9 August 2018

Jim Ratcliffe’s move to Monaco and the limits of taxation


Sir Jim Ratcliffe is moving to Monaco. Presumably it’s the principality’s tax regime, not its wide open spaces, that appeals to Britain’s richest businessman.

Ratcliffe is worth £21 billion as a result of having founded Ineos in 1998 — not a bad sum for a couple of decades’ work. A great many people, including those in charge of the Labour party, think that a bigger chunk of Ratcliffe’s fortune should have gone to the state.

But that ambition runs into the brick wall of how taxation really works — something economists understand but all too many politicians do not. There’s that pesky Laffer Curve for example, according to which tax revenue falls when the rate of taxation exceeds a certain level. Our current best estimate is that peak revenue collection is at about a 54 per cent tax on income. Note that we are not talking about income tax but all taxes upon income. When we include NI we’re at about that now.

This is in a system with allowances – being able to move out of the taxing jurisdiction is an allowance of course. That’s also something we cannot stop while we are members of the European Union – nor EFTA or the EEA. Freedom of movement of people means just that.

We also know that people take advantage of that movement to change the tax they owe. The taxes that apply to footballers in Spain prove that.

We might also look at that Laffer effect upon inheritance tax, for there is a Laffer curve for every tax. And there is also one for the general level of taxation across the economy.

Sir Jim might be moving because of the fact that the inheritance tax due on his fortune, eventually and a long time a’comin’ hopefully, could be as much as $8.4 billion. That is more than the entire annual inheritance tax take of £5.2 billion. It’s therefore possible to argue that our lust for the money of the dead is losing us cash if just this one man moves out of the country because of it.

We could also look purely at business taxation. Kimberley Clausing, famously – well, famously for this area of economics – showed that local tax rates make no difference to investment decisions. I once asked her whether that was because the multinationals she was studying were already using offshore to dodge those taxes, meaning local rules didn’t change incentives. I was surprised to get an answer of ‘maybe’. We now know more.

According to our standard analysis, if you tax investment more then you’ll get less of it. Use of tax havens means the effect is masked as the taxes don’t bite. When the laws change to make it harder to use those havens, the expected effects appear again. In other words, tax havens mean that the potentially disastrous effects of the over-taxation of business and investment don’t appear. If we closed them all down then they’d be back.

The standard call from the left about taxation is that the rich should pay more. Which they do, but they mean even more. But that demand runs into the reality that there’s a rate of taxation which reduces, not increases, the amount collected.

People really can just up sticks and leave our tax system. We’re not allowed, under the rules we’ve signed up to, to stop them. And all the evidence suggests that people really do move because of tax. We’ve even got a pretty good idea of where the peak tax rate is.

All of which means that there’s no more money to be had out of the rich. If we want government to be doing more then we’ve also got to have it doing less in some other field. Or we’ve got to be taxing ourselves, not them over there, to pay for it all.

Taxing ourselves isn’t popular, taxing the rich is already played out as a tactic, and removing tax havens will just show us the costs of the system we’ve already got.

In other words, the size of government is already at its effective limit and we’ve therefore got to have a difficult conversations about which bits of it we could do without if we want it to do anything new.

Tim Worstall works at the Adam Smith Institute and Continental Telegraph.