Date: March 1, 2012
Reporting From: Santiago, Chile
Earlier this week, the British government announced that Barclays PLC, one of Britain’s oldest and largest banks, was facing an $800 million penalty for engaging in a tax avoidance scheme. Barclays had been exploiting loopholes in legislation in order to avoid paying a higher tax rate, and the government is now drafting legislation to close these loopholes.
Hang on a sec. Full stop.
If the government has to pass legislation in order to ‘close the loopholes’, then the loopholes right now are obviously legitimate. Hence Barclays tax avoidance practices that were perfectly legal.
After all, that’s what tax avoidance is– legally avoiding taxes by exploiting loopholes and legitimate deductions in the tax code. Tax evasion, on the other hand, is willful misdirection or underreporting of income that violates tax code. Barclays engaged in the former.
How is it that the Treasury can penalize Barclays for having done something that is perfectly legal? Technically, it can’t. That’s why the legislation being proposed to close these tax loopholes is going to be RETROACTIVE.
In other words, since the British government can’t legitimately penalize Barclays, they’re going back in time to change the law to make what Barclays did illegal… all to collect some extra dough.
In related news, the Treasury also announced that recent tax receipts have failed to meet expectations. Despite Britain’s constantly increasing tax rates (now as much as 50%), income tax revenues dropped by $810 million from a year ago, a 4.68% decrease.
British government, meet the Laffer Curve. Even the guy flinging spitballs in the back of a high school economics class can tell you that raising tax rates often decreases overall tax revenue.
Consider that, with a 0% tax rate, government revenue would be zero. Similarly, at a 100% tax rate in which people didn’t keep a single penny of what they earned, government revenue would also be zero because nobody would have an incentive to work!
Working up from 0, and backward from 100, would yield similar results. At 1% tax rate, the government would collect a bit of revenue. At a 99% tax rate, a small handful of people might work, also generating some revenue for the government.
Economist Art Laffer is credited with describing this relationship between tax rates and government revenue, however philosophers going back to the 14th century also examined the idea.
Laffer’s point was to show that there’s an equalization between the government taking a small piece of a big pie (low tax rates, huge incentive for economic productivity), and a big piece of a small pie (high tax rates, very little incentive for economic productivity).
Britain is trying to take a big piece of a rapidly diminishing pie. As the pie gets smaller, they keep increasing the size of their slice by upping tax rates… which is the exact opposite of what they should be doing.
There are a lot of other places in the world that are happy to take a smaller slice of a big pie. In Hong Kong and Singapore, where tax rates are very low, both of those governments are awash with surpluses.
Even in Bulgaria, income tax rates are a flat 10%. It’s such a low rate, it’s not even worth the effort to avoid. People have an incentive to pay simply because it’s so cheap and easy. It’s perhaps for this reason that Bulgarian Finance Minister Simeon Djankov has been openly courting UK investors to relocate to Bulgaria.
Meanwhile, back in the UK, the British government is fighting hard to shake every pound they can out of the people. Revenue & Customs (the British IRS) is launching a whopping 30 new task forces, going after everybody from used car outlets to flea market sales booths.
This is so absurd, it seems like a headline from the Onion: “British Treasury Preparing Task Force for Flea Markets”. Unfortunately it’s true.
Look, here’s a simple truth. Governments are so bankrupt and desperate that they’re willing to do absolutely anything to confiscate people’s wealth. They’ll steer away from sound economic policy, completely reject the rule of law, and even go back in time… just to keep the party going a little while longer.
International diversification– selectively diversifying your assets and interests across sound jurisdictions– is a very solid strategy to protect yourself against such runaway government theft.
This includes things like buying property abroad, storing physical gold and silver in a non-bank secure storage facility overseas, and opening a foreign bank account.
If you think that taking such steps (and making the appropriate disclosures) makes you a target, you may be right. But by doing nothing, you’re still going to be a target. Just ask any flea market salesman in the UK.
Financial Times on the British government’s reaction to Barclays-
Bulgarian Finance Minister wooing UK investors-
HMRC creating 30 task forces-
50% tax rate failing to boost revenues-
Cato Institute explains the Laffer Curve
HMRC tax receipt figures, raw data-