The European temptation of taxing the rich

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So far, the increase of the tax burden on big fortunes in Spain has become the symbol that would mark the difference between policies to achieve a fiscal balance by the ruling right or the left wing that controls the opposition party.

Secretary general of the socialist PSOE, Pérez Rubalcaba, has issued a reminder saying that the phenomenon of the tax exile has grown too “democratized” since the late nineties and it has even accelerated in the last decade. Today, the large fortunes do not seem to be an important source of revenue for the Treasury, but a propitious victim to make claims that many believe are laden with demagoguery.

The debate is not exclusive of Spain, but affects the entire euro zone, which is still far from a necessary fiscal unity. Arnault, the richest man in France and president of the luxury group LVMH companies, is the proof. He recently stirred the French establishment when he requested the Belgian nationality the very same day the French president announced an increase in the tax rate on large fortunes to 75%.

This fiscal measure, considered by many as demagogic and confiscatory, is defended by the left as the solution to the serious problems many countries in the Union are facing, especially in the periphery, where the wealthy have many tunnels to sneak their assets in order to avoid paying taxes. It's more of an ideological that an effective debate, though.

Months ago, New York's mayor Michael Bloomberg said it was a “joke” to believe that raising taxes on the rich would solve the fiscal problems of the U.S. “If you raise taxes on the wealthiest you'll get about 1,000 million dollars a year,” he noted at a conference organized by The Wall Street Journal, while recalling that the U.S. budget deficit would increase to one, or two trillion dollars this year, “so it's a joke to say that taxing the rich more will solve the problem.”

In the UK, where taxes are lower than in France and other euro zone countries, prime minister David Cameron quipped with the so-called Hollande rate stating that he will put the “red carpet” to the French exiles. Not in vain London is considered as the sixth French city for its more than 250,000 residents, especially entrepreneurs who do not only flee the Treasury but the red tape of the French administration.

It is not, in any case, a minor issue. Spain does not have by far as many large fortunes as other countries like France, Germany or Italy, and still it has been trying to address the problem. However, it has not found the way yet to get the over 135,000 alleged fortunes to “collaborate” and stop using legal loopholes that make them immune to any tax reform.

The first thing that is important to clarify is that the tens of thousands of alleged Spanish fortunes are closely supervised by the authorities. Neither of them can afford to shirk their fiscal responsibilities, which does not mean they do not put their capital safe in tax havens or benefiting from legislation especially gracious to those who have money, lots of money: a dual income tax designed to encourage financial income, the SICAVs, foundations with a remarkable degree of opacity, tax havens that are part of a single currency zone and free movement of capital relocation by double residence, real estate investments, business… strategies that build up a shelter.

If there is something that Spain and the euro zone in general do have are financial instruments and mechanisms of all types to differ, if not avoid, the annual payment of taxes.

Every nook and cranny in every legislation are well known and used by the rich–who on the other hand, mostly comply with their tax obligations in Spain.   But legal avoidance is not evasion, and governments must be careful not to mistake one for the other.

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About the Author

The Corner
The Corner has a team of on-the-ground reporters in capital cities ranging from New York to Beijing. Their stories are edited by the teams at the Spanish magazine Consejeros (for members of companies’ boards of directors) and at the stock market news site Consenso Del Mercado (market consensus). They have worked in economics and communication for over 25 years.