How Her Majesty ('s Treasury) is draining Europe's super rich

By Florian Chevoppe | 2 May 2012

To quote this document: Florian Chevoppe, “How Her Majesty ('s Treasury) is draining Europe's super rich”, Nouvelle Europe [en ligne], Wednesday 2 May 2012, http://www.nouvelle-europe.eu/node/1469, displayed on 28 February 2020

A "fair measure". This is the argument brought up by the French Socialist party whose candidate Francois Hollande has recently proposed to set up a new 75% income tax for incomes above 1 million euros (£834,000). This new proposal, by a man almost sure to stand at the second turn of the presidential election has probably upset a few - if not a lot - of people. Indeed, according to a recent study by Credit Suisse published in October 2011, France is the country with the highest number of millionaires in Europe : 2.6 million. But is there really a general trend of raising taxes for the most fortunates across Europe ?

An isolated French initiative ?

If France comes first according to this study, in the UK and Germany millionaires are actually richer. Fortunes worth more than $100 million are "more frequent" there. And in the UK, Francois Hollande's proposals were almost universally rejected. During his meeting with Labour Party leader Ed Miliband, it was clearly rejected. And David Cameron's coalition government is currently on diametrically opposed trend.

The "50p tax", which introduced by Labour Chancellor Alastair Darling in 2009 and brought HM Treasury more than £5.5bn was scaled down to 45p by the coalition government. About this, British journalist John Lanchester wrote "the only countries that have anything even vaguely resembling the British policy towards the super-rich are places that are openly accepted as tax havens, such as Monaco and Switzerland." No need to say more.

But the idea seems to have been heard in those countries which border France. With a deficit higher than a 100% of the GDP, Elio Di Rupo's socialist government wants to put in place a "temporary crisis contribution on important property holdings, that is to say those valued at more than €1.25 million". Temporary indeed. In Germany too, last summer, a group of 50 of the richest Germans joined the "tax me harder" group, which called on the government to raise taxes on high incomes.

Similar initiatives to the Socialist proposal have been implemented, or reimplemented around the Hexagone. In Spain, after having abrogated it in 2008, a tax was re-introduced by Socialist Prime minister Jose Louis Zapatero in 2011. In one of his first austerity budgets, Mario Monti also put in place measures affected those with annual incomes towering above €300,000. Finally, Switzerland also started a parliamentary procedure to set up similar taxes for annual incomes higher than €360,000. Luxembourg, Monaco and Andorra have however not changed their fiscal policies.

One can see that there are two very different Europes, and three trends. First, there is a eurozone Europe, whithin which there is absolutely no convergence of fiscal policies. In this Europe, there are those who are raising their tax rates on high incomes, more or less because their are obliged to (Greece, Ireland) or because they have to deal with threatening debts like France. Still in this single currency Europe, free riders such as Luxembourg remain, bordering major economies like Germany. Finally, there is an anti-single currency Europe which could be compared to "war profiteers", enjoying those tax spikes, and will readily welcome those fleeing fortunes.

Professional British profiteering

This is what the United Kingdom is doing at the moment, but it is not the only example. Countries bordering major economies such as Canada have taken similar measures and became tax heavens. But the exodus has already begun : in 2011, according to real estate agency Knight Frank, 10% of buying transactions in London, the largest city in Western Europe, were made by Italiens and Greeks. According to this agency, the number one reason of all these arrivals in the city is "the placement of money outside of the eurozone", and ever-higher taxes.

This is one of the main failures of the EU's economic integration in the last 20 years : having set up a common monetary policy without any fiscal and economic convergence. The ease with which transactions and capital movements can be made, densification of high-speed transports and litteraly no obstacle to moving from a country to an other makes capitals flight a children's game. The revocation of the Edict of Nantes led more than 200,000 to flee the Kingdom of France, and crippled its financial and industrial capacities. Will this happen too in the Kingdom of € ?

What is sure is that it is particularly hard to implement such measures when one's own country shares borders with a semi-dozen tax heavens, and an undersea channel with another one. To be convincing, such policies can not be implemented at the national level, or even at that of the eurozone. As far as fiscal convergence is concerned, there can be no free rider of weak link in the European Union. As long as one of the 27 states that there are now will maintain a policy of fiscal dumping, the stability of others will be endangered. But does it mean fiscal dumping should become the norm ? States would then get in a race to the lowest tax rate.

One can then see that the French proposal is a highly dividing one, but whichever policy is followed by our leaders it must be at the community level. The time of competition between states within the EU has passed. In order to succeed, there can only be two methods : either states decide to relegate a part of their sovereignty and competencies to a caring, watchdog "mother Europe" or governments set up radical and unanimous convergence plans. These two hypothesis are credible, but as of today, the Fiscal Compact signed on March 2nd abides to neither of them : London and Prague remain non-signatories.

 

Further reading

On Nouvelle Europe :

Rigueur et pauvreté en Europe

On the internet :

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