Corbyn’s tax plans
How can you protect your money from a Labour grab? Jeremy Warner
The pound had another wobble this week, but this time it was less about Brexit and more to do with a rather different concern; that of growing political instability and the possible election of a hard Left, Corbyn-led government.
Until quite recently, I went along with the prevailing City view that Jeremy Corbyn’s eventual triumph at the polls was a relatively improbable end result. Admittedly, Labour’s new radicalism did much better than expected in the last election, but this could plausibly be attributed to an unusual confluence of forces quite unlikely to be repeated, including an angry protest vote from well-heeled metropolitan Remainers who would not normally be counted even as Labour-leaning let alone supporters of a hard Left political agenda.
Yet it is no longer possible to be so complacent. Theresa May is plainly finished as a leader. It’s a question of when, not if. Caught between a rock and a hard place, her predicament grows worse by the day. If she does what Brussels demands and significantly increases the size of the divorce settlement, she’ll face condemnation from Remainers – who will claim that the referendum was won on the basis of a lie – and hard Brexiteers alike.
The combination of penny pinching austerity on the one hand and profligate largesse to an organisation Britain will soon be leaving on the other would be a hard sell politically at the best of times. Yet to do the opposite and refuse the money, thereby risking a “no deal” exit, would be equally unacceptable to many parliamentarians.
The weakness of May’s premiership doesn’t of itself make a Corbyn victory inevitable; it merely provides an opportunity. Yet Corbyn senses much deeper forces in his favour, and he is right to do so. Politics is on a long cycle; what’s going on looks like a hard to resist generational shift. If Brexit represented a vote against an unsatisfactory status quo, Corbyn’s populism is the logical next step in this yearning for change, however delusional the solutions offered. It’s an absurd parallel, I know, but with reference to the 100th anniversary this year of the Russian Revolution, May is Kerensky, representing the initial phase of Tsarist rejection. Corbyn is the Bolshevik stage yet to come.
In any case, we are, I fear, at the beginnings of a period of possibly quite significant capital flight, which will accelerate as Corbyn’s moment of glory approaches. Monday’s wobble in the pound may have been just a forewarning of what’s to come. Already, the super rich are taking precautionary action. Because they can, many non doms are also thinking about relocation. Some have already gone. When overseas investors hesitate, they do so as much because of fears of a hostile, sequestrating tax regime as worries about Brexit.
Labour’s publicly stated tax policies fall into four categories. Income tax on the 2pc of the population with earnings exceeding £80,000 a year would be significantly increased, with the burden falling particularly aggressively on very high earners, including an “excessive pay levy” on earnings of more than £330,000. The rate of corporation tax would be restored to 26pc, there would be a further catch-all crackdown on tax avoidance, and stamp duty would be applied to bonds and derivatives alongside shares, a strange thing to do when greatly expanded spending plans will require massive support from debt markets. But then commercial logic gets little consideration in any of this.
Less overtly stated, but all too likely to be imposed are wealth taxes, land value taxes and, in an attempt to prevent the outflows that supposedly sank Greece’s radical Left, Syriza-led government, capital controls.
What can the relatively well off punter do to protect himself? Depressingly little, seems to be the answer. The young and adventurous can, of course, simply leave the country and find a job elsewhere. A significant brain drain is the almost inevitable consequence of any such tax regime.
For the vast majority of people, however, this will not be an option. Nor would domiciling yourself abroad for tax purposes, an excessively complicated procedure which requires both that income is predominantly earned overseas and that limited time is spent on these shores.
Effective capital controls may be next to impossible in this age of massive cross-border flows, but that won’t necessarily stop Labour trying.
Labour will be ready, John McDonnell, shadow Chancellor, promises, “when or if they [the City] come for us”. One plan floated by Labour in the Eighties involved, in effect, taxing overseas investment much more heavily. Labour assumed it would force greater investment in Britain. It didn’t seem to occur that it would also deter profitable investment in the UK by overseas investors. Since the Thatcher years, the policy has broadly been to try to attract foreign capital by making Britain tax competitive. Labour’s plans infer imprisonment of capital so as better to tax it, a reversal of current policy.
For those with spare capital, it might therefore pay to shift the money offshore, by for instance setting up an overseas bank account. This won’t protect it from income and wealth taxes. As with inheritance, income is taxed on a global basis; the same would be true of wealth. But it would at least protect the money from capital controls. For those with long memories, £50 per head used to be your lot when going abroad, and sometimes even less, provoking some extreme avoidance practices; the serial entrepreneur Rolf Schild allegedly deliberately had himself kidnapped by Sardinian bandits in order to avoid exchange controls on the £220,000 paid as a ransom.
As for wealth, a possibly better approach than simply offshoring it would be to split the money into smaller batches and hand it on to your children. But again, for most people this would be messy, complicated and impractical. My guess is that Labour’s plans will invite an explosion in simple, but illegal, tax evasion. There are plainly no winners from such a downward spiral. What seems clear is that Corbyn on top of Brexit would be a peculiarly toxic combination. We needn’t worry about the big boys; they will be long gone before it happens. As always, it will be the little guy who suffers most.
‘My guess is that Labour’s plans will invite an explosion in simple, but illegal, tax evasion’
Jeremy Corbyn out shopping: how much spending money will people have under his proposed tax regime?