Do the rich a favour: tax them more

Why this sudden outbreak of plutocratic altruism? Have the rich suddenly discovered that money doesn’t buy happiness after all? Or could it be something a little closer to home? Five years ago, one of Britain’s richest men, Sir Ronald Cohen, warned that there would be “riots in the streets” if the gap between the haves and the have-nots was allowed to grow. How remarkably prescient that was. Cohen, a private-equity specialist in the City, pointed out that he was paying less tax than his cleaner. He was paying only 10% on the capital gains he made buying and selling companies and he didn’t believe that this was fair or sustainable. He also benefited from being a so-called “non-dom” – another Government-sponsored tax dodge that allows wealthy people to declare that they are not domiciled in Britain even though they live here, and thus avoid paying tax on their foreign earnings.

In a misguided drive to attract the wealthy to Britain, successive chancellors have made London the world capital of tax avoidance. Estimates of the amount lost to the British taxpayer from these scams vary enormously but it is certainly in the tens of billions. Much more is lost through company tax breaks that allow British companies to set up subsidiaries in tax havens such as the Channel Islands or the Cayman Islands, outsource their profits there and thus avoid paying UK tax. Tax Research UK’s website suggests this could be costing the Exchequer £200 billion a year.

Now, you could say – as the former Tory minister, John Redwood has said – that if wealthy people find their money such a burden, no-one is stopping them from giving it away or sending it to the tax man voluntarily. But Sir Ronald Cohen and the French billionaires have put their finger on the paradox of taxation: it isn’t simply about money. It is really about fairness and equity. To maintain social cohesion, those at the bottom need to know that those at the top are paying their share, contributing to society, and not allowed to rob the rest of us blind. Otherwise the subtle contract that allows rich and poor to occupy the same urban space breaks down – as we saw three weeks ago in England, and last year in Paris.

The Chancellor, George Osborne, would do well to reflect on this as he decides whether to keep the 50p top rate of tax introduced after the 2008 financial crash and levied on salaries higher than £150,000. Osborne says he’s minded to scrap it because there’s little evidence that it actually brings in more revenue than the old rate, largely because of tax avoidance. But this is surely tantamount to saying that, since the wealthy will only avoid paying taxes, there’s no point in taxing them. You might think that this was a case for tightening up the tax laws rather than giving up the ghost. Why should ordinary people continue paying taxes if the rich avoid paying theirs? Why don’t we all declare non-dom status and have our salaries paid into numbered accounts in Leichtenstein?

Osborne has a point that, with globalisation, it is increasingly difficult for governments to collect high taxes because individuals and companies will simply move to countries with lower taxation. But ordinary citizens in Britain might be inclined to say: good riddance. Do we really need all those short-selling city speculators? And anyway, why don’t governments get together to stop tax arbitrage and close tax havens? Does the UK Government support the idea of a financial transactions tax, a Tobin tax, that taxes speculative money as it flows across borders, as suggested by German Chancellor Angela Merkel? Er, no.

This fiscal defeatism is not only morally disreputable, it is politically dangerous – above all for the rich. Karl Marx observed 150 years ago that capitalism, left to its own devices, will sow the seeds of its own destruction by creating ever greater inequality. Eventually, the dispossessed will revolt against the financiers who have appropriated society’s wealth. It is up to governments to save capitalism from itself by introducing policies that redistribute some of the wealth and stop the have-nots from taking to the streets. That’s what Roosevelt did in the 1930s to save America from communism.

So, those billionaires who were calling for more tax last week were really acting in self-interest. They don’t want to have to live in fortresses, like the princes in Saudi Arabia. They want to feel that they can walk the streets of Paris in safety. Violent unrest is now a very real threat to social and economic stability in many European cities, not least English ones as we saw earlier this month. We have around one million young people unemployed, many of them graduates and most with access to computers and social networking. The recent revolutions in the Arab world have been led, like all revolutions, by déclassé intellectuals leading armies of young men with nothing to do. They are not so different from us. Last week, they stormed Gaddafi’s palaces in Tripoli, smashed up his golden statues, urinated in his pool, wrote graffiti over his fancy furnishings. The plutocrats of Paris and London should be watching and wondering – could this be our mansions and palaces in a few years time? Will people in Belgravia have to hire private armies to protect them?

Osborne should do the rich a favour: tax them more, not less. They will complain bitterly, but society needs to know that something is being done to share the pain. He should scrap non-dom status, increase tax on homes worth more than £1m, end tax breaks and pursue tax avoiders into their safe havens abroad. He should slap a 5% surcharge on incomes above £300,000. Squeezing the rich till they squeal today may be the only way to ensure their safety tomorrow.