The British budget last Wednesday did very little to rectify that country’s yawning fiscal deficit, but what little it did was almost entirely at the expense of the country’s high-income earners, those making over 150,000 pounds (US$210,000). The fascinating question is: if British governments return to their pre-1979 high-tax ways, as seems likely, what will happen to London’s financial services business?
Not content with raising the top marginal income tax rate to 45% from 40% last November, Chancellor of the Exchequer Alistair Darling raised it again to 50%. Two tax increases in one year will certainly start to convince affluent Brits that this has become a habit, as it was with previous Labor governments. Indeed, yawning future budget deficits, and the accompanying financing difficulties, are likely to lead to further such increases. Now the European Union wants to impose a Europe-wide statutory limit on bankers’ bonuses.
The Europeans (and this includes the Brits) are taking a cue from Rahm Emanuel and using this crisis to both revert to higher tax regimes and to eliminate tax shelters. Their idea is that people will just sit around and allow their incomes to be taken away by the Taxman.
But this is not the case, as Martin Hutchinson points out:
Since the destruction of almost all the historic British financial institutions in 1986-2000, the picture is very different. A high proportion of the participants in the London market are foreigners, and even British participants are much more securely members of the international moneyed elite than of the decayed British aristocracy or impoverished middle class. The significant London financial institutions are almost all headquartered outside Britain, and their London staff have caused the head offices endless cost and risk over the last few years by their careless attitude to the parent institution’s risks and insatiable appetite for their own rewards.
Potential clients are themselves global, with corporations manufacturing worldwide and run by rootless MBA management, while the wealthy are almost entirely from non-UK cultures, possibly effectively without any domicile at all if their home country has been taken over by crooks, thugs or Marxists. In any international business, London is no longer without serious competition; for one thing, most owners of London financial houses have taken good care to install equivalent capabilities in their home country headquarters.
Although it will take more abuse to achieve this result in the U.S., it certainly can be done. And will almost have to be, given the a) high tax rates necessary to service the enormous debt our government is running up and b) the anti-growth policies (such as cap and trade) which will make repayment of this debt even harder. When this transpires, there will be much movement of the world’s financial system.