Wednesday, July 04, 2012

How would this work, exactly?

There's a common argument that making taxes too high just leads to sneaky rich people squirreling away their capital in tax havens. The argument is, on the face of it, compelling: a huge number of filthy-rich Brits are not domiciled in the UK, meaning that they don't pay income tax to Her Majesty's Customs & Excise. Conversely, the new French president is talking about a 75% income tax on top earners, leading to the British PM saying he, for one, welcomes his new cheese-loving donors. I'll leave you to ponder just how much money a French tycoon is willing to pay just to avoid moving to London.

But does that work with the Estonian tax model? Since corporate profit gets taxed at the point it becomes someone's income, is it really possible to put the money in a bank in Grand Cayman and tell EMTA to go to hell? Yes, an investor gets his dividend in a lump sum and is personally responsible for setting aside the tax until it's due. But let's assume I took all the money and moved it abroad, to a place where the Estonian government can't get their hands on it.

What about next year?

The tax man knows exactly how much tax I owe, because the corporation is submitting its own records. If I am behind, enough for the tax man to really take an interest, surely he just orders the corporation to stop next year's dividend payout, and confiscates it to cover the taxes due.

This could get quite difficult in countries that attempt to tax one chunk of earnings multiple times, such as a tax on a person's net worth, or the notional appreciation of their non-liquid assets. Once somebody's moved their cash offshore - the clean cash, on which all the proper taxes have been paid - and continues growing that capital, either through deposit interest rates or stock market investments via offshore-based funds - it can be very hard to get a clear idea of just how much money they have at any one point. But Estonia only taxes actual income, at the point that it is converted to cash.

Leaving aside the issue of payroll taxes. Property taxes in most of Estonia are minuscule and only pay for the administration of the county clerk's office; this year, mine was too small for them to bother collecting. There is no inheritance tax. Capital gains of some types are charged as income - for example, buying a condo and selling it shortly after for more, if you can't prove that you actually lived there, the price difference is treated as income. I'm not sure how sales of artwork by private individuals are taxed, if at all. There is no car tax or pet tax, if we're getting really ridiculous.

I am genuinely interested. Is capital flight really an issue of loopholes, or simply of shoddy enforcement? I don't seriously believe the richest Estonians are paying their full share of tax, even though that share is the same as the rest of the country. I'm just trying to figure out the hole in my argument.

An investor won't abandon a working, profitable business just to avoid one year's tax. This is borne out by the convincing argument that the US has had tax rates of over 90% in the 20th century, and indeed, nobody's going to say, "if I make money on this deal, I'll have to give a lot of it to the government; so out of spite, I'll leave the deal and make no money at all!"

And to the French captains of industry: Welcome to Estonia! Our income tax is 21%, for everyone. And if we have to, we can learn to cook our snails and frogs.

1 comment:

Finder of Things said...

The important thing is that a transparent flat tax rate works for the vast majority of people. The rich are always going to find ways how to avoid excessive taxation while it's possible to categorize the world into several tiers of development. Today's age of economic and informational freedom will not contriubute well for anyone's high top tier income tax rate ambitons. I see it as a rather gimmicky way of solving popularity issues and nothing truely practical. Well you could call it a loophole or simply a feature of the system that transactions between individuals are generally not taxed in Estonia but I think it's a good feature. Encouraging economic growth is a tricky business and double taxation does not help with reducing bureaucratic overhead. Consequently artwork sales is Estonie are not taxed until it's kept between individuals.


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