The Sunday Times

August 21st, 2011

You say you’ll flee higher taxes, Mr Filthy? We call your bluff

In Graham Greene’s novel Our Man in Havana, the chief of police Captain Segura explains with chilling good humour that there are class distinctions in torture. There are the torturable classes and there are those who are torture-proof. This nasty truth has often seemed to me to apply to tax in this country, for the past couple of decades at least. Paying tax is for ordinary people; the super-rich are not really taxable.

Oddly enough this dispensation has been widely accepted for several decades. It was even a Labour minister, Peter Mandelson, who said in 1998 that his government was intensely relaxed about people getting filthy rich — so relaxed that Labour barely restrained them and hardly taxed them. The received view has been that if the rich and the super-rich are forced to pay more tax, they will leave the country and take their wealth-production somewhere else, which would be a disaster for the economy.

The same argument was applied at the time of the credit crunch and the banking crisis: filthy-rich bankers and their tottering banks could not be more strictly regulated, it was regretfully said on all sides, because that would drive them away to tax-proof and regulation-proof places, as a result of which our financial services industry would collapse. In other words, people widely agreed, whatever their views about tax and regulation, that the super-rich hold us over a barrel. They do not belong to the controllable classes.

Now, though, this consensus seems to be weakening, even among some of the super-rich themselves. Warren Buffett, the gazillionaire investment oracle of Omaha, said recently in a New York Times article that he felt that he should pay more tax. Last year, he said, he had to pay just 17.4% of his taxable income, a lower percentage than any of the ordinary mortals in his office, who paid between 33% and 41%. The American mega-rich get extraordinary tax breaks. Buffett thinks that the very rich have been coddled for long enough by a billionaire-friendly Congress. “It’s time for our government to get serious about shared sacrifice,” he wrote.

There were, of course, the predictable howls of outrage, but equally some super-rich people publicly supported Buffett. In this country, too, although there had been the usual indignant harrumphs about the Lib Dems’ proposed mansion tax when Vince Cable first announced it last spring, there was a much more considered response when he re-announced it last week.

The Tory party as a whole might never wear it, but there are many Conservatives and very wealthy people who accept that there is justice in the rich sharing the general pain in these hard times. The British, even at their most vainglorious, have never been quite as relaxed about displays of extreme wealth as have the Americans, and never quite so confident about their entitlement to it; after all, it was as recently as 1974 that the top rate of income tax here was 83%, which, with a 15% surcharge on unearned income (investments and dividends), could rise to a 98% marginal rate of personal income tax.

Perhaps that is why there has been less outrage here than one might have expected about the mansion tax, especially given that the Lib Dems suggested lowering the 50% top rate of income tax at the same time. That is obviously a step in the direction of fairness for the hard-pressed professional middle classes and the huge majority who can never hope to own a house worth more than £1m.

It is true the mansion tax wouldn’t raise very much. According to MoneyWeek, if it were raised on property values above £2m, it would produce about £1 billion a year. Raised on values over £1m it would probably be more than £2 billion. So its point would be more political than fiscal. But a property tax would send a clear, popular message that — to coin a phrase — we really are all in this together, even filthy rich foreigners, at least in house and home. There would be a chance property prices would come down, too, which would also be an obvious social good.

The only question is whether it’s possible without driving away the economy’s golden geese. It would be a very risky experiment.

Last year, Britain’s financial sector paid £53.4 billion in taxes, which was 11.2% of the country’s total take, according to Price Waterhouse Coopers. But London is hard to better from the point of view of the super-rich. As well as having the expertise, traditions and infrastructure of a leading financial centre, it is (riots aside) a lively and interestingly mixed place to live, especially with children — much nicer than New York, Hong Kong or Shanghai. When hedge funders fled to Zug not long ago, their bored wives soon forced them to return to more regulated but less dreary places.

Within my living memory, taxes were much, much higher. But the top rate in 1974 did not cause a mass flight of wealth-creators from the country. Similarly, when the euro was created, and people warned that London would cease to be a leading financial centre in Europe, there wasn’t an ugly rush of heavy hitters to Frankfurt, despite all predictions. London did best, even outside the eurozone. And as Buffett said last week, tax rates for the rich in America were far higher in the 1980s and 1990s, yet he and others did not throw a fit and stop investing.

“I have worked with investors for 60 years,” he wrote. “I have yet to see anyone … shy away from a sensible investment because of the tax rate … And to those who argue that higher rates hurt job creation, I would note that a net of nearly 40m jobs were added between 1980 and 2000.”

That was America; they do things differently there. In any case, the general acceptance over here of the fact that the super-rich do not belong to the controllable classes seems to be beginning to crumble. Inequality in society is tolerated by consent, whether by tradition, religion or supposed self-interest. The recent riots in London, and the uprisings of the Arab spring, must have made many people pause to think about the nature of consent and of consensus.

If enough people are disaffected and angry, if enough people feel that the very rich are beyond tax, beyond responsibility, beyond reasonable control and above the hardships most people face, that tacit consent to their great wealth may disappear.

The mega-rich, the bankers, brokers and assorted wealth creators (and wealth destroyers) may have everyone else over a barrel for now, but perhaps not for long. They may find that they suddenly do belong to the controllable classes.