Workers' Liberty

Reversing Tax Liberation

I have every sympathy with the sentiments expressed in this article, but a number of aspects of it concern me.

For example, it argues that New Labour exaggerates the argument that raising taxes on businesses or the well-off will cause them to move their money to a lower tax area. Yet the article begins with a reference to the front page report that the tax avoidance industry rakes in £100 billion a year for the rich, and that owners of British based businesses operate tax-free from Monaco provided they work their enough of the time. So which is it? Are the rich able to avoid paying higher tax rates simply by registering their businesses in Monaco or some other tax shelter, and “enduring” having to live in the sun in Monaco for part of the year, in which case the new Labour argument is justified, or not?

The article says in opposition to this argument from New labour that “It is not as easy as they say for rich people to pick up their whole business – factory, equipment, workforce, supply network – and transplant it to a lower tax area.” We actually yes it is in fact, but it is largely beside the point. Just look at the way the Chinese have dismantled Longbridge and transported the whole thing for reassembly in China. If you can do that profitably for a large company like MG then it becomes a piece of cake for smaller companies. In fact the same thing happens on a smaller scale all the time. I can think of numerous companies in my local area that have moved for tax advantages, not just from one country to another, but merely from one area to another because of incentives given to them by the Local Council. In addition I recall many years ago at University studying alternative Local tax systems. One of the problems with a local income tax was precisely this. The experience in the US was that the rich did simply up and move sticks to lower tax areas, for example moving out of New York and into New Jersey, with the result that the tax base of New York fell dramatically, taxes for the poorer citizens remaining there had to be raised, and services were decimated. It led to New York basically becoming bankrupt. And in Britain we see middle class people, let alone the rich, moving house just to be in a good area for their kids to go to school.

But in another sense the point misunderstands the nature of modern capitalism. The truly rich, the people who really own and control the productive wealth are no longer attached to individual companies in the way that capitalists in the past were. Companies come and go fairly frequently. Once dominant firms, and even whole industries, are replaced by others, but the capitalist class, particularly in its dominant upper echelons remains composed of the same people. They do so not by tying their wealth to this or that company, to this or that factory, piece of equipment etc. but through the ownership of share capital, and ownership of debt, and property. On that basis there is no need to move this or that factory to some other lower tax economy. All that is required is to sell your shares in the companies located in country X, and buy shares in companies in country Y. Or alternatively, to sell your British Government debt and buy Brazilian debt, or US debt. And it then becomes simply a matter as to whether you assign your main residence as being your mansion in Argentina or increasingly Nicaragua is becoming popular with the rich, or your home in Australia, France, Spain or any of the other places you have bought property.

I have another problem with the argument. The article refers to the percentage of tax paid by the top middle and bottom 20% of tax payers in Britain. But in fact I think this is very dangerous for socialists. The middle 20% of tax payers will include many ordinary workers. The top 20% of tax payers will include many people who are middle class as opposed to being rich per se. The problem is the gross inequality in modern capitalist societies. An inequality to some extent masked by the relatively high standard of living achieved since the second world war. That inequality is manifested in real wealth being concentrated in the hands of a minute number of people much smaller than 1% of the population, and at the other extreme a significant number of people that have significant negative wealth i.e. large amounts of debt. The vast majority of people fall in the middle where the range of wealth and income is far smaller. Indeed, that is one reason why politicians have sought to address this middle ground.

I don’t know the figures for the UK, I must do some research and find them out, but in the US in order to get into the top 1% you need only $3 million around £1.5 million. I say only, whilst recognising that for many people at the bottom end that is an inordinate amount of money. But in the grand scheme of things in reality it is not much. A middle class couple on decent earnings in the US could over 20 years simply save that amount of money, and indeed many of the people in that category are people in their 50’s and 60’s who have done precisely that. But that wealth is infinitesimally small compared to say the wealth of Bill gates who owns as much wealth as the bottom 40% of the US population combined.

Let me given an anecdote to put it into context. A few weeks ago I was talking to a bloke in the sauna. We were talking I think about banks and service. He went on to tell me that he had had problems with his bank, and in the end asked to see the Manager and pointed out to him that he had £340,000 of PEP’s, ISA’s and other investments with the bank, and that unless they sorted out his problem he was moving everything to somewhere else. That £340,000 was money he had in addition to his house which was already paid for. So, was this bloke some capitalist? No he lives up the road from me in a bungalow. He used to be a petrol tanker driver, and his wife still works as a school dinner lady.

There are lots of workers or retired workers like that. Not to mention the numbers of simply middle class rather than rich people. If socialists try to base their policies on a conception of the working class as just those at its lower end, indeed unless they seek to draw in behind them at least some of the middle class, they are doomed to failure. The possibility really would be only for a revolution such as that in 1917 based on a small minority which from the beginning would find itself at odds with the majority.

The idea of seeing tax as the solution to the problems of the working class itself gives me unease. It is too close to the old redistributive socialism of the Fabians rather than the reliance on class action, and self-reliance proposed by Marx. That is not to reject the idea of a progressive taxation, but its focus needs to be clearly on the really rich not on sections of the population that ultimately socialists need to win over. It also means that part of the solution to the rich being able to avoid tax by moving from one country to another is for a further democratisation of the EU, and for the logical policy of tax harmonisation within it.

Arthur Bough

1. Tax harmonisation in the EU is fine, but Monaco is not in the EU (nor, for example, is Guernsey). And there are plenty of other tax havens outside the EU. Nevertheless, the New Labour argument is wrong. Taxation of people who do business in the country but are resident elsewhere is practised not by just some hypothetical workers' government of the future, but the US government.

2. Sure, the top 20% is a much wider bracket than the super-rich. But it is just not true, arithmetically, that adequately restored public services and the defeat of poverty can be achieved just by getting at a few billionaires and without touching those who belong to the SUV-driving, villa-in-Spain-owning, several-holidays-a-year "middle class". (And, of course, in any case, the planet cannot survive unless the "lifestyles" of those "middle class" people are curtailed a bit).

Martin Thomas

Martin, the US had a big problem a couple of years ago ebcause a number of fairly large companies, not multinationals, were simply registering themselves in the Bahamas. The erason that then the company was not actually doing business in the US. The US actually has seen a massive amount of outsourcing. In the last tax packet by Bush a tax incentive was given for companies that actually repatriated profits back to the US, of course it was used to fiddle the books and simply increase dividends in the US to take advantage of a temporary tax reduction. Then there is the potential for transfer pricing etc.

Nor does your answer deal with the more important point that if you are Bill Gates you can simply sell some of your shares in the US and buy shares in France or Brazil or Russia.

The fact is that companies are moving around to a considerable degree. As i said I know of a number of companies locally that have moved from Staffordshire to Cheshire for no other reason than to take advantage of incentives given in Crewe and other Cheshire Boroughs. One company Baker Perkins a few years ago built a very nice new headquarters in just outside Newcastle with the help pf grants etc. from both Stoke Council and Newcastle Council. They never actually moved everything in to the place because in the meantime they got an offer from somehwere in Eastern Europe, and just upped and went.

Agreed Monaco isn't in the EU, but at least tax harmonisation throughout Europe would reduce the ability of companies to play off one EU country with another in a race to the botom on tax rates.

I don't agree with the notion that the solution to the problems of the NHS and Public Services is higher taxation of workers, even of higher paid workers. That sounds to me like Fabianism. Its the policy Social Democratic parties have been following for the last 50 yrears or so. It hasn't worked, and it just pushed higher paid workers and the middle class into the hands of the Tories. I think its also doubtful that even in terms of the argument you put that what you say is true. That £100 billion of tax avoidance isn't coming from well-paid workers and the middle class. Its coming from the very rich, just as the VAT fraud is coming largely from large buisnesses.

When Bill Gates has as much wealth as the bottom 40% of the US population, with Warren Buffett not far behind, I suspect that a similar gross maldistribution exists in Britain too. And with that kind of distortion I think that attacking that wealth certainly would make a big difference.

But as I said I do not accept this old redistributive socialism. The answer to the problems of the NHS etc. is not to move the deckchairs around on the deck of the Titanic it is to build a better ship.

I agree that the resources of the planet will be satrained if we aim for what Marxists have always aimed for i.e. a situation of abundance for all. We once used to talk of giving everyone the same lifestyle as the well-off people in California. That looks a lost hope. The problem is of course that as much of the basis of how we thought a communist society would operate because of such abundance will now have to be re-thought. With the continuance of relative scarcity, and a limitation on the lifestyle people can enjoy the hope that they will then as a result do things on a voluntarist basis is a forlorn hope. It seems inevitable then that we will continue to have to incentivise people to do jobs, and that inequality will inevtiably persist if on a much reduced basis.

As for your definition of middlec class, I think it is way outdated. I know lots of ordinary working people, many in quite low paid jobs that have several holidays a year. If I look around my estate where most of the people do ordianry working class jobs, I see most houses have at least 2 cars outside, many with 3 or 4, quite a few SUV's etc. I don't know many that have a villa in Spain as well as a house here, but I do know some. Part of the difference I think is differences in the cost of living in different parts of the country. I can quite udnerstand how people in London can have the perpsepctive you outline.

The ex lorry driver I was talking about has a very nice bungalow. Its probably worth close to the same price as my house. I was told a while ago by someone from London that my house would cost there around £600,000. There is no way on earth I could afford to buy a house costing that much. But my house is currently worth only around £150,000 so that was quite affordable, even more so when I bought it for just £30,000. So the lorry driver that had £340,000 might be a bit out of the ordinary in that his wages as a lorry driver would be a bit above the average, and many people in the same position would have spent a lot of the money rather than saved it. But, even if you add that £340,000 to the value of his house its still way less than it would have cost him to buy it in London, and that's before you treble the amount he would actually pay after interest payments on the mortgage.

Every week I talk to ex-miners down in the gym and sauna, and while they are certainly not rich they do have money and savings of a reasonable amount. If the intention is to highly tax ordinary working people like that, I think there is absolutely no hope of winning them over. And as for persuading them to give up their several holdiays a year or the cars they automatically provide for their kids as soon as they can drive etc. Well... good luck on that one.

Arthur Bough

I was just thinking about this today and thought the following comparisons might be useful.

Take the example I gave of my house and the equivalent in London. For my house at £150,000 the mortgage on a discounted rate, interest only would be around £7,500 a year. For the same house in London, if the bloke I was talking to from London is right, and from the prices I've seen he probably is, the mortgage on the £600,000 would be around £30,000 a year.

This last sum is more than the combined net income of me and my wife while I was still working, which came to around £28,000. The difference between the two of £22,500 is a pretty significant amount. Just to give other comparators for say a younger couple buying a cheaper property you could get a decent, mordernised terraced house or ex-Council house for around £50-70,000, a good Town House with gardens for around £90,000, a semi for around £110-120k. You can work out the comparators.

If we take the £22,500 difference. I've just come back from a month's holiday in Spain. We rented a four-bedroomed villa, with its own gardens and swimming pool. It cost £1,800 for the month. With the cost of my diesel to Spain, Channel Tunnel crossing and tolls it came to around £2,000. For the four of us it was £125 per week each. Suppose you did that twice - which we couldn't because we don't all have 8 weeks holiday. That would come to £4,000. That leaves £18,500. I'd guess that you could easily by an SUV with say £10,000 as the difference between that and an ordinary family car. That leaves in that first year £8,500 as savings. In subsequent years it would leave the full £18,500 as savings.

Put another way over about ten years the difference in housing costs would mean that someone here could over ten years with interest have with interest accumulated around £200,000 compared to if they had had to buy the same house in London. Depending on what type of villa you buy in Spain and where its located that £200,000 would be more than enough, and probably you could have enough left over to pay off half the mortgage on your house here.

Let me phrase it another way. I have never earned as much as the average wage. My wife has always earned even less. We could hardly be described as middle class, therefore, but whilst I would have struggled to afford to live down South, particularly in London, despite the fact that for long periods I only worked part-time, and for several years virtually not at all, and my wife has had around ten years not working at various times I have always managed to live well within my means. Possibly it depends on what you decide to spend your money on too. I don't have a mobile phone, in fact my land line bill is usually only £1 or £2 a month. I can't beleive it when I hear people say they spend £50 a month on a mobile phone. That's £600 a year which is what I paid the last time I went on a package holiday for four to the Canaries for a fortnight.

And at one time I used to go once a week with a friend to the Labour Club. There would be at least two rounds of drinks amongst four of us. That was nearly a tenner. But he'd go every day. As I don't drink saving £3,500 that could have gone on beer would pay for another two four week week holidays. A while ago at Kung Fu one of the blokes in his mid thirties with a family who is a mechanic at a small garage, so again hardly well paid, middle class material, was talking to a few other blokes about the fact that he'd been to a lap-dancing club. He'd spent £200 in one night, and he didn't just go there infrequently either!

So I think its a mistake to look at what people have in terms of holidays etc. in large part some of those things are taken for granted by many ordinary workers, and secondly its dangerous to think you know how much someone earns by some of the things they own. It might just be they have spent their money differently.

Perhaps one idea would be for people in London and the South to refuse to be ripped off in respect of housing costs. Move up here so that our house prices rise, and we can all sell up at the higher prices and move to Spain (joke).

Arthur Bough

I have just been reading a report that says that the gap between house prices in London and the North is likely to widen further. The reason is that the movement of people from the North to London has mostly disappeared but has been replaced by a movement from Poland to London on a much, much bigger scale. In fact 329,000 since May 2004 compared to the 13,000 the Government expected. The report says that in 2003 the Government expected there to be a shortfall of 100,000 houses against demand. The result of this higher than expected immigration is likely to mean a shortfall of more than 200,000 houses pushing prices still higher. According to Rightmove sellers in London are asking for prices 13.8% higher than a year ago.

The report says that average house prices in the South were 2.19 times higher than the North (the North is not defined prices in York for instance are very high) and that has fallen to 1.58, but that this is set to widen considerably again for the reasons given above. That would at first glance change the basis of the calculations I have given above. However, this is a comparison of average house prices. The average is obviously a function of the types of houses, it is not a very good guide to the ration of prices for a particular type of house. For example, if the South has a high proportion of terraced houses/flats whilst the North has a higher proportion of semi-detached and detached houses the average figure will be distorted. Secondly, the value of a house is also affected considerably by the location it is in. One of the reasons the bloke from London I was speaking to said my house would be so expensive in London is because you would struggle to find anything comparable i.e. not only do I have a large garden, but I am surrounded on three sides by farms and open fields, a hundred yards down the path at the end of the road is a large Country Park with a big lake, sitting above it is the village cricket ground, yet I am five minutes walk from one village, and about the same in another direction to the town (which is actually no more than a village itself, or I can catch a bus every ten minutes into the City centre which is only a 20 minute ride. Given the over concentration of development in London there are not many if any places like that.

The report also has some comments about tax too. It says the rally in London house prices has been most marked in the prices of the more expensive houses. It argues part of the reason for this is New Labour's tax policies, which have made London and the South east an attractive palce for Russian billionaires and their ilk to live. It says that instead of squeezing a small number of very rich individuals with very high visible marginal tax rates inthe Old labour way, Brown has raised money from the huge swathe of middle income rax payers through stealth taxes. It concludes the very rich have got richer under New labour helped by his refusal to tax non-domiciled foreign billionaires living in Britain.

Arthur Bough

Martin, speaks above about the top 20%. In last night's BBC 2 Programme "What Britain Earns" we learned who would be covered in this 20% that Martin wants to increase the tax on. It included such well known bastions of the middle class as Tube Train drivers, and people in similar jobs!!!

Martin's proposal for increasing taxes is just the old Fabian policy of increasing taxes on the working class, and section of the middle class to pay for the waste and inefficiency of the Capitalist State.

The other week another Programme asked "Can Gerry Robinson Fix the NHS?" The answer was clearly no. No one that seeks to solve the problems of the NHS either through some Privatisation programme, or through the kind of Manangement techniques that Robinson proposes could provide a long term solution. But what the programme did illustrate, and what Robinson did identify was the huge waste and inefficienty of the NHS arising from its state capitalist, burueacratic structures, right through its Dickensian class ridden structures.

Answers to those problemns cannot be given by Privattisation without creating similar problems in their wake, and the type of solution that might cure it - a huge dollop of democratisation - are not going to be given by the capitalist State in any meanigful sense. Even were some real democracy to be introduced as a result of pressure from the working class, the State would simply wait its opportunity to role it back. Only if the working class has direct ownership of its own healthcare can it secure a decent Service, only then can it run it on a democratic principles free of continual attempts by tghe State to claw back control. That is the Programme that Marx outlined for working class struggle against the statism of the Lassalleans, together with the integration of such Co-operative activity organised throughout the economy, the development of alternative centres of workers power and democracy that must grow up alongside it, and the building upon that material basis of the Workers Party that will fight for political pwoer to defeat the attempts of the bourgeoisie to undermine it.

Arthur Bough