The enthusiasm for taxing the rich ignores the real rich - big companies

Jul 13, 2012, 10:00

Merryn Somerset Webb

Posted byMerryn Somerset Webb

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We've written here many times before that the obvious route out of the Western world's current crisis is a lengthy period of financial repression - ie one in which inflation is high, interest rates are low, and states assert their sovereignty to lift money from the private sector to help finance their debts.

This is clearly a process that is well underway all over the place: witness the rising tax burden and negative real interest rates we have been forced to put up with for the last few years.  However, a proposal from what the WSJ refers to as a "leading German economics research institute" has taken things a little further than most have so far been prepared to.

According to the German Institute for Economic Research (DIW), a large part of the solution is for those with high incomes to pay more on their wealth in one way or another.  This makes sense, says DIW, because while national debts might have soared "we also have very high amounts of private assets that, taken together, considerably exceed the total national debts" of most countries." So why not "go after those private assets"?

The report suggests giving people an allowance of €250,000 and then taking 10% of all other wealth.  That 10% could be removed either as a "one off levy" or as a "forced loan" that might later be paid back "depending on the progress" of any one country in dealing with its debt. In Germany ,this measure would raise something in the region of €230bn, or a whopping 9% of GDP, and so could bring Germany's national debt as a percentage of GDP down to more like 70% than its current 80%.

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It is hard, obviously, to know where to start with this one. I'll leave you all to put your personal objections to it below, but it is worth pointing out that while the German finance ministry has rejected the notion out of hand for Germany, a spokesman also said that it might be "interesting" for some of the other eurozone states. So it isn't an idea that is going to go away.

However, the odd thing about all the current enthusiasm for taxing the rich is that it ignores how most of them got rich in the first place; and it ignores the real rich - the world's big corporations.

Andrew Smithers of Smithers & Co constantly points out, as I do here, that the profit margins of our huge companies have never been higher - and nor have their cash piles. Short-term shareholder capitalism (as discussed here and in my editor's letter in the magazine) has made large companies and their managers rich, and all too many other people poor.

So, given that the cash piles of the top 1,000 or so companies around the world make even the richest individuals in the world look a little short, we shouldn’t be surprised if Governments soon start looking to them rather than focusing endlessly on the semi-rich and rich (who already contribute the bulk of our tax revenues and could contribute a lot more if we stopped letting them avoid our existing taxes).

Earlier this week, I interviewed CLSA's Russell Napier, who is something of expert on financial repression, and I asked him about this. His view? It won't be that long until governments do just that: "if some corporate bond yields are below the yields of their sovereign, these merely indicate that the sovereigns have not yet asserted their sovereign rights." But if they don't want to go bust, they will. You can read my full interview with Russell in the magazine next week. If you're not already a subscriber, get your first three copies free here.

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  • 1. Shinsei1967

    (13 July 2012, 10:45AM)  Complain about this comment

    FTSE100 companies might be sitting on massive cash piles but this money doesn't belong to Vodafone or Unilever or Tesco it belongs to these companies shareholders.

    In other words most of "us", through our pension funds and ISAs.

    So all you are doing is suggesting another tax on the "semi-rich" who already provide most of the state's tax revenues.

  • 2. Patrick Power

    (13 July 2012, 12:59PM)  Complain about this comment

    I am a subscriber to Moneyweek and have recently renewed but it was a difficult decision. Bill Bonner, and some of the other writers really understand the free market and capitalism and the true underlying causes of our current problems. However I am growing weary of the constant socialist nonsense coming from Merryn, no understanding at all, and one wonders how an editor with this mindset can continue here

  • 3. Baxter Basics

    (13 July 2012, 01:09PM)  Complain about this comment

    "Freedom's just another word for nothin' left to lose" - Janis Joplin

    Looks like governments around the world are deeply committed to making us much freer then...

  • 4. merryn

    (13 July 2012, 01:20PM)  Complain about this comment

    Shinsei and Patrick. Please don't think for a second i am recommending this. Of course I am not! Regular readers will know that our solution to the crisis is pretty straightforward - cut the size of the state and let capitalism work! The point is that the government is showing no signs of taking this route and so we need to be ready for repression - and the risks it brings to those of us investing in cash rich defensives. Crisis almost always brings an expansion of the state whether we want it or not...

  • 5. NeutronWarp9

    (13 July 2012, 06:08PM)  Complain about this comment

    2 - Patrick P - You rather loosely throw around terms like free market, capitalism and socialism and then appear to believe that your interpretation of these concepts is THE correct one. A larger state is not in itself a definition of socialism; just as the EU is not the epitome of a free market.

  • 6. Robin

    (13 July 2012, 06:33PM)  Complain about this comment

    Technology/investment makes companies more profitable but also put people out of work. Less money paid in wages results in less money for consumers to buy whatever the company may produce, thereby lessening the market size for the company. The system shuffles money into the hands of the rich and stagnates the economy. I realise this is a contrarian view and I don't support abandoning technological development or free market competition. These are the cornerstones of modern society. But something must compensate for this effect. The rich hoard wealth which stagnates economic activity. They do so by not engaging in real entrepreneurial enterprises but rather outsourcing their money management to hedge fund managers who engage in a great poker game involving 'technical analysis'.

  • 7. Critic Al Rick

    (13 July 2012, 10:43PM)  Complain about this comment

    Have you noticed that despite 'the rise in tax burden and negative real interest rates we have been forced to put up with over the past few years ' the National Debt and Budget Deficit are getting larger?

    Financial repression appears not to be showing any signs of achieving its supposed goals, rather it is harassing achievement of those goals. Furthermore, it is doing absolutely nothing to redressing the most important imbalance - that of the Balance of Payments Deficit.

    Whilever we have a Balance of Payments Deficit the UK is losing wealth. This loss of wealth will ensue whilstever we, as a whole, continue to live beyond our means; whilstever money out of the UK exceeds money in.

    We've maxed out the UK's credit card, sold off most of its 'family silver' and are now plundering the wealth of its private pensioners and savers.

    At this rate the only repression that will succeed will be that of the middle classes. But maybe that IS the desired goal.

  • 8. JAW

    (16 July 2012, 07:44PM)  Complain about this comment

    A relative has a small business in S England with 2 owner-directors and 4 staff. Here are the company business costs per week in £ on turnover of 16 to 20K/week

    Warehouse rent 240
    Business Rates 300
    Road Tax vehicles 30
    Operators Licence 35
    Operators Licence vehicle checks 80
    Vehicle Insurance 75
    Public Liability Insurance etc 50
    Waste disposal 25
    PAYE Taxes 250
    National Insurance 500
    VAT 1000
    Heating 50
    Electricity 10
    Water 10
    Telephone 25
    Accountant 70
    Bank charges 2 % of turnover = 320
    Overdraft facility fees 1.5 to 2.5 % = 200
    Credit card facility 25
    Corporation Tax 23% = 690
    Not included is the VAT, council and other taxes directors and staff pay from their wages.

    The business pays out £3985 per week before it makes a penny for itself. Typically 70% of profitability goes to the Government. Who are the rich? Only the Government.

    Businessmen, like the unemployed, are beginning to think work doesn't pay. Close down.

    Solution?

    Eat The Government!

  • 9. Boris MacDonut

    (16 July 2012, 09:13PM)  Complain about this comment

    #8 JAW Despite your griping the business cited is making £156,000pa of taxable Corporate profits, on your figures, almost 20% of turnover. What strikes me as odd is how the 6 people employed here pay less than £13,000 in PAYE between them. Suggests a very low average wage of under £19k. Perhaps if they can afford to make a £156k profit they could pay the workers a bit more or create another job.
    Still at least the accountant gets £3,700 a year for drawing up simple accounts that take about one day's work.

  • 10. Daisy

    (22 July 2012, 11:27AM)  Complain about this comment

    Interesting article Merryn. Another timely warning! Thank you. Given these companies are in may cases already avoiding tax, no doubt they will find ways to avoid the latest suggestions. Unless governments find ways of forcing them to domicile their businesses or sections of their businesses in each government's own juristiction, with tighter accounting and taxation rules, it will be another tax easily avoided by the biggest and richest.

  • 11. Boris MacDonut

    (23 July 2012, 06:05PM)  Complain about this comment

    #10 Daisy. Apparently the uber rich are hiding $21 trillion offshore. that is 24% of the World's wealth. Perhaps the UN should form a World taxation authority. Take say 20% of the money from the havens (at gun point if necessary) and dole it back to nations according to population/GDP.

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