Merryn's Blog

The enthusiasm for taxing the rich ignores the real rich - big companies

Big companies' profit margins have never been higher, and many of them are sitting on huge piles of cash. But they're not being squeezed for tax like rich individuals are.

We've written here many times before that the obvious route out of the Western world's current crisis is a lengthy period of financial repression - ie one in which inflation is high, interest rates are low, and states assert their sovereignty to lift money from the private sector to help finance their debts.

This is clearly a process that is well underway all over the place: witness the rising tax burden and negative real interest rates we have been forced to put up with for the last few years. However, a proposal from what the WSJ refers to as a "leading German economics research institute" has taken things a little further than most have so far been prepared to.

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According to the German Institute for Economic Research (DIW), a large part of the solution is for those with high incomes to pay more on their wealth in one way or another. This makes sense, says DIW, because while national debts might have soared "we also have very high amounts of private assets that, taken together, considerably exceed the total national debts" of most countries." So why not "go after those private assets"?

The report suggests giving people an allowance of €250,000 and then taking 10% of all other wealth. That 10% could be removed either as a "one off levy" or as a "forced loan" that might later be paid back "depending on the progress" of any one country in dealing with its debt. In Germany ,this measure would raise something in the region of €230bn, or a whopping 9% of GDP, and so could bring Germany's national debt as a percentage of GDP down to more like 70% than its current 80%.

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It is hard, obviously, to know where to start with this one. I'll leave you all to put your personal objections to it below, but it is worth pointing out that while the German finance ministry has rejected the notion out of hand for Germany, a spokesman also said that it might be "interesting" for some of the other eurozone states. So it isn't an idea that is going to go away.

However, the odd thing about all the current enthusiasm for taxing the rich is that it ignores how most of them got rich in the first place; and it ignores the real rich - the world's big corporations.

Andrew Smithers of Smithers & Co constantly points out, as I do here, that the profit margins of our huge companies have never been higher - and nor have their cash piles. Short-term shareholder capitalism (as discussed here and in my editor's letter in the magazine) has made large companies and their managers rich, and all too many other people poor.

So, given that the cash piles of the top 1,000 or so companies around the world make even the richest individuals in the world look a little short, we shouldn't be surprised if Governments soon start looking to them rather than focusing endlessly on the semi-rich and rich (who already contribute the bulk of our tax revenues and could contribute a lot more if we stopped letting them avoid our existing taxes).

Earlier this week, I interviewed CLSA's Russell Napier, who is something of expert on financial repression, and I asked him about this. His view? It won't be that long until governments do just that: "if some corporate bond yields are below the yields of their sovereign, these merely indicate that the sovereigns have not yet asserted their sovereign rights." But if they don't want to go bust, they will. You can read my full interview with Russell in the magazine next week. If you're not already a subscriber, subscribe to MoneyWeek magazine.

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