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The Hunting of the Rich

For the top income earners, 2011 might be considered as the year of the “hunting of the rich”.

From an economic perspective, one could argue that the year 2011 should be labeled as the year of the Euro crisis. In retrospect, for the top income earners it might be considered as the year of the “hunting of the rich”. As governments are increasingly being confronted with the harsh reality of the structural increase of fiscal deficits, while having to deal with a growing need of funds to comply with the growing demand for social and well fare programs. Here the politically obvious path of least resistance is to squeeze the rich for more tax revenues.

Some of the most debated occurrences in the developed world would include among others:
- The French & Italian surcharge of 3% on those with incomes in excess of €500,000 and €300,000 respectively.
- The British top rate of 50% on earnings in excess of £150,000.
- The US “Buffet rule”, which should ensure that no household with earning in excess of $1million, would pay lower average tax than the “middle-class”. Named after the super investor, Warren Buffet, who pointed out that, despite being a billionaire, on average, he pays less tax than his secretary.

There are also non-governmental actions such as; the “Occupy Wall Street” movement, which is a protest movement, which started in September 2011 by the Canadian activist group Adbuster in New York, and which since then has grown and spread to many other cities in the US and around the world. This movement has been described as a leaderless resistance movement with people of all backgrounds,genders and political persuasions. The one thing they have in common is that, they consider themselves the 99% that will no longer tolerate social and economic inequality, greed and corruption of the top1%.

Contrary to the wide-spread belief, not all high income earners oppose an increase of their tax bill. In this regard, in November 2010 a group of US millionaires joined forces and established the so-called “Patriotic Millionaires Group”. This group, which consists of more than 100 financially successful citizens of the US, has as their main goal, to lobby and persuade the US government to increase taxes for those making $1 million or more per year. Here is a of part of a letter which recently was sent by this group: “We are writing to ask you to do the right thing for our country and REJECT ANY Super Committee deal that does not raise tax rates on incomes over $1 million to AT LEAST 39.6%, REGARDLESS of how many deductions are eliminated. Private jets shouldn’t have been tax deductible in the first place.” This initiative is receiving widespread support, and this group is growing steadily.

But you also have those that argue that an eventual increase of tax would have a counterproductive affect on the economy and job creation. The basis of this belief is that an increase of the tax levied on the high income earners would lower their appetite for entrepreneurial risk and will result in a shift from income to capital gain. Capital Gain is the difference between the cost of acquiring an asset and the value of this asset at a certain point in time; the bigger this difference, the higher the capital gain. In London, we have seen that a number of asset managers have relocated their activities to other EU countries such as Luxembourg and Switzerland, to avoid the 50% tap. Also, many articles have been published on the issue of London potentially losing its competitive position towards the other world financial centers, due to a potential weakening of its professional infrastructure, as many of the talented professionals would choose to relocate in order to avoid the 50% tax.

Having more means at his disposal, it is obvious that the rich can make a more effective use of the legal provisions available to reduce their tax burden. However, the main reason why a billionaire could on average pay less tax than his secretary is embedded in the structure of the taxation system itself.

From high to low, the taxation of income types would rank as follows:
- Employment income is taxed the highest.
- Business income is taxed as second to highest.
- And investment income (interest, dividends and capital gains) are taxed the lowest.

Fact is that the lower income earners predominately enjoy employment income, and that high earners are predominately investment income earners.

Its not only the legally allowed provisions, but also the effectiveness and efficiency of certain tax collection agencies plays an important role. To illustrate this matter we will cite some recent news that surfaced about Greece and Italy, the two head-line making countries when it comes to the crisis in Europe. It seems that 42.2 percent of the luxury yachts in Italy are owned by Italians with a reported annual income of 20,000 Euros or less. Moreover, in Italy 181,171 expensive sports cars are owned by people with reported annual income between 20,000 and 50,000 Euros. In Greece in the rural county of Thessaly, which counts with 250 000 inhabitants, there are far more Porsche Cayenne’s registered than the number of inhabitants (a Porsche Cayenne costs around 80,000 Euros).

Stop Press:
Good news, it seems that Holland and Curacao have reached agreements on the new, “Tax Arrangement within the Kingdom of the Netherlands”. It seems that soon the famous; “Dutch Sandwich” will be back and better. As it appears, this new tax arrangement in the Kingdom of the Netherlands, would allow for some highly tax efficient holding structures. All in compliance with the OECD model conventions and the provisions of the FATF & G-20 recommendations. Stay tuned for more news on these important developments.

Sadekya Fiduciary Partners.

Rudsel. J. Lucas TEP, Managing Director
The Triangle Office Building, Hoogstraat 20-22
P.O. Box 4750
Curacao
Telephone: 599 9 4652698
rudsel.lucas@sadekya.com