Taxation

 

“Capital markets have been at the forefront of deconstructing national borders and as a result have served as a showcase of a borderless world. But it appears that location increasingly matters more rather than less in global finance... And the respective policy responses to the current credit crisis will reinforce this phenomenon. The pre-eminent role the London Stock Exchange has assumed amongst foreign issuers is insightful. In 2007, the London Stock Exchange raised US$30bn on behalf of foreign issuers, double the amount raised by non-US companies on the New York Stock Exchange and NASDAQ combined.” (p. 42)

“Against this drift, New York’s Mayor Michael Bloomberg commissioned a McKinsey report…with alarming conclusions in spring 2007. An excessively litigious environment and burdensome regulations, such as Sarbanes-Oxley, were primarily held responsible for the deteriorating attractiveness of New York as a destination for public market listings. Both factors have undoubtedly increased costs to a level where the competitiveness of the US as a listing venue is compromised.” (p.42)

“A too often ignored consideration determining Wall Street’s overall competitiveness, however, is America’s tax system. The US’s extraterritorial tax system, empowering its authorities to tax – on a worldwide basis – not only US citizens’ but foreign US residents’ income and capital gains, effectively shelters America from full economic competition. It will compromise the US’s ability to attract foreign wealth, in particular in a world where the economic epicenter has not only shifted eastwards but when the US does not represent necessarily any longer the most vibrant system and place altogether – at least in the near future.” (p. 42)

“In a flattening and mobile world, a country’s ability to attract foreign wealth will increasingly determine economic competitive advantage… It is a country’s fiscal model – from provisioning and financing public services to overall taxation – that will increasingly drive an individual’s choice for domicile and residence. Were US citizens and foreign US residents not taxed on a world-wide basis, competition amongst tax systems around the world would increase. More and more Americans would consider residency offshore while the rest of the world would compete – by way of a competitive tax system – to capture most of American’s spending power. America, consequently, would be challenged to attract foreign capital inflows through a reformed tax system, too.” (p. 43)

“As the individual’s global mobility is rising, the tax systems of the US and Europe can no longer rely upon the outdated notion that their economies exercise a form of magnetism on global capital flows or, for that matter, their own citizens. We are at the beginning of a new era in politics where a country’s competitiveness to keep and attract the brightest and the wealthiest from around the world will have to redefine the domestic political agenda. In fact, the individual is emerging as the power broker amongst leading economies.” (p. 43)

“In no small measure, Britain’s economic success, outpacing that of Germany since the fall of the Berlin Wall, is in particular due to the favorable tax status granted to foreigners that are resident but non-domiciled in the UK. Effectively, foreigners’ capital gains are non-taxable as long as they are generated abroad, not repatriated to the UK and – since the changes introduced in the 2008 budget – a club membership fee of GBP 30,000 is paid.” (p. 43)

“This two-tier tax system has turned the UK into one of the world’s biggest offshore banking markets attracting new wealth from China, Russia, India and the Middle East to make London – despite its rainy weather – rather than New York their residence of choice. It is the wealth of those individuals combined with the battalions of bankers and lawyers from around the world catering to that wealth, which allowed London to overtake New York as the world’s leading banking market.” (p. 43)

“Today, in the face of the erosion of local roots, the individual is challenged – more than ever – to think and act. Opportunities for professional self-fulfillment are no longer there to take or leave, but must be conquered and reaffirmed every day. The ability to think and move beyond national and cultural boundaries will be the individual’s most potent navigation tool…. Indeed, it will be interesting to watch how many Bear Stearns and Lehman Brothers bankers will reinvent themselves in a shrinking financial services industry without fundamentally questioning their destiny in the absence of reconsidering location.” (p.44)

“A country’s ability to create jobs, facilitate entrepreneurial risk-taking and guarantee economic – not a priori political – liberties without the costs of an overburdening and public services-poor state will increasingly determine an individual’s choice of residence. In particular since the fall of the Berlin Wall, Great Britain – one of the least evil and most mature liberal systems of the world – was a major beneficiary of Continental Europe’s brain drain as the leadership of Germany and France put pan-European political institution-building ahead of economic growth and job creation… Who’s your City?” (p. 44)

“Tax reductions as an ad-hoc measure to stimulate the economy are futile in the long-term as interest rates and taxes will have to rise eventually to finance a growing budget deficit. Tax reductions must be structural and part of a plan that emphasizes an important role for the private sector in public healthcare, transport and education.” (p. 79)