"If we tax the rich they will all leave the country."

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spaceman spiff
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May 6 2012 15:30
"If we tax the rich they will all leave the country."

Hi all,

I was discussing the French elections yesterday with some friends. I am not French and don't live in France, and my interest in their elections is mostly just academic and an interest in the leftist parties.

What surprised me was the attitude of most of the people there. There was a lot of talk about "crazy Hollande" who would bring disaster on France and Europe. How his policies of taxing the rich would be great for England, because all the rich would move there. How the GDP of France would plummet once the rich had all left the country.

What is the truth of this?

I know that Roosevelt taxed the rich during the Great Depression, and even proposed a 100% tax rate above a certain figure, only to be bargained down to a tax rate in the 90s. To that, my opponents responded that it was far more difficult back then to move abroad. Now with the EU the rich can flee.

I also remember an interview with Melenchon where he said that the rich would be taxed regardless of where they lived, so it wasn't a problem. He didn't mention any specifics on how that would be done.

So what are the theoretical repercussions of taxing the rich and having many of them "move abroad"? Would it really result in "capital flight" and lower investment back home? Is it as simple as that?

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Kronstadt_Kid
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May 6 2012 17:50

As I said in another thread, this has happened before in France - http://en.wikipedia.org/wiki/Cartel_des_Gauches

Although lots of money is stored in tax havens anyway.

It is also possible to over state the risk of capital flight as people do like living in a country where they speak their language.

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Chilli Sauce
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May 6 2012 21:37

I get this argument from families and the truth is that capital flight is a real threat (albeit an exaggerated one). I use the discussion as an opportunity to let them prove that capitalism is a system where the vast majority of society is held at ransom by a small, powerful group at the top.

spaceman spiff
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May 6 2012 21:50

Chilli, I also brought up the fact that if it's true that a few hundred millionaires can cripple an economy by leaving, then that's proof of a faulty system. However, I wonder what Melenchon meant when he said they would be taxed anyway, and was hoping to get details of how this could be done.

Harrison
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May 6 2012 22:55

I think capital flight shows good reason why an extreme social democratic program (ie. the AWL's "workers government", CPB's "people's charter" etc) won't work unless a degree of effectively stalinist authoritarianism is introduced to prevent capital flight. (Allende in Chile failed to introduce enough authoritarianism, as a consequence the Chilean economy completely fucked up)

Nations with valuable natural resources can circumvent it to an extent, ie. venezuela, because they generally just do more social redistribution of wealth produced from the sale of those resources, (still, other sectors of the economy tend to stagnate, unless the state constantly pumps a portion of the wealth produced by nationalised industries extracting natural resources, into the other sectors)

Personally, i find that rather than trying to disprove that taxing the rich will invoke capital flight, its more fun to be disingenuous and agree with and usurp the right's hyperbolic arguments that overstate the danger of capital flight, and to draw something like the conclusion 'if we are to establish social justice, we need communism'.

You can argue that if you want to establish social justice and want to avoid
a) Capital flight and economic bankruptcy (leading to a drastic decline in living standards)
b) Establishing effectively stalinist mutations of democracy, and restrictions on personal freedom (in order to prevent capital flight)

... you can say that the only solution is workers self-management and communism. I find its a neat way to convince someone who is 'anti-neo-liberal' or fetishises old social democracy of the need for libertarian communism.

bastarx
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May 7 2012 00:25

This article is somewhat relevant IIRC: http://libcom.org/library/capital-moves-john-holloway

thereisnofirmament
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May 7 2012 22:27

if we tax the rich - they'll leave! Good! We don't fucking need them!

Ok ok ok - we're talking about a capitalistic economic system, but even then i don't think that capital flight (like atlas shrugged - the temper tantrum of the rich at the prospect of having to pay taxes) is even a problem. Capitalist ideologues go on and on and on about creative destruction, perhaps there's room for creative destruction with capital flight. If there is a good or service that is in demand by a population, they have money to pay for this good or service, then someone will come along to make money to pay for such a good or service. Regardless of the taxes. As Warren Buffet said, he never knew of anyone who wouldn't invest in the economy simply because of a slight increase in taxes. The income tax for the top 1% in the 1950's was at 90% and that was considered to be the golden age of capitalism. Why? Because if there is demand, someone will try to fulfill that demand. To make money (which is what capitalism's about I thought). And if taxes were indeed higher - but used to pay for social welfare programs that would help the poor, then the poor would have even more demand, the money would stimulate and it would circulate. This is basic keynes.

Really this talk about capital flight is all fear mongering - a way for the rich to stop paying taxes and get rid of social welfare institutions the people need - and also trying to get people to think that we even need the rich more than they need us - when in fact it is the reverse. A randroid once asked me how would jobs be provided in a socialist economic system without private property in the means of production? The answer is simple: if there's demand, if there's resources, and there are people who are wanting to work, voi la! You got jobs! It's really not more complicated than that: capitalists are middlemen, standing between us and the resources we need to survive, who don't do anything besides highway robbery. That is all.

summeroflove85
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May 7 2012 23:49

One can prevent being negatively affected by Capital Flight. The UK had fairly rebut controls on the movement of Capital in and out of the country in the immediate postwar period. Predictably Thatcher abandoned Capital controls in the 1980s as part of her free-market-reforms. The UK Labour Party in the 1980s was still keen on Capital Controls as a way of underpinning its economic program:

Quote:
exchange controls - maintained by successive British governments since 1939; and so foolishly scrapped by the Tories in 1979 - will be re-introduced. This will help to counter currency speculation and to make available - to industry and government in Britain - the large capital resources that are now flowing overseas.

[1983 Manifesto)

One does not have to be a Stalinist state to have affective Capital Controls. Iceland introduced them (as far as I know successfully) after the banking collapse of 2008. Although there is a body of opinion which against capital controls http://tppwatch.org/news-video-audio/media/economists-condemn-restriction-of-capital-controls/ (guess why!) members of the IMF are not prohibited from using Capital Control regimes (including exchange controls).

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jonglier
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May 8 2012 12:37
Harrison wrote:
(Allende in Chile failed to introduce enough authoritarianism, as a consequence the Chilean economy completely fucked up)

Not entirely relevant to the fundamentals of this discussion, but -- while what you say is probably true to an extent, you should be careful about making this claim. The intervention of the USA through the CIA and other agencies was highly significant in the Chilean economy "fucking up". For example paying the truck drivers -- very important to Chile's economy -- to go on strike. And while there may have been some capital flight due to a lack of authoritarianism from Allende, the Chilean economy, one could argue, was already "fucked up" before Allende took power given that the profits from the primary resource of the country -- copper -- were being channelled into US corporations (since they owned Chile's copper). So even with capital flight out of the country (which you allege) Allende's nationalisation of the copper industry had a hugely beneficial impact of the economy. There is a reason why the USA took such a strong -- albeit underhanded -- interest in intervening in Allende's Chile and that is precisely that the economy was not on the path to self-destruction.

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Steven.
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May 8 2012 21:47

Some people have made some good points here.

I just thought I should point out that "capital flight" is much more significant when it comes to taxes and costs for business, as opposed to income taxes on rich individuals which are much less important in the big scheme of things.

For example, we have had mass manufacturing capital flight over the past 30 years chasing cheaper labour costs from the UK and US to South America, South Korea and now China and India. (Although this is part of a much slower process than the kind of rapid capital flight being mentioned here, but still)

Harrison
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May 9 2012 03:49
jonglier wrote:
Harrison wrote:
(Allende in Chile failed to introduce enough authoritarianism, as a consequence the Chilean economy completely fucked up)

Not entirely relevant to the fundamentals of this discussion, but -- while what you say is probably true to an extent, you should be careful about making this claim. The intervention of the USA through the CIA and other agencies was highly significant in the Chilean economy "fucking up". For example paying the truck drivers -- very important to Chile's economy -- to go on strike. And while there may have been some capital flight due to a lack of authoritarianism from Allende, the Chilean economy, one could argue, was already "fucked up" before Allende took power given that the profits from the primary resource of the country -- copper -- were being channelled into US corporations (since they owned Chile's copper). So even with capital flight out of the country (which you allege) Allende's nationalisation of the copper industry had a hugely beneficial impact of the economy. There is a reason why the USA took such a strong -- albeit underhanded -- interest in intervening in Allende's Chile and that is precisely that the economy was not on the path to self-destruction.

thanks, appreciate the response, that point must have come across a bit crude.

my understanding of Allende & Chile is derived from this text, which i forget generally downplays the importance of US intervention and predominantly blames the Chilean state's policies in order to promote the idea that a greater roll out of cybernetic management technology (which Allende did partially implement) would have solved the Chile's economic crisis.

spaceman spiff
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May 19 2012 09:38

Hello all,

I've done some research on this matter and asked the question elsewhere.

I found a few online boards discussing it.
Apparently this book is really seminal:
http://www.amazon.com/Atlas-Shrug-Economic-Consequences-Taxing/dp/0674001540

But I think it may be above my skill level at the moment. Anyway then there is this article by Christina Romer, professor of economics at UC Berkeley and chairwoman of Obama's council of economic advisors.

Finally, there is this paper by Peter Diamond at MIT and Emmanuel Saez at UC Berkeley where they apparently show evidence in favour of taxing the wealthy.

The way I've understood it, the way to minimize capital flight from higher taxes is to apply a worldwide tax system, or territorial taxing system. The US already has this. So basically if I invest some money in Ireland, and want to repatriate my earnings to the US, I would pay the 12% corporate tax rate or whatever Ireland has, and then 23% to the US, so that the total matches the tax rate in the US.

So according to the evidence, loss of investment is unlikely, and investment elsewhere can be taxed. Even if some rich Frenchman becomes a British citizen and renounces his French citizenship, he would still have to pay taxes to France for his investments there. Plus let's face it, why would any Frenchman want to be English anyway? Hehe I kid

So the moral of the story is that if you were serious about it, you could close the loopholes that the wealthy use to avoid paying taxes.

Diamond and Saez say this:

"First, very high earners should be subject to high and rising marginal tax rates on earnings.

Second, low income families should be encouraged to work with earnings subsidies, which should then be phased-out with high implicit marginal tax rates.
Third, capital income should be taxed."

I need to do more research to understand how stock options play into all this, because another one of Melenchon's policies is to ban the use of stock options for ceo remuneration. I suspect it simply has to do with propagating a short-term mentality.

So for the 4-6 years that the CEO is heading the company, he needs to make sure the profit goes up so that stock goes up every quarter, so he takes money out of R&D and stops investing. Instead, he uses it to buy the company's own stock. When you buy your own stock the stock value goes up and you get richer.
So short-term mentality carries over to whole economy.

For example, Bain Capital - former CEO pays less than 15% income tax on something like 225 million wealth and 20 million income each year. How does he make money?
You Buy companies, close plants, lay people off, extract as much money from enterprise as you can.
Then borrow money based on the assets of company, as the money you borrow is tax deductible.
Then spin it off again.

Long-story short: capital flight is not a great problem, and you can stop it being a problem altogether by closing tax avoidance loopholes.
Also, tax the rich.

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Serge Forward
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May 19 2012 09:50
Quote:
If we tax the rich they will all leave the country.

You say that like it's a bad thing.

martinh
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May 19 2012 11:51

I wish they wouldn't come here if they do leave France (or anywhere else). London's economy is completely skewed by all these parasites putting their assets into the EU's pet tax haven.

TBH taxation of the rich varies everywhere. I get the impression they pay a lot more in most other developed countries, Australia taxes its citizens and residents on worldwide income, for example. The UK even allows people to live here and pretend they don't for tax reasons. The super-rich and finance sectors are always threatening to move to Frankfurt or Zurich or Dubai. The reality is that they generally don't, because none of those places are geared up for the sort of lifestyle that they want.

Regards,

Martin

jameswalsh
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May 19 2012 21:41

Serge beat me to it.

It's better than having to shot em- English people hate blood on the carpet.

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Joffrey Barathe...
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May 21 2012 21:22

If I was rich and you tried to tax me I would move to some little island and keep all my wedge, while trying to push privatization of the NHS and flood the dark continent with gats in exchange for some of them sweet sweet diamonds..

Problem with communists is, none of you are Ballin.

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fabian
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May 26 2012 22:29

It would be great if the rich were to flee, the toilers should then expropriate "their" property in their absence.