Last month, Charlie Munger, VC at Berkshire Hathaway Inc. and a long-term business partner of Warren Buffett, warned that the latest proposal by the Democrats to tax the wealthiest Americans was ignorant and bound to backfire.
He might just have been right…
The Times newspaper has published several reports detailing how nearly a third of Britain’s billionaires have already or are relocating to various tax havens over the past decade, with some even breaking UK law by bankrolling political parties. The Times revealed that 28 out of 93 British billionaires have either already relocated to tax havens or are in the process of doing so.
The incentive to shift base is real: although those living offshore are still required to obey local tax laws, they avoid paying Her Majesty's Revenue and Customs (HMRC) 38.1 percent on dividends and another 20 percent on sale of shares.
The report comes just days after a public outcry after the UK government delayed a vote on a proposed legislation intended to end secret company ownership in offshore territories especially by the ultra-rich.
Hiding from the taxman
Looking to join those who have fled from the British taxman is Sir Jim Ratcliffe, Britain’s richest man. Sir Ratcliffe plans on moving to Monaco, the most popular destination for British billionaires. Ten British billionaires and another 408 UK business owners have already relocated to the principality.
Other than Monaco, other popular tax havens include Switzerland, Channel Island and the Isle of Man. All in all, there are 6,800 British citizens who have set up 12,000 UK firms in low-tax jurisdictions.
HMRC estimates that the UK misses out on roughly £1billion from citizens who have relocated to Monaco--not counting other jurisdictions. Sir Ratcliffe’s chemicals firm is valued at around £35 billion ($46 billion), and a move to Monaco would mean that the Treasury loses another £4 billion every year.
“We must stop tax evasion so that the wealthiest pay their fair share," said leading opposition Labour Party’s lawmaker, Margaret Hodge, following The Times exposé. Related: Fans Panic After Tesla Removes Its “Secret Weapon” From Website
The latest wave of exodus has been spurred by a hike in income taxes with top earners now required to hand over 45 percent of their incomes to Treasury after the rate was lowered from the previous 50 percent clip in 2013.
Yet, the theory that taxing the rich more triggers migration to more obliging jurisdictions might not be as straightforward as you might imagine.
Do the rich go on strike when taxed more?
Ayn Rand’s classic, Atlas Shrugged, tells a story of how the rich go on strike by withdrawing their services and running away from society in protest against taxes and regulation. The book inspires political rhetoric that taxing the rich will inevitably lead to migrations. In the United States where states set their own tax policies, periodic warnings are issued that taxing the rich will lead to migration to more accommodating states.
But does the book’s metaphor and common rhetoric stand up to statistical scrutiny?
At 2.4 percent, interstate migration among America’s elites is actually the lowest of all demographics based on income with 4.5 percent of the poorest residents migrating across states every year. In other words, the rich tend to stay put more than everybody else.
According to Cristobal Young, author of The Myth of Millionaire Tax Flight: How Place Still Matters for the Rich, when millionaires do move, they do favor lower-tax states but only marginally so with only 15 percent of millionaire migrations leading to a net tax advantage while the other 85 percent having zero net tax impact.
Another interesting find: all tax-motivated migrations by America’s rich are to just one state—Florida—a low-tax state that comes with other major perks including plenty of sun, sand and palm trees.
The same ratios hold true across the globe: According to Forbes, about 84 percent of billionaires still live in their countries of birth and only 5 percent of billionaires relocate to other countries once successful. The transnational capitalist class that is so prevalent in the UK is, therefore, more of a UK thing than a global phenomenon.
By Alex Kimani for Safehaven.com