Date: Tuesday, February 20, 2007
In recent months many have been debating whether the Sarbanes-Oxley Act has been even more damaging to the U.S. financial services industry than the Interest Equalization Tax, which literally handed over the Eurobond markets to London on a platter.
The debates about whether London has, or is about to take over New York City as the world’s leading financial centre has been circulating around the world for a few months now. There is no doubt that London has benefited hugely from international listings by companies who no longer wish to list in the U.S. in order to avoid falling under the auspices of the Sarbanes-Oxley Act. Now, whether that means that London is now the world’s leading financial centre is another matter. But, what is clear is that unpopular laws can be quite costly to a financial centre or a country.
Similar to the discussions about how London is gaining at NYC’s expense, many are now debating the implications of a socialist victory in France and how some of their tax policies might benefit London. Many are suggesting that should Mme. Ségolène Royal win the French Presidential elections in May and remain true to her word and increase taxes for the high earners and major corporations that many of the best minds in France might leave the country and move to London.
The areas of special concern seem to be financial services and biotechnology sectors, industries in which London has a special strength. According to a recent senate finance committee report, France has lost €2.2bn of taxable assets in 2005 as a result of people leaving the country to avoid paying the wealth tax. This figure is expected to swell should the Socialist party win the election and introduce further tax hikes.
Losing talented individuals to neighbouring countries is nothing new in the world of macroeconomics. The U.S. has prospered mainly as a result of being able to attract the best minds from not only its neighbours to the north but also from most of the rest of the world.
However, what makes today’s world somewhat different from the past is that due to the greater concentration of wealth when countries introduce unfavourable regulations they not only lose many of their most talented individuals, but they also lose a huge chunk of their wealth as well.
Unlike the recent joiners to the European Union, whose citizens seem to be highly mobile, labour mobility among the more established and wealthy members of Europe has historically not been very high. Consequently, countries have not been too successful in attracting the best minds from their neighbours when they introduce regulations that would seem to induce an exodus. As a result, unfavourable regulations have not been too costly.
However, unlike the working or middle-class, the wealthiest members of the society are extremely mobile, and they seem to be in control of ever greater proportion of national wealth. Consequently, when they leave, a greater share of national asset values leaves with them than was the case in the past.
In fact, the wealthiest European are behaving more and more like major global corporations which move their headquarters around Europe in order to benefit from more conducive taxation. Very soon the U.K. might also find itself on the receiving end of the attacks from Europe that Switzerland is currently facing for attracting many U.S. corporations to move their European headquarters there.
If the exodus that many in France are predicting does in deed take place, the U.K. is bound to face huge criticism for having a too lenient a tax system; one that places other European countries, especially France in this case, at an unfair disadvantage.
Now, the fact that the U.K., similar to Switzerland, is only trying to make life easier for her citizens by having a more flexible tax system is obviously beside the point and U.K. will certainly be attacked should the tax hikes result in a loss of wealth to France. The perception is that if we do something that causes our citizens to leave and they do, it is not our fault but the fault of the country to which they are going.
No one in Europe is thinking about maybe reducing their own taxes to become more competitive. They simply view Switzerland as the problem because it has more attractive tax rates, even though as discussed in a previous bulletin, there are many countries in the E.U. that have lower taxes than Switzerland.
Until countries realize the dangers of introducing unfavourable regulatory policies in a world where wealthy individuals and their ever more concentrated capital are highly mobile they will continue to make decisions that makes other countries look more attractive and attack those same countries for not introducing regulations that match the mistake that they have made. France seems to be enroute to proving that point yet again.