A great deal is said about taxes: How to make them just; how to distribute them more evenly; how to raise them without undue pain; how to lower them sensibly; how to simplify them in one stroke by burning thousands of pages of tax code – even how to make America great again by cheating the poor and the working class.
For us retail investors, one thing is more important than anything else: taxes reduce our return. A country that withholds dividend tax, for instance, reduces the dividend for any investor by exactly the amount of tax collected.
If a country ‘A’ taxes a four per cent dividend at 25 per cent, the dividend paid to the investor will be three per cent. If the same type of company in another country ‘B’, which does not tax dividends at all, pays out 3.5 per cent, everything else being equal, the return would be 16.7 per cent bigger. Any investor who cares to calculate will certainly chose country ‘B’ over country ‘A’.
Of course, nothing is ever equal. One company is better run, the other in a shaky jurisdiction. The point is that the taxes we pay are as important for any calculation as the money we make – hence our attempts to look for all possible ways to avoid them.
Taxes have a short and turbulent history. In Europe they came into existence with the end of feudality. Money was needed to pay for wars as people refused to fight them for no salary. In the beginning they were raised once in a while, then more permanently. First at a low rate, increasing from period to period as the State took on more essential tasks than warfare. Today, most developed countries tax overall economic activity at 40 per cent or more.
Only very few countries can afford to live without taxes (Saudi Arabia) or very low taxes (Russia). Some tax so heavily that people prefer to cheat, others so randomly that citizens feel cheated. Solutions how to best tax range from income tax to consumption tax, from poll taxes to progressive taxes, from inheritance tax to window tax, from vice taxes to death taxes. As President Benjamin Franklin is quoted as saying: “Nothing can said to be certain, but death and taxes.”
What a good government tries to achieve is to finance the common good with minimal pain for the taxpayer, while keeping waste at a minimum. Roads, transport, security, education, social advancement, poverty alleviation, healthcare, pensions, public housing, protection of heritage and the environment, and the rule of law are all expensive undertakings and it is difficult, as with all common goods, to find agreement on what is necessary and what superfluous.
The bill for a nice country comes by return of mail. The argument raised in this paper that countries that demand the highest taxes have the happiest citizens confuses correlation with causation. Citizens are only happy to pay high taxes if they have a say in daily politics, if their demands are met. If we combine extortionate road taxes with abominable potholes, for instance, the happiness of the taxpayer must be limited, no matter how happily high the tax.
Justice in tax matters is essential. Nobody wants to be taken for a fool. Free riders are nowhere popular. If nobody pays taxes, as happened in Greece for many years, there are few who will complain. Equally, if everybody seems to pay his or her fair share, people should be content, although what presents fairness might be disputable. If executives who contribute little obvious value are paid 100 times more than the average salary, it is difficult to see how even a heavily distributive taxation (which will have only limited effects anyhow) can induce a sense of justice.
For the benefit of each and every citizen of Malta, it is economically sensible to offer foreigners a favourable tax residency
The biggest injustice in all OECD countries is the unequal treatment of employees, who can by no means minimise their tax bill, while entrepreneurs have easy ways to show losses when the taxman rings. Billionaire investor Warren Buffett famously remarked that he couldn’t understand how his secretary had a higher tax rate than he himself. Who can?
The era of the internet seems to have perfected the possibilities for multinational companies to pay no taxes anywhere. To put the blame on their doorsteps is not quite fair. International tax competition and national tax laws are eager to provide the loopholes for most of them to legally pay less than nothing.
This is detrimental to most countries, which have to watch how their citizens are contributing to growing corporate profits out of their country for no local taxes in return, but hugely profitable for those low-tax countries which provide a registered business address. They get money for nothing.
This brings me to the ‘island of light’ demanded by fellow columnists in this paper. I am very much in favour of transparency when it comes to the politicians in our country – their tax records and their offshore dealings – as well as when it comes to biased institutions, nepotism, graft and political influence peddling. It is constitutionally dubious when checks and balances are out of order and whistleblowers are treated like lepers. I too hate the erosion of open space, the demolition of our heritage and our permits-for-perks practice, often involving people in the highest places.
Yet I urge that we do not delve into xenophobia. For the benefit of each and every citizen of Malta, it is economically sensible to offer foreigners a favourable tax residency, so long as they do not burden our health services, our schools and public services with their presence. It makes sense to bar them from taking up employment and vying for our labour. If they can make themselves useful regardless, fine. If not, and so long as they contribute to our budget getting more paid in than taken out, what harm do they do to us by making us richer?
This equally holds true for our ‘money-for-passport’ scheme. As long as we make sure the candidates are screened properly, making sure that neither criminals nor convicts can qualify, what is wrong in giving a passport for a large amount of money to someone who would qualify for it in 10 years’ time anyhow? We get the money now and can spend it while reducing taxation.
To stigmatise the rich, PEPs (politically exposed persons – meaning every diplomat and public servant of a foreign country) or any successful businessman who votes with her feet as ‘cockroaches’, ‘citizens of nowhere’ or ‘money launderers’ is economically illiterate. With their contributions, they will pay for public goods we would otherwise have to pay for ourselves. What is wrong with that?
So long as we do not close our eyes to their legal or moral shortcomings by taking bribes, such schemes – so long as they are internationally accepted – should be lauded, not criticised.
To state that it is preferable to swap 10 years of economic hardship for Maltese purity smacks of illiterate nationalism.
Andreas Weitzer is an independent journalist based in Malta. He reports on the economy, politics and finance. The purpose of his column is to broaden readers’ general financial knowledge. It should not be interpreted as presenting investment advice or advice on the buying and selling of financial products.
Please send in any suggestions for discussion in this column to: editor@timesofmalta.com – Subject: Sunday Times Personal Finance.