Paris, 14 October 2013
The tax revolt is gathering strength and becoming a global phenomenon. More than 400,000 US Federal Government civilian workers have been furloughed. While the European media tend to dismiss this as a minor mishap – the result of arm-twisting by reckless hard-liners in Congress – the plain truth is that US public opinion shows rising support for tighter control over federal spending.
Besides, there’s nothing surprising about the growing demand for fiscal stringency. Given that purchasing power in developed economies has clearly declined over the past five years, there is virtually no tolerance for measures that add to the existing tax burden. So the idea of having high earners foot most of the mounting tax bill looks almost irresistible to our rulers. This additional tax bite is not only politically acceptable to the many; we are also told it will do very little harm to economic activity – since better-off households are assumed to have more than enough money to keep on spending.
Big mistake. This overlooks the extent to which people are mobile and entrepreneurs drive economic progress. Texas, a state that has no income tax, enjoyed population growth of 21% over the last ten years, whereas the US population as a whole grew by less than 10% over that decade. Likewise, though the jury is still out on the overall impact of the major tax hike under way in France – aside from increasing disillusionment over VAT collection – entrepreneurs and recent graduates are already leaving in droves to settle in other, more hospitable parts of Europe. Against this backdrop, the legitimate fight against tax havens is creating a largely unrecognized perverse effect. Their elimination is encouraging holders of undeclared accounts to go into exile, whereas in the past they would have been more inclined to bite the bullet and pay higher taxes.
What are the consequences for money management? In an open and competitive world, governments actually enjoy very little leeway in tax matters. Pair this constraint with the absolute need to shrink public deficits and they are left with only token power to stimulate the economy – ultimately meaning that mature countries will be stuck in a sluggish growth trap. While free money won’t be available forever, interest rates can be expected to remain low for some time to come. The markets will continue to react favourably to the halting recovery in Europe, with stocks offering greater visibility likely to get more expensive. And all the while, the growth differential between the emerging and developed worlds will continue to widen.