When I became a lawyer almost 30 years ago and started to deal with High Net Worth clients, I quickly discovered that those targeted by “Tax the Rich” policies don’t just meekly await their fate. Just the opposite – they anticipate, prepare and react prior to the implementation of any new legislation. Sadly, this fact-of-life continues to be ignored by politicians and their influential advisors.
Case in point. This past week world famous economist and author Thomas Piketty said “Billionaires are harmful to society and would be effectively abolished under his tax plan”. Piketty’s 2013 bestseller “Capital in the 21st Century,” is THE bible for tax-the-rich politicians such as Senator Elizabeth Warren…in fact Piketty’s protégé Gabriel Zucman is credited by Warren as being the author of her proposed wealth tax.
Not surprisingly, as US election season approaches Piketty is now back in the news because he has just published a new book “Capital and Ideology”, the English version of which is scheduled to arrive in March 2020 just four months before the Democratic National Convention. He may not like billionaires, but he loves marketing!
Unsurprisingly Piketty anticipated and dismissed a possible flaw in his proposals – that billionaires would simply move out of any taxing jurisdiction which attempted to impose his wealth-crushing new taxes. His proposed solution? First, implement significant Exit Taxes to strip the wealth of those who dare to try to escape. Second, establish an International Parliament that would implement and enforce global tax standards. This would discourage the wealthy from even considering escape because there would be no other country which would offer them a better tax deal.
I will leave it to others to eviscerate Piketty’s thesis as to whether “Billionaires” are helpful or hurtful and how they might possibly liquidate sufficient illiquid assets to pay these existing taxes when the potential purchasers are concurrently busy liquidating their assets to pay their own taxes. Rather, I will focus on exposing the inherent magical thinking Piketty exhibits with his Exit Tax and Global Tax Standards solutions.
First, HNW and UHNW families around the world – and their professional advisors – are constantly and closely watching “Tax the Rich” proposals being put forth by current and potential future political leaders. Increasingly they are preparing Back-up Plans for themselves, their families and their businesses which will allow them to quickly react and leave their taxing jurisdiction, should the likelihood that such confiscatory policies being implemented became imminent. The wealthy view such Back-up Plans as the equivalent of living in a fire danger zone and having house insurance and an SUV gassed up with packed bags inside. It is not that they want or are even relatively sure that a fire will hit. It is just that they know that if it does hit it will be financially devastating…so they want to be ready to leave at the first whiff of smoke.
The reality is that the wealthy will leave en masse BEFORE a confiscatory Exit Tax such as that proposed by Senator Warren could be applied to them. This means there will be no grand stripping of assets from the departing wealthy. It also means that the jurisdiction which implements this foolishness will permanently lose substantial future tax revenues from the exact group that props up their current tax revenue model.
Piketty’s concept of an international parliament to impose and implement global tax standards is even more preposterous. In the real world the concept of the Prisoner’s Dilemma ensures that Tax Competition exists between countries. Vigorous tax competition continues to exist not just between major developed countries and small “Tax Haven” countries but also with their G20 counterparts. For a recent example, one need only look at the failed effort to implement a Financial Transaction Tax (“FTT”) in Europe. If the Prisoner’s Dilemma rendered the FTT dead on arrival between even the 28 members of the EU, what are the chances that a “Global Tax Regime” will ever get beyond the musings of a French academic and his devotees?
In short, it is important to remember that politicians in non-French countries do not get into and stay in office by passing policies which will hurt their voters but support the fantasies of some French academic.
While reading about Piketty’s latest proposals I am reminded of an old story I was told by an engineer friend of my parents:
“An Economist and an Engineer are trapped on a deserted island with just a tin of baked beans. The Engineer spends an hour contemplating the angle at which he would need to hit the tin on a rock in order to pop off the lid. Finally, the Economist smugly pushes aside the Engineer and grabs the tin out of his hand while boldly announcing that he has the perfect solution to their dilemma. The Engineer’s elation at finally being able to eat evaporates when the Economist begins with…..”Now assume we have a can opener”
Some commentators speculate that Piketty is trying to inspire progressives to implement bold policies such as a wealth tax or taxing capital gains at ordinary income rates. That may be so, but I can attest from thirty years on the front lines that if implemented, there will be unintended but predictable devastating consequences. Politicians who campaign on targeting the rich will simply motivate those Golden Geese to go through the relatively small effort and expense of securing a Back-Up Plan to protect them in case such “inspired” politicians get elected.
In “Planning for the Worst and Hoping for the Best”, the wealthy are already anticipating and preparing for such a possibility. So if such proposals actually see the light of a legislative day in your country, then expect a massive ….and well organized…departure.