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Is the world moving towards more authoritarian tax rules?

Autocratic rule is on the rise throughout the world as regimes are passing authoritarian tax reform policies in the wake of COVID-19 at the expense of the middle- and low-income earners.

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Is the world moving towards more authoritarian tax rules - Envsion Magazine
Photo Credit | Foreign Policy

There are a lot of worries these days about vaccine passports, the de facto ID cards and other authoritarian moves in the press, due to Covid-19. One topic which hasn’t been mentioned as regularly is the move towards more authoritarian tax rules.

This perhaps shouldn’t come as a surprise because we have been moving in this direction for years since the Great Recession of 2008-2009, with public attitudes shifting.

In truth, there has never been a golden age for positive attitudes to wealth creation. Many years ago I can remember watching a documentary about people who emigrated to the tiny city state of Monaco.

In the documentary, there was one British man who wasn’t exactly super rich, even though he was very well-off. The interviewer pointed out to him that he wouldn’t have been any better off in Monaco than the UK.

Why would he go through the hassles of moving to save taxes, if the cost of living wouldn’t make it worth the hassle?

His reply stuck with me as a fellow Brit. He says that in the UK (and frankly many countries), there is an inverse snobbery where being “rich” is almost seen as a dirty word.

Being successful is seen as a bad thing by plenty of people, and the underdog is often supported in sport and many other domains.

This documentary was aired about 14 years ago. After the 2008-2009 financial crisis, Occupy Wall Street, the rise of Bernie Sanders and Jeremy Corbyn and many other events, we are now in a different era.

This will be an era where people blame “the rich”, even though they often secretly want to be rich themselves, complain about Amazon and yet shop on it a few hours later.

It is in this context that it is unsurprising that there have been numerous new taxes, and proposals to further hike them, in the wake of COVID-19.

Argentina bought in a wealth tax which also hit expat Argentinians living overseas more heavily (a de facto expat tax), with politicians in Australia, Canada, the UK and the US proposing similar measures – a classic example of authoritarian tax rules.

Janet Yallen, the current American secretary of the treasury, has also proposed a global minimum corporate tax, which had been on the cards anyway, with the OECD working on it for at least two years.

If it goes ahead, firms that relocate to the UAE, Ireland or any other low-tax jurisdiction, could be forced to “top up” their taxes and pay a “royalty” to their home countries.

What could start as a global minimum corporate tax might lead to a global minimum income, inheritance and other taxes.

The naïve will say it will only affect billionaires and multi-national corporations (MNCs). It is certainly being sold like that – “Apple and Amazon should pay their fair share”.

Yet the federal income tax in the US, which only started just over a hundred years ago, was sold on the basis that it is “only 1% on the 1%”.

I am exaggerating slightly.

The Revenue Act (1913) imposed a rate of 1% on incomes above USD3,000, with a 6% rate on those earning over USD500,000 a year – a huge sum at that time.

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The point is, only about three percentage of the population paid it. Less than 0.1% paid the 6% rate.

Now almost everybody pays and barely two generations after it was bought in, the higher rate of tax in the US peaked at 90% during the Eisenhower years. It might have fallen since then, but it is miles away from being 1%-6%.

Like with the income tax, it will be incredibly easy to gradually move the goalposts for things like wealth and minimum taxes as the years go on. If a global minimum corporate tax only affects trillion-dollar companies in 2021-2022, it could soon affect everybody by 2030.

Many American expat readers might find this interesting because the Foreign Account Tax Compliance Act (FATCA) was originally sold on the basis that it was going after the MNCs who have money overseas.

In reality, it has affected every day, middle-class, American expats who can’t afford expensive lawyers.

The only positive news about this trend is that, eventually, just like the aforementioned 90% tax rate, it probably won’t work.

Politicians and governments will, once again, realize that regulation and restrictions create moral hazards, encourage reckless behaviour and avoidance.

Amazon and the like will hire a few more people to find legal loopholes, and the average person and business will suffer.

The question is, what can the average successful individual do to prepare for these authoritarian tax rules in the meantime?

It is imperative to stay abreast of changes in the world, get advice where needed and review your financial situation.

For some that could mean changing your residency or getting second citizenships. For others, it might mean changing aspects of your investment proposals or restructuring a business, depending on the exact changes in your jurisdiction.

Either way, we are potentially moving into a very different type of world. A world where the United States, the European Union and several other blocks are moving away from previous models of globalization.

I doubt countries like Singapore, the United Arab Emirates and the Republic of Ireland could have developed if these measures were bought in in the 1950s, 1960s or even 1980s.

Smaller, developing, countries in the global south will need to reconsider development models, with individuals and businesses also needing to more carefully consider how to plan for the future.

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