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Friday, 8 May 2009

More on the 50% tax rate: tax equalisation

For the benefit of those who read the previous post and think why should I bother about what somebody makes in the City, consider the following:

The firms operating in the City and many other multinational firms send their key staff overseas, including to London, to give them international experience, so the following applies as much to international pharmaceutical companies, software houses, advertising agencies and the rest of the business world as it does to banks.

Let us assume that a typical executive in one of these firms earns a salary plus perks plus bonus of £150,000, not a huge amount in today's world, but if he/she is to be encouraged to take his family from their comfortable life in Dallas, Rome or Singapore to work for several years on the other side of the world, the firm has to give them an equivalent lifestyle or slightly enhanced. That means paying for rented accommodation in the foreign country, say £4,000 a month for a short term lease, paying for education costs for children to keep them in the same academic system, annual business class flights back home for the family, removal costs and incidental costs and a whole lot more to keep the family sweet. For arguments sake let's call that somewhere around £100,000 of additional costs.

This has been the way these firms have operated for years and they aren't going to change that policy because of some Labour desire to make them pay what Gordon Brown thinks is a fair amount of tax. And therein lies the killer, because the deal with the employee usually runs that the employee is kept whole on an after tax basis. They are kept no worse off than they would have been if they had stayed at home simply because the tax rate is higher at their overseas post. So an employee in Singapore paying 20% tax on his normal gross of £150,000 would keep £120,000 at home. But if he moves to London the deal is that he still gets £120,000 net plus all of his additional costs (which are taxable benefits). So in London he has to be paid (£120,000+£100,000) grossed up (50% tax rate) to £440,000.

On the other hand an employee on the same gross salary moving from London to Singapore would only have to be paid (£150,000*50%+£100,000)/80% = £218,750, a 50.5% saving. As multinationals are generally taxed eventally on their worldwide profits with credits for foreign taxes on profits, the corporate tax rate in each country is largely irrelevant to the decision, but the imediate cash cost to the company is totally relevant.

Go figure. Whenever a multinational decides on an international posting they will see London as an increasingly unattractive destination, and possibly see the UK as a source of highly taxed employees who would jump at the chance of a foreign posting. Until now, the UK was in broadly the same position as many other European countries although London costs were higher than most, but only a fool what transfer their regional headquarters to London under the current arrangements. When the management structure moves elsewhere, so does the support staff and the business handed out to local suppliers.

One might question the validity of the Laffer curve when it comes to local workers and entrepreneurs, but when it comes to budgetting decisions made by dispassionate multinationals, expect them to make the economically rational decision every time.


Demetrius said...

There is a more basic question, is London a good place to be and a good place to do business? My first time in London was in the 1940's, and one was in December 1952, days after the Great Smog began to lift. It may be old age, but in recent years it has become a much less pleasant place to be around. It seems to be getting rougher, dirtier, and more dangerous in some respects. Given that I was doing manual work at time in the 50's this is saying something. The 1980's are long gone, and if we are in for a dose of austerity etc. it could all get ugly. Also, given what is going on, it is becoming a risky place to do business. So where will the mobile money go to?

Anonymous said...

Actually it is better than that because:

1) It is the TOP rate that is 18% at least half that amount will be less.

2) Thats it for tax, no NI, no CGT. Whereas once you factor in employers NI and employees NI it is nearly 70%.

I have to say it was a no brainer before the tax rise.

Alex said...


I am not sure exactly what you are saying here, but by the time an employee has been paid £150k gross they will have paid about half of that in NI and tax. Granted there is the employers 12.8% (going up to 13.3%) as well but it doesn't get you up to 70%. The highest marginal rate including employers NI is about 66% which occurs in the £12,000 band above £100k when personal allowances are withdrawn.