Soak The Rich Schemes Failing
As the debate about soaking the rich — sorry, that's “ending the Bush tax cuts for the wealthiest” — intensifies, Italy is providing a particularly picturesque example of economist Arthur Laffer's principles.
“As Italy swelters in temperatures of up to 40 degrees Celsius, the country's marinas should be packed with bronzed sailors in expensive deck shoes tending to their gleaming yachts,” the (London) Telegraph reported last week. “But Italian boat owners are feeling the heat not just from the sun this summer. Thousands are weighing anchor and fleeing with their gin palaces to quiet corners of the Mediterranean to escape a tax evasion crackdown — part of efforts by the government of Mario Monti, the prime minister, to tackle Italy's 1.9 trillion euro public debt.”
Laffer's famous “curve” shows that when taxes are raised above a certain level (it varies where that is, exactly), revenues actually decline. That's because money (capital) is mobile. Especially when it's so easily unmoored from the dock.
“The unwelcome attention has led many yacht owners to flee Italy's marinas for friendlier foreign ports, from Corsica and the Cote d'Azur in the west to Croatia, Slovenia, Montenegro and Greece in the east,” the Telegraph explains. “Others are heading southwards, to Malta and Tunisia — where they can access their boats on low-cost budget flights from Italy for a fraction of the tax bill they might otherwise face. Around 30,000 yachts have fled Italy this year, costing 200 million euro in lost revenue from mooring fees, port services and fuel sales, according to Assomarinas, the Italian Association of Marinas.”
This is perhaps the purest example of the mobility of capital. And there are different kinds of mobility; assets can be moved out of a nation, as is happening in Italy, or they can be moved into tax shelters. The end result is the same — higher tax rates, lower tax receipts.
For its part, Italy has responded by — get this — assessing even more taxes on nice boats.
“A steep new tax of up to 700 euro per day on the largest yachts mooring in Italian ports, introduced by the Monti government in December, was watered down in March to exclude foreign-owned boats,” the Telegraph notes. “But it has further fuelled the exodus of Italian boats abroad. To avoid the ignominy of an EU bailout, Italy must crack down on tax evasion and the black economy, worth 275 billion euro a year, or 17.5 per cent of GDP. But yacht owners have a unique advantage over shops, restaurants and other businesses: they can simply sail their assets away on the open sea.”
This isn't news to the Telegraph itself, however. That newspaper reported last year that Britain's own soak-the-rich scheme was yielding similar results.
“The amount of income tax paid fell sharply last month in the first formal indication that the new 50 (percent) higher rate is not raising the expected amount of revenue,” it wrote in February. “A Treasury source said the relatively poor revenues from self-assessment returns were partly down to highly-paid individuals arranging their affairs to avoid paying the 50 (percent) rate.”
That's because Brits are paying attention
One London tax accountant was quoted as saying, “My guess is that because the 50 percent rate was flagged up in advance, many taxpayers, particularly those with their own businesses, decided to extract dividends ahead of the change. It highlights the fact that high tax rates don't always deliver high tax revenues.”
President Barack Obama's call to end the Bush tax cuts for the “wealthy” makes for good campaign speeches. But reality, and Arthur Laffer's curve, will soon be along to scuttle the idea.