The Week Explained: Taxing the rich

PUBLISHED : Monday, 14 January, 2013, 12:00am
UPDATED : Monday, 14 January, 2013, 7:37am

Have you been worrying over how much the rich have to pay in taxes? Did you experience a warm glow of relief on learning that the French actor Gerard Depardieu has escaped his tax liabilities as a French citizen by acquiring a shiny new Russian passport? No, I thought not.

Yet the debate about how much the rich should pay has dominated the proceedings of American policymakers in recent weeks and looms large in the political agenda of a number of countries.

In Britain there is uproar over how big multinational corporations, notably Starbucks and Amazon, managed to avoid paying British corporation taxes due to the structure of their billing and licensing agreements.

This row flared again when Sir Martin Sorrell, the chief executive of the global advertising conglomerate WPP, said the amount multinational companies need to pay in taxes was "a question of judgment".

Although statements of this kind are provocative, few issues excite the kind of passion aroused by taxation. On one side are those who see taxation as a means of redistributing wealth and the social responsibility of the better off to contribute more to society. In contrast are those who say taxes lead to big government and an erosion of personal freedom. Moreover, a high tax regime provides a disincentive to enterprise.

While this debate is under way it is hard to find uncontested evidence for the view that the rich pay proportionately less of their income in taxes than ordinary citizens.

This is particularly the case in America which has a fiendishly complicated tax regime, compounded by the imposition of both federal and local taxes. The advocates of less tax for the rich have come up with some impressive charts showing how in terms of absolute income (that is minus such things as charity donations and other ways of reducing the top-line income figure) the rich pay a higher percentage of tax than anyone else.

Critics dismiss this data, pointing out that actual income is what counts and that the "defend the rich" camp tend to focus on federal taxation, whereas the real source of inequality is derived from including both state and federal taxes, producing a picture that shows the highest tax burden falling on the so called squeezed middle class. Moreover, rich people get most of their money from dividends and capital gains, usually taxed at a lower rate than payroll income.

In Hong Kong, of course, there is no capital gains or dividends tax at all, which is why those who own companies take most of their remuneration from dividend payments. Thus local rich people pay a far smaller proportion of their income to the government than the middle class. The simplicity and modesty of the local taxation system makes it more transparent. The highest level of income tax is just 17 per cent, which is very low by global standards but even this amount seems too demanding for practically every well off person in Hong Kong.

At this point the defend-the-rich camp will point out that, while dividends are not taxable, corporate taxes are a percentage point higher than income tax rates. Yet the scope for minimising corporate tax liability is considerably greater than that for personal tax liability even though dividends are "above the line" for corporate tax liability. At the end of the day the system ensures that the rich pay a far smaller proportion of their real income in taxes than middle class people, who have no company to pay them dividends.

Ironically, this means that the highest taxpayers tend to be people like the civil servants who administer the tax regime.

No one likes to pay taxes but there is such a thing as obligation to society. In the heat of the tax debate this basic concept seems to get lost. The incentive to fulfil this obligation is more acceptable in places where citizens have better control over their governments.