-hang-up-his-crook, Archbishop of Canterbury wrote a brilliant newspaper article linking the crisis to the fact that credit has lost the personal relationship of  lender and borrower. Someone  borrows from a bank somebody else’s money that even the bank, having entered into a series of  complex derivative transactions against its loan book, cannot  identify. As a result, the borrower feels little guilt towards the lender for defaulting and the lender feels no compassion for the borrower’s plight.

Taxation has the same problem. Taxpayers see no connection between the taxes they are, begrudgingly, required to pay and the good they do. This is partly because they often do no good at all and partly because governments insist, for reasons best known to themselves, on behaving as if they rule the country. If governments made themselves more accountable for their taxspend, there would be a cohesive effect on society and a greater chance that taxpayers would accept tax increases where necessary.

As a responsible tax practitioner I have to stress that I am not proposing that we should all hug each other and raise the marginal income tax rate to 75% like in that Bastille of bankrupted socialism, France. The Laffer Curve would be expected to maximise government tax revenue way, way, way below that kind of rate. What is more, with all the brouhaha in America and beyond over differentiated tax rates on labour income and capital income it should be remembered that  the rate of return on human capital investment is less tax sensitive than the rate of return on non-human capital investment and there is a widespread view that if labour income tax rates are not higher than capital income tax rates there will be damaging distortions in the allocation of capital (human and otherwise) in a national economy. Furthermore, as far back as the mid-19th century John Stuart Mill recognised that tax on savings effectively represented a double tax on income already taxed once. And if you don’t believe any of this, President Wannabemitterand has discovered to his chagrin that  high tax rates drive people and capital abroad (including ,most recently, hell raiser superstar Gerard Depardieu, which proves that Christmas can still churn out its miracles).

What IS needed is, similar to the 3% budget deficit limits now imposed on Eurozone governments in Europe,  statutorily agreed percentages of government income earmarked individually for Health, Welfare of the Elderly, Child Welfare and Education. Whatever is left could continue to be spent on expensive toys that go bang-bang in faraway lands, ministers’  stretch limousines and cows suspended in formaldehyde at state sponsored excuses-for-art-galleries. Governments should also be required to provide user-friendly annual summaries breaking down to each assessee  how, based on national averages, his, her or its money was spent. If the Government foresees a shortfall of tax revenues requiring a tax increase, it should be required to announce what, precisely, the additional revenue to be raised is for.

One day

One day

Should this plan be implemented successfully there may be no more need for a lady to stand with a half-empty collection box. However, the singers must be persuaded to stay, as they are so good. One possibility would be for the whip around to be for repairs to St Martin-in-the-Fields Church in Trafalgar Square  for, if there is one thing those American Founding Fathers got right, it is that no Government cash should ever go to organized religion. I am sure Mr Scrooge would agree with me. The chiming of the neighbouring church bells on Christmas Eve drove him mad.

Is the clock ticking for Switzerland?

Class?

Class?

Towards the end of 2010, in one of his last interviews, John F Kennedy’s iconic speechwriter, Ted Sorensen, shared a previously unpublicized titbit concerning the 1960 Presidential Election. At 3am on Election Night, Richard Nixon gave a not-exactly- concession speech (he officially conceded the following afternoon). Watching the event on TV, Kennedy turned to Sorensen and said, with a touch of  sarcasm: “That’s Nixon. No Class”.

Ever since I learnt to think independently (which is a lot more recently than I care to admit) the word “Class” has given me trouble. It is no coincidence that the only acceptable opposite of “Class” is “No Class” often modified by one of several expletives. Despite gargantuan efforts by modern lexicographers to come up with a good definition, the Shorter OED lists 7 homonyms for the word, none of which have anything to do with what Kennedy was talking about.

Part of the problem has been that the term has  been a moving target for so long. While a dinner jacketed Sean Connery’s request for a certain drink “shaken not stirred” may have been the height of class (aka elegance) 50 years ago, nowadays every western 17-year-old lying face down in the street can reel off a catalogue of cocktails and chasers.

However, one thing that all tax practitioners would agree  is that , whatever “Class” is, the Swiss have it.

She was a Grimaldi

She was a Grimaldi

Throughout the 20th century and into the 21st, Switzerland has been the ultimate tax haven for the discerning company or individual. The Rolls Royce Phantom II of the international tax avoidance (NEVER evasion) industry. Not for them the vulgarity of Netherland Antilles or British Virgin Islands. While Monaco may offer the attractions of the Grand Prix, Monte Carlo’s Casino and the glamorous House of Grimaldi, Switzerland offers supreme natural beauty, elegant manners and the ever-so sacred discretion of professionals you would trust in a harem.

Even as it was  mauled by the Americans for aiding and abetting tax dodgers, the country kept its head high and suffered no apparent reputational damage (after all, that is what everyone knows they have always done. It was the Americans who came over as brash). However, recently it has started to look as if paradise could be lost, not because of external pressures (which have been there forever) but, rather, internal ones. The Swiss (or to be more precise 103,000 of them who signed a recent petition) have discovered they have a social conscience – and, with that, there (potentially) goes the tax haven neighbourhood.

Riled by the cosy tax arrangements of such class acts as  Phil “A groovy kind of love”  Collins and Tina “I’m your private dancer” Turner, a socialist  group is forcing a referendum on Switzerland’s Federal lump-sum taxation regime. This move, itself, comes in the wake of the discontinuance of the regime by several Cantons.

Switzerland has been operating some form of lump-sum taxation for 150 years. The basic idea is that foreign High Net Worth individuals wanting to establish a tax residency of convenience in Switzerland and not planning working or doing business there, can negotiate a level of tax ostensibly based on their cost of living. This has traditionally replaced income tax and wealth tax.

Recognizing the winds of change in public attitudes the Federal Government issued a draft law in late September amending the existing regime. The reaction was a petition organized by a group of lefties (I always thought a radical Swiss was someone who took his jacket off at dinner- but I was clearly wrong) that will ensure a national vote within 2 to 3 years with the aim of scrapping the regime altogether. They, like the Cantons before them, object to the idea of anyone paying tax on an expenses basis.

The proposed changes in the law were, to the plodding residents of progressive taxpaying countries like me, quite minor  although quite possibly volcanic in  Swiss terms (though not volcanic enough for those culturally defective fellow travelers  who have betrayed all that Switzerland stands for).   Currently, lump-sum taxation is available to foreigners and Swiss citizens who have been abroad for over 10 years (the latter only being eligible to one year of the special regime). Under the draft law, Swiss citizens are eliminated (not literally).

Setting a minimum for lump-sum taxation was a moral imperative

Setting a minimum for lump-sum taxation was a moral imperative

The draft law  clarifies that the tax is based on the cost of living in Switzerland and abroad, whereas it had been previously unclear as to whether only Switzerland was included. This has to be one of the best pieces of tax haven doublespeak in decades and, if they were not Swiss, I would congratulate them on a good joke, well told.  The cost of living on which the tax is based bears no relation to the cost of living in Switzerland, abroad or, for that matter, in outer space. It is, in practice, calculated mechanically as a multiplier (currently 5, proposed 7) of the rent paid by the taxpayer or the rental value of an owned home. The proposed law does for the first time  include a minimum CHF 400,000 (around $425,000) in case any HNW individual was saving tax by shacking up in a youth hostel.

The question on everybody’s lips is “What will fall next?”. Can we expect Principal and Mixed Company rulings to be toppled? Will IP be returned home? Will Stand-up comedians miraculously stand up on Lake Geneva?

What a spoilsport

What a spoil sport

But the big question is whether the country can still lay claim to  “Class”, which has always been the backdrop to its discrete financial industry,  when it publicly expresses self-doubt and is inhabited by at least 103,000 whingeing reds disturbing its rigid norms? For what it is worth, my take on “Class” is that it is a cheap veneer of elegant superiority that has gradually been chipped away by all those inconvenient social pioneers- totally lacking in sartorial elegance -variously disguised in suffragettes’ skirts, cloth caps, loin-cloths, bushy beards and open sandals who, for well over a century, have been breaking down the walls of inequality in society. God bless them. Even James Bond, the product of a Swiss mother and Scottish father, is a little rough round the edges in his latest incarnation. Perhaps Switzerland is finally coming down from the mountain.

A funny thing happened on the way to the Forum

"Who needs a programme?"

“Who needs a programme?”

As a kid, did you ever dream of an extra tap in the kitchen that dispensed endless lashings of Coca Cola  and Strawberry Milkshake? Or what about being let loose for an afternoon inside a locked, and deserted, sweet shop? Well, the  not-so-juvenile tax practitioners of Bungabungaland woke up on November 21 to a dream come true.  A new programme was launched a day earlier which, similar to the speed trap warning programmes marketed by mobile phone companies, tells you how much you need to report to the Bungabungaland tax authorities in order to avoid suspicion. In a country where tax evasion is part of the national culture, the idea that you could key in your assets and expenditure and be told how much taxable income to declare, is truly amazing. What is more incredible, and could only happen in Bungabungaland or its neighbour across the Ionian Sea, is that the programme is on the Italian Tax Authority’s’ website.

The truth is that the idea is ingenious, if impractical. In a country where nobody wants to tell the truth about their taxes (morality has been outsourced to the Vatican for centuries ), why not let  people feel they are deceiving the authorities by tweaking the edges of the programme, while they end up  paying substantially more tax than they otherwise would have done?

But, philosophy aside (and philosophy is an absolute aside when it comes to taxation), what is really so strange about all this in a country that is capable of producing a leading politician who is a stand-up comedian?

Spelling was never his strong point

Spelling was never his strong point

At the end of October second place in the Sicilian Regional Election was taken by Beppe Grillo’s Five Star Movement. Grillo, a former accountant and banned TV comedian,  was previously best known for organizing  V day celebrations in which he outed Italian politicians convicted of  serious crimes. The V was short-hand for a two finger salute which, in turn, was short-hand for something  often spelt with a surfeit of asterisks.

His party’s political success – it is currently running second in some polls for the upcoming General Election – is a sign of how bad things have become since Bunga Bunga. Of course it is not the first time the Italian electorate have done strange things – an Italian colleague reminded me yesterday that porn star La Cicciolina was elected to parliament for five years in the late 1980s on a platform of environmentalism and free love and, if we really want to go back, Caligula proposed making his horse a Senator.

Meanwhile, reading Grillo’s famous blog (there are Italian and English versions) he does appear to talk quite a lot of sense – including insistence that taxes are a good thing as long as they are  not used for the things they are used for now.

In point of fact, a stand-up comedian going into politics is not as custard-pie-in-your-face laughable as it sounds. While Italian politics has, for much of the last 20 years, been a hotbed of slapstick comedy, the dry interregnum of Mario Monti is  providing an incubator for the resurgence of  satire. Stand-up comedians are at centre stage in modern satire, the successors to Voltaire, Thackeray, Wilde and Dorothy Parker. In amplifying the ridiculous or unacceptable in everyday life they are one step ahead of their audience in consciousness of what is really going on around them. You laugh at a stand-up comic because he hits you with scenes that you realize are obvious but about which you have never gathered your thoughts (or thought that nobody else would consider them as important).

A political leader in a modern democracy should be someone who has the perception and ability to articulate what society is groping for but is not collectively able to express, and then make it come true.  That goes one step further than a stand-up comedian’s CV, but that may not be important for Grillo. As one who exposes the negatives of society, a stand-up comedian may not be well placed to go the extra mile with positive action- which is crucial to leadership. However, Grillo has stated categorically that he will not join in coalition with another party. What that means, in a system that inevitably produces coalitions, is that he is running for the post of Leader of the Opposition. For that he is perfectly qualified. The only question is whether Italy would be better off having him outside parliament protecting democracy as part of the Media Fourth Estate or, inside, protected by parliamentary immunity.

The Montis were luckier than her

The Montis were luckier than her

Meanwhile, the rest of the world has been enjoying the quiet studiousness of Mario Monti and his cabinet. That is not to say that there have been no moments of humour. Almost a year ago, according to the BBC, a Deputy in the Italian Parliament challenged that, with austerity biting and Bunga Bunga still banging on the frontal lobes of the entire population,  the new Prime Minister had held a lavish Christmas party in his official residence at the taxpayer’s expense. In reply to the accusation, Mr Monti, explained that he and his wife  had, indeed, held a party –  for their children and grandchildren. Mrs Monti had gone shopping herself for the food at her own expense and had cooked and served the meal herself. Mr Monti did point out that she had indeed used the gas stove in the official residence, the gas being paid for from the public purse. He hoped, however, that he and Mrs Monti would be forgiven this extravagance bearing in mind that, on assuming the premiership, he had refused a salary and was working for nothing.

Mas or Messi?

Barcelona. There was a time, not so long ago, when the capital of Catalonia was not yet known for Freddy Mercury’s super-hit of the same name, when the  1992 Summer Olympics had not yet produced gold, when Carlos Ruiz Zafon had not yet got round to romanticizing La Rambla and the mysterious Cemetery of Forgotten Books, when Gaudi’s architecture and that permanently half built church just looked plain weird – and the best football team in the world had yet to stamp its trademark on the beautiful game.

Spain was a place for low-cost vacations, El Cordobes, fugitive gangland figures and cheap Muscatel wine that belonged next to the Coca Cola on the shelves of English supermarkets. But most of all, if you happened to like 1970s British humour , Barcelona was the birthplace of the semi-idiot waiter Manuel in John Cleese’s classic sitcom, Fawlty Towers. No TV character was ever more successful in hijacking the collective perception of an entire city.

Artur Mas, the President of Catalonia and a normally highly intelligent man, has been displaying elements of Manuel Syndrome lately to remarkable effect. Struggling, like everybody else, with Spain’s austerity programme and coming to the conclusion that the wealthy region of Catalonia was paying more taxes to support the rest of Spain than it was receiving from Madrid, he decided it was time to shake things up.

Calling an election only two years into his term of office, he based his manifesto on a promise of a referendum on Catalonian independence from Spain. That the promise was contrary to the Spanish constitution didn’t seem to bother him. This was his chance to give Catalonia freedom to set its own taxes (which seems to be the main gripe) and for an obscure local politician (Mr Mas) to hit the big time.

He would have “persuaded” Mas not to call a referendum

In fairness, Catalonia  does have certain characteristics of a nation. It has its own culture, its own language (which is more than can be said for Australia, Canada and the United States) and a population of 7.5 million. On the other hand, Catalonia has lacked true independence since time immemorial, while  a chunk of it has been  stuck in another country for centuries. That chunk has not expressed any similar desire to break away from the warm bosom of  its French maitre. So at best the prospect is for a Peoples’ Republic of A Big Chunk of Catalonia with an in-built reason for going to war with France to “free” its (unenthusiastic) compatriots from foreign domination. Judging by France’s dismal performance in wars over the last century, they might even win.

Apart from being a local politician who wants to get his name in the history books, Mr Mas is also an economist, which, given the economic lunacy of his independence idea and the mess Spain is currently in, makes me wonder what they teach in the Social Sciences Department of the  University of Barcelona.

Catalonia is justly proud of its export record but almost half of its trade is with other Spanish regions. If it were to gain independence it would need to apply for membership of the EU (not a foregone conclusion as has been pointed out to the Scottish secessionists) and meet its EU budget obligations, while servicing its own (bloated) debt. Although, in the modern global economy,  absolute size  is no longer a pre-requisite for  prosperity, access to trade certainly is. What is more, major economies have learnt that there is much to be gained by supporting weaker economies as they grow, producing , in turn, new middle-classes that will increase demand for their products (perhaps Mr Mas, so engrossed in other issues, hasn’t had time to learn about the European Union).  So what is the point of seceding from a country that is critical to your own economic prosperity, even if it does currently cost you a few pesetas each  year?

In the event, while pro-independence parties won the election last week, Mr Mas took a drubbing and will now, thankfully,  spend more time trying to stay in power than concentrating on independence and messing things up generally.

It also became clear during the campaign that enthusiasm for absolute independence was not that great. Should the Government in Madrid offers the regions some form of federalism with  proper taxing rights, it could be that the whole independence thing evaporates. Then Catalonia could get on with being the engine to  pull Spain back to the economic health so crucial to the Euro project.

At the end of the day, any move for independence will have to deal with a far bigger question. What will happen to FC Barcelona? Would the Spanish let them carry on playing in La Liga or punish them for deserting ship? If they were turfed out, could Spain and Catalonia survive without  the bi-annual Civil War between Barça and  Real Madrid? In the end, given the power of football, that could be the deciding factor. Anyway, isn’t all this nationalist stuff passé? After all, the opposing fans will be cheering for Messi and Ronaldo. Neither is Spanish, let alone Catalonian.

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