Why quick-fix taxes never work
Nick Clegg made headlines this week with the controversial announcement that he would back the introduction of a one-off ‘wealth tax’. Clegg’s belief that the amount of tax paid by the super-rich is disproportionately low may ring true in some cases, but it strikes me as absurd to attempt to introduce a short-term tax hike without any clear understanding of either how it would be implemented or what its long-term consequences would be.
To suggest that a ‘time-limited contribution’, levied on the UK’s most asset-rich individuals would get anywhere near fixing the treasury’s problems is to underestimate the complexity of our fragile economic situation. To expect the nation’s wealth generators to submit to a ‘wealth tax’ as a form of patriotic philanthropy is naive and betrays a fundamental misunderstanding of the way business operates. It is only reasonable to presume that wealthy entrepreneurs and individuals would consider their options and perhaps move their business to countries where the tax conditions are more favourable, if such a tax were introduced. It may be unpopular but not unrealistic to suggest that survival and indeed profit are more important to most businesses than the ethics of tax.
So to go back to the old adage about the golden goose – if we drive a whole flock of them away to more clement climes, do we really think we can start manufacturing golden eggs ourselves? I am very aware that the treasury is in urgent need of an injection of cash - especially as corporation tax is down on last year’s revenue – but I fail to see how a short term fix of introducing a ‘wealth tax’ can have anything but negative effects on the UK economy in the long term.
Good business practice dictates that plans are made for the long term, with a 5-10 year trajectory mapped out. Entrepreneurs and asset-rich individuals drive business. If we push them out of the UK with an unpopular tax – ‘one-off’ though it may be – they are likely to put down roots elsewhere and won’t come flooding back in a hurry.
For an indication of how ostensibly short-term tax measures can have long-term ramifications, we need look no further than the bricked-up windows of many of our older houses. Introduced in 1696 as a quick-fix solution ‘for making good the Deficiencies of several Funds… enlarging the Capital Stock of the Bank of England and… raising the Publick Credit’ (ring any bells?) the window tax in fact lasted for over 150 years until its repeal in 1851, with lasting effects which are still visible today.
Of course it’s vitally important that we have a tax system which is fair for everybody and which protects the most vulnerable members of society. It’s still imperative that any new measures designed to ensure that the most wealthy pay the correct amount of tax are the result of a carefully planned strategy, rather than an off-the-cuff suggestion by a politician hoping to bolster his party’s ailing ratings.
Mike Fleming is Tax Director at Straughans Chartered Accountants www.straughans.co.uk