From time to time I’d like to launch a thought-provoking idea, just to start a potentially interesting discussion. I haven’t quite figured out the answer to the first one, but here goes. In the light of wildly differing income taxation rates, growing population mobility and decreasing meaning of nationality, are nation states going to start competing for the income tax of the Middle Class, at some point? While this idea might seem out there, just indulge me for one moment and take a ride on my train of thought.
Multinational Corporations invented the formula
As Multinational Corporations have the strict obligation to maximize profitability for their shareholders, it was inevitable that they would start re-locating to the nation with the lowest tax rate. They have been exploiting this possibility for decades. Find the nation that has the most favorable tax rate, negotiate a tax exemption ruling and siphon the profits over. Repeat when fiscal conditions change.
Two defining characteristics of the multinational corporation act as a catalyst, in light of this practice: its multinational foot print and the size of its turnover. With a presence in virtually every country, the practical implications of a re-location are minimal. Additionally, a low tax percentage rate still implies a rather sizable contribution to the hosting nation’s budget. Job creation might help tip the scale in its favor.
The Happy Few blazed to path for the private individual
This concept isn’t completely alien to private individuals. The happy few have been moving their assets to the nation with the lowest common tax denominator for decades. Nations such as Monaco, San Marino, The Cayman Islands and Switzerland have been competing for their bank digits.
Two similar characteristics are at play, here. Jet Setting around the world seems to go hand-in-hand with extended fortunes, which reduces the issue of location. Just like a small tax rate for Multinationals still implies, a marginal change in taxation percentages, still implies big differences in absolute numbers.
Billionaire Club membership required
Traditionally, the previously-mentioned requirements eliminated everyone but the insanely rich from using this principle to their advantage. Non-members of the Billionaire Club just weren’t mobile enough to qualify for the possibilities. Jobs, families, children and social factors kept almost anyone tied to a single location. The cost of relocation was simply too large to take advantage, and the potential benefits far too small.
Panama Papers revelation
In general, the Panama Papers were not surprising because of the reasons that were broadly discussed. We all knew that fortunes and profits were being hidden in offshore constructions, let’s be honest. What I considered to be the big revelation, were the actors involved. The local butcher, the owner of the restaurant behind the corner, your architect … the Upper Middle Class. Something had clearly changed along the way. The threshold for the use of international tax optimization had been lowered.
Let’s not get physical
Over the last 25 years our society has changed significantly, to the extent that your grand parents would not be able to function in the 21st century. The major catalyst has been the Internet, which has radically reduced the importance of physical location. We can talk to anyone, from anywhere, at any time, at the stroke of a touch button. Social media has reduced the need for physical relationships, making it possible to maintain any social relationship from anywhere. Additionally, digitalization has significantly reduced the importance of physical objects. Basically, almost any office-type job can be performed from anywhere in the world.
Trade agreements continue to create larger free-trade areas (EU, ASEAN, CETA). While these are areas grow larger, they will inevitable have to merge. In the end this would create a one-world trade area. Growing trade-areas imply increased mobility of the work force.
Inter-culturalism on the rise
For the equivalent of EUR 800 one can travel to almost any location in the world. This leads to increased inter-cultural contacts. In my personal circle of friends, I see long-term relationships between Europeans, Asians, Africans, Russians and people from the Middle East. These relationships further lower the bar for re-localization, with often two continents as potential home base.
This inter-mingling brings us to an important question, mid to long-term: what is the meaning of nationality? It is no longer firmly linked to the location of your birth, nor necessarily an implication of your parent’s origins.
Residency, labor, and nationality unlinked
With the determination of nationality rather fuzzy, this situation is further complicated with the absence of a straight-forward link with the location of residency and the location of economic activity. Do we pay taxes in the country of our nationality/labor/residency? The answer to all three is: not necessarily. This opens possibilities and creates a certain degree of freedom.
Historical factors no longer apply
We’ve just established that changing conditions have left the Middle-Class increasingly untethered from a fixed location. Relatively small differences in income taxation rates led to significant differences in absolute numbers for larger fortunes.
Over the past decades, income taxation rates have grown increasingly different. With a European country like Belgium, maintaining a taxation rate well above 50%, the government earns more from the labor of its residents, than the residents themselves. Surely, one could be far better off, somewhere else.
Other, more indirect, parameters might influence this. Interest rates, mortgage availability, cost-of-life.
In a way, the indicators are in place: the phenomenon is happening on the fringes of society: the extremely rich, retirees maximizing their pensions in areas with a low cost-of-living, economic fugitives, digital nomads, …
So my question to you is: in the long run, don’t you think nations are going to start competing for the taxes of the Middle Class,? Crazy idea, or inevitable phenomenon, … only the future will tell.