Private equity firms show the need for simpler, lower taxes for all

July 30, 2007 3:33 PM

The Taxpayers’ Alliance exists first and foremost to defend the interests and rights of ordinary hardworking taxpayers.  It is ordinary taxpayers who have to foot the mounting bill for a monolithic government bureaucracy wasting money on pointless, feel good projects.  Taxpayers have seen more of their own money swallowed up by the state and seen comparatively very little in return.  Yet it is the voice of those taxpayers who fund the gravy train that seem to count for least within the political process.  It is thus for the pensioner who is unable to pay spiralling council tax bills, the first time buyer unable to get onto the property ladder due to stamp duty, and the low paid worker who faces cripplingly high marginal tax rates and so little incentive to work that the Taxpayers’ Alliance exists to defend.

Private equity executives, whatever else they may be, do not quite fit the description of the ordinary taxpayer struggling to make ends meet.  However, following the barrage of criticism recently unleashed upon them by various left wing groups and politicians, we felt the need to come to their defence.  Most of the concern has focussed on the fact that the majority of the compensation offered to private equity comes from carried-interest, which is taxed as a capital gain rather than income, and so tax rates of 10% or less rather than 40%.   The interim report of the committee of MPs investigating private equity firms considers both this issue and the use of the non-domicile status as a tax loophole, along with the impact of private equity funds on the wider UK economy.

In the age of international capital mobility, firms are able to easily relocate around the world.  So when many other European countries are moving towards a system which treats carried-interest as a capital gain, it seems foolish for us to move in the opposite direction, by creating a tax system that penalises private equity firms and so gives them a clear incentive to make the most of their foot loose status and move abroad.  Private equity firms have produced £55 billion of investment over the last five years, whilst they contributed £26 billion of tax revenue to the exchequer last year.  That would be quite some loss to the British economy.

There is a broader point here.  One reason the rich do not need the Taxpayers’ Alliance to defend their interests is that they can afford an army of accountants and lawyers to exploit our outrageously complicated tax code to find its numerous loopholes.  It is these loop-holes that allow them to pay much lower marginal tax rates than many of the poorest workers.

A flatter, simpler tax would remove many of the loopholes that allow the richest to end up paying the lowest tax rates.  It is an empirical fact that tax cuts and simplifications lead to the richest providing a greater percentage of total government revenue.  Tax simplification, not clobbering a vital component of the British economy to appease the trade unions, should be the government’s economic priority.  To his credit, Alistair Darling said much the same thing when he asked to be judged on his success in simplifying taxation.  However, as the FT so brilliantly puts it, the government’s claim that it will continue to simplify our taxes is rather like “the Mafia [pledging] to continue deepening its commitment to the rule of law.”

A fact that seems to have escaped everyone’s attention, though, is that rich people paying lower marginal rates than poor people is no argument for raising the rate on the rich, it is an argument for cutting it on the poor.

The Taxpayers’ Alliance exists first and foremost to defend the interests and rights of ordinary hardworking taxpayers.  It is ordinary taxpayers who have to foot the mounting bill for a monolithic government bureaucracy wasting money on pointless, feel good projects.  Taxpayers have seen more of their own money swallowed up by the state and seen comparatively very little in return.  Yet it is the voice of those taxpayers who fund the gravy train that seem to count for least within the political process.  It is thus for the pensioner who is unable to pay spiralling council tax bills, the first time buyer unable to get onto the property ladder due to stamp duty, and the low paid worker who faces cripplingly high marginal tax rates and so little incentive to work that the Taxpayers’ Alliance exists to defend.

Private equity executives, whatever else they may be, do not quite fit the description of the ordinary taxpayer struggling to make ends meet.  However, following the barrage of criticism recently unleashed upon them by various left wing groups and politicians, we felt the need to come to their defence.  Most of the concern has focussed on the fact that the majority of the compensation offered to private equity comes from carried-interest, which is taxed as a capital gain rather than income, and so tax rates of 10% or less rather than 40%.   The interim report of the committee of MPs investigating private equity firms considers both this issue and the use of the non-domicile status as a tax loophole, along with the impact of private equity funds on the wider UK economy.

In the age of international capital mobility, firms are able to easily relocate around the world.  So when many other European countries are moving towards a system which treats carried-interest as a capital gain, it seems foolish for us to move in the opposite direction, by creating a tax system that penalises private equity firms and so gives them a clear incentive to make the most of their foot loose status and move abroad.  Private equity firms have produced £55 billion of investment over the last five years, whilst they contributed £26 billion of tax revenue to the exchequer last year.  That would be quite some loss to the British economy.

There is a broader point here.  One reason the rich do not need the Taxpayers’ Alliance to defend their interests is that they can afford an army of accountants and lawyers to exploit our outrageously complicated tax code to find its numerous loopholes.  It is these loop-holes that allow them to pay much lower marginal tax rates than many of the poorest workers.

A flatter, simpler tax would remove many of the loopholes that allow the richest to end up paying the lowest tax rates.  It is an empirical fact that tax cuts and simplifications lead to the richest providing a greater percentage of total government revenue.  Tax simplification, not clobbering a vital component of the British economy to appease the trade unions, should be the government’s economic priority.  To his credit, Alistair Darling said much the same thing when he asked to be judged on his success in simplifying taxation.  However, as the FT so brilliantly puts it, the government’s claim that it will continue to simplify our taxes is rather like “the Mafia [pledging] to continue deepening its commitment to the rule of law.”

A fact that seems to have escaped everyone’s attention, though, is that rich people paying lower marginal rates than poor people is no argument for raising the rate on the rich, it is an argument for cutting it on the poor.

Latest Blogs:

TaxPayers' Alliance Icon

The sugar tax and the public finances

6:00 AM 05, Dec 2016 Harry Fairhead

TaxPayers' Alliance Icon

Working for the taxman

6:00 AM 26, Nov 2016 Harry Fairhead

TaxPayers' Alliance Icon

Further thoughts on the Autumn Statement

4:56 PM 24, Nov 2016 James Price

TaxPayers' Alliance Icon

Have we had too much austerity?

10:57 AM 23, Nov 2016 Alex Wild