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This summer, a report from consultancy Henley & Partners estimated that the UK was set to lose 3,200 dollar millionaires in 2023. One of the reasons cited was taxes.
It’s not just the UK where the rich are feeling unloved, either. Earlier this year, California introduced a wealth tax proposal. Among other things, this would entail a tax of 1 per cent on household wealth of more than $50mn and 1.5 per cent on wealth over $1bn. The proposed tax would apply to worldwide net worth, with provisions for those who are not resident in the state full-time.
Recent analysis by the US financial information company SmartAsset showed that the two US states that rich young professionals were leaving were high-tax California and New York. Their favourite destinations? Florida and Texas, which have no personal income tax. Norway has also experienced an exodus of billionaires after introducing wealth taxes.
Unsurprisingly, there has been a backlash. This typically involves the rich (and their advocates) saying that, if countries and states raise taxes, they will leave, taking their money (and their valuable tax revenue) with them. This raises an obvious question. Should we care? Or should we call their bluff?
The starting position of the rich, here, is usually that they do pay a lot of tax — way more than the rest of us. This is broadly correct. Writing in 2021, London School of Economics researchers noted: “In one respect, the UK tax system already looks top heavy. The top 1 per cent pay 30 per cent of all income tax revenues.
“In other words, £3 in every £10 that the government receives in income tax is paid by just over 300,000 individuals.”
Case closed, right? Not quite. The researchers also found the amount of tax paid varied significantly by how the remuneration was generated (ie income vs capital gains). About one in four of people earning more than £1mn a year did pay a lot of tax. But one in 10 paid just 11 per cent — the same rate as someone earning £15,000. As the researchers put it, “The rich, it seems, are not all in it together.”
It’s worth noting that studies looking at income tax rates and economic growth tend to find that the effects are pretty negligible — and that many of the highest periods of growth in the developed world were also high tax periods. Indeed, there’s also plenty of research to suggest that lower tax rates just result in those at the top of the scale paying themselves more.
This is part of the story behind runaway executive remuneration (while pay lower down the income scale has stagnated). Here, it is worth remembering, too, that billionaires do not exist in a vacuum. The argument being that billionaires should pay more tax, as they depend on society in all sorts of ways, much as they’d sometimes like to think they don’t.
We should not mistake the loud voices as being entirely representative of the rich, either. Katharina Hecht, a visiting fellow at LSE’s International Inequalities Institute, says: “In my interviews with people with income in the top 1 and top 0.1 per cent in the UK, I found that approximately a third of participants suggested that inequality should be lower, and many were supportive of the idea of higher taxation for people like themselves in order to provide opportunities for others. In particular, the NHS and the education system were highlighted as in need of public funding.”
Finally, we might reasonably ask ourselves whether the threat of leaving is that realistic. In his book, The Myth of Millionaire Tax Flight, the Cornell sociologist Cristobal Young writes, “People almost never move when they are at the advanced career stage — a time when they are most likely to face a millionaire tax.”
When most people are at their earning peak, he explains, they have families and have put down roots in an area. They have business and social contacts and are linked into networks. “Top income earners, in other words, have often accumulated significant human, social and cultural capital where they live.”
Indeed, one of the oft-made comments about people who actually do follow up on their threats and go into tax exile is that they give up an awful lot to save a little of something they already have more than enough of.
So, should we care about rich people’s threats to leave over tax rises? A bit, perhaps, but probably not as much as they think we should.
Rhymer is reading . . .
Feeding Nelson’s Navy by Janet MacDonald. It’s an engrossing account of how you feed 150,000 men who were often at sea for months at end. As well as being an incredible exercise in logistics, what they ate was better than the rotten meat and weevil-ridden biscuits of popular imagination — and the average ration was an astounding 5,000 calories a day.
Follow Rhymer on Twitter @rhymerrigby
This article is part of FT Wealth, a section providing in-depth coverage of philanthropy, entrepreneurs, family offices, as well as alternative and impact investment