Brian Monteith: Let’s not take French leave of our tax system

Nick Clegg made a fool of himself last week. That might not seem an unusual incident when coalition ministers prefer fighting, briefing and leaking against each other rather than exposing the absence of any credible alternatives coming from the opposition, but for the Deputy Prime Minister to fly a kite about the need for a new tax policy and have it shot down so quickly by the Chancellor told us how shambolic the coalition has become.

Clegg’s idea – to introduce a temporary tax on the wealthy in the name of “fairness” – was poorly thought through and had all the hallmarks of being rushed out in advance of the Liberal Democrat conference to try and take the heat off the hapless party leader. It didn’t work. Within days Lord Oakeshott, Lib Dem grandee and cheeky monkey to Vince Cable’s grinding organ, was saying yet again that a new leader might be needed.

What was especially odd was that Clegg did not open his eyes to what is happening in London and Paris, or call upon his experience as a Financial Times award-winning writer. His time in European politics as an MEP serving in Brussels and Strasbourg and his command of five languages including French might also have helped. For all the evidence he needed that simply taxing the wealthy more would not deliver the benefits he was suggesting was staring him in the face.

Some 70 per cent of French people living and working in Britain reside in London. It is very easy to think, what with all those stories of British pensioners retiring to France and the rush to buy second homes there following the opening of the Channel Tunnel, that there must be more Brits in France than French in Britain, but that is wrong.

The official statistics record about 150,000 British citizens residing in France, a figure that is dwarfed by the estimated 300,000-400,000 French living and working in London alone – leading many to call it France’s sixth biggest city. The “working” aspect is crucial, for while the majority of British people in France will be 40-plus, often without the need to work full time, the typical French émigré is under 40 and working in a good job and commanding a good salary. The French contribution to British economic growth is therefore considerable.

Such is the scale of the French community that there are not just recognisable French quarters, such as areas of South Kensington in London, but there are many schools and nurseries as well as a French state school, the Lycée Français. For the last national assembly elections a constituency was created for Britain, together with the far smaller number of French ex-pats in Scandinavia.

Indeed, the attraction of Britain for talented French people in IT, business and the arts, but especially in finance, has long been recognised in Paris where their loss is most keenly felt. President Sarkozy was attempting to make the financial incentives for entrepreneurs, bankers and financiers to stay at home more attractive but, like so many of his proposed reforms, his wish remained unfulfilled.

Now President Hollande, who was elected on a socialist platform of costly changes to the public sector such as reducing the pensionable age and employing 50,000 more teachers, aims to pay for his promises by taxing the wealthy more through a 75 per cent top rate of tax.

For a lesson on what then happens when you propose this kind of reform, Clegg should have simply asked around, for the talk in Paris is about how French banks such as Societe Generale are looking to relocate their client-facing operations, worth some 12,000 jobs, to London, leaving their back-offices in Paris. How’s that for helping economic growth? – Britain has avoided the type of policy France voted for and Clegg would have us adopt.

And it is not as if high earners are not already taxed highly in Britain. When it comes to the share of the income tax burden it is difficult to comprehend how Clegg believes that the UK system is skewed unfairly in favour of the rich when the top 1 per cent of earners contribute 24.2 per cent of income tax revenues and the top 10 per cent contribute 55.3 per cent. The bottom half of earners contribute less than 11 percent of all income tax – while the top half contribute 89.2 per cent.

As well as illustrating the degree to which the wealthy already make a huge contribution to public services in Britain, these figures also illustrate how easy it is for, say, 60 per cent of the lowest earners to vote for governments who, through the power of law, can force the remaining 40 per cent to pay for their benefits, or a lower share of taxes. This tyranny of the majority has, fortunately, a corrective force and it is the combination of freedom of movement and tax competition between states.

Tax competition is a good thing, for it puts a brake on governments believing they can just coerce more money out of people in response to the dictatorship of the mob majority.

Last year, a study by KPMG showed that thanks to the supposedly temporary 50p top rate of British income tax introduced at the tail end of the Labour government the UK had climbed to the unenviable position of having the fourth-highest top rate of tax amongst the 86 leading economies of the world – with only Denmark, the Netherlands and Sweden above us.

Thankfully, there are many factors that help people decide where they wish to stay and work. France has a lower top rate but has higher taxes on assets, making it more expensive to be wealthy, while London can offer better career opportunities, better salaries, and greater social mobility. All go into the mix and contribute to French graduates and young professionals looking towards London and the rest of Britain.

Taxing these people more would simply send them home, with their economic activity going too.

How odd it would be if George Osborne were to listen to Clegg and cause the legions of French émigrés that add so much to the success of Britain’s financial sector to think they would be better off in Paris after all. 

• Brian Monteith is policy director of ThinkScotland.org