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A Post-Brexit World: Which Tax Strategy Will Win?

· Finance,economic policy,Taxes

LIVING IN BRITAIN: INDIVIDUALS AND SMALL-MEDIUM BUSINESSES PAY THE BRUNT OF TAXES

In Britain, the majority of taxes are paid by individuals, either through personal income, through small-medium enterprises which employ 60% of the population, and through VAT. In this system it is growing increasingly hard for people to survive in which they are taxed at every turn.

I recently read an article in the Telegraph in which the writer says that the majority of taxes are paid by the wealthiest group. The writer attributes "wealthy" as people making more than £100K per year, but according to standard global definition, this income bracket would be considered solidly middle class amongst the developed nations. If we were to define this class as middle-class, then the writer is right, middle-class people are the hardest hit in the British economy, not only through taxes, but lack of infrastructure to help their businesses.

Let's examine the current tax system in Britain which is:

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In this system a 40% tax is levied on people making just £45,001 a year. This is an extraordinary amount to pay to be able to live in the UK. Let's take an example, a typical software engineer in London makes around £35K a year. Under the UK tax scheme, he or she has to pay 20% in taxes, however, if he or she got a £11K raise within a few years to make £46K a year, then the engineer would have to pay 40% in taxes and take home £27,600 after taxes, and actually take home less than if he/she had under £35K in which the take home amount after taxes is £28K. To levy a 20% tax on people making £35K and 40% on people making over £45K is simply unsustainable.

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The harsh reality that both the Labour and Conservative Parties are not telling people is that the majority of Britain's population is actually poor, the median income at around £25K and mercilessly taxing the poor and middle class won't lead to a prosperous society. Jeremy Corbyn and Theresa May say £80K year is the top earning bracket. In fact, this is not true: just five of Britain's richest families have more worth than the poorest 20% of British citizens. The highest earners are not the ones who make £80K per year, but at least £200 million per year. Taxing middle and working class people at 60% at the £80K level is just simply absurd and will ensure that Britain will lose all its most productive industries to other nations as the mass exodus of talented Brits will leave for greener pastures elsewhere. In addition, as the Panama Papers have revealed to the public, wealthy people have creative ways of dodging the tax code and never report their income.

For working and middle class people, paying these high rate of taxes makes it unaffordable for people to just pay the basic necessities. The cost of living increase with the exacerbation of real estate prices have lead to a vastly disproportionate society in which skilled workers, such as engineers with a Computer Science Masters degree would more likely move to places like Spain or Hong Kong where they are not hit with these high taxes. These taxes are leading to an exodus of UK talent to the other nations, simply because these personal income taxes prevent emerging talent to be able to afford living in Britain.

Instead, I think what would be a better system of individual taxation would be to streamline taxes so that people who make £100K or less are not taxed at all. This creates a safety cushion to protect both emerging talent and small business owners. In addition, lowering personal tax to individuals makes it more likely that individuals will file in the UK due to the near competitive rates from tax havens so that they are less liable to hide money in offshore accounts. By shifting the tax burden to the highest earning corporations instead of to individuals, this will substantially increase tax payments directly into the UK.

Proposed Individual Tax

Personal Allowance Up to £100,000 0%

Basic Rate £100,001-500,000 10%

Higher Rate £500,001-£10 million 15%

Additional Rate £10+ million 20%

The people in the lowest and middle income brackets pay the most percentage in tax whilst super high earners (£10+ million) use systems for tax avoidance. By lowering overall personal income tax will help Britain achieve a fairer society in which young people and emerging talent are incentivized to stay in the UK workforce. As Britain enters the Fourth Industrial Revolution, it is necessary to create more multi-millionaires in our society rather than an society of Lords and Serfs in which only a few control the entire wealth of the nation. That is why it is essential that both the Labour and Conservative Party put forth legislation to prevent corporations from using offshore tax havens whilst removing the tax burden on individuals.

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The Conservative Party is dealing with the problem of tax havens by attempting to create a tax haven itself in the UK by lowering corporate taxes, but let's face it, lowering the corporate tax to 17% will never compete with the 7% that other tax havens, such as Bermuda offer. Why should any corporation be willing pay 17% in the UK when they can utilise legal loopholes to pay 7% elsewhere? This strategy does not make any sense at all, whereas a better plan to increase tax payment into the UK is to lower overall individual taxes instead so that the rates from tax havens are competitive enough so that individuals file in the UK.

Many wealthy people consider themselves "multi-national" to avoid paying taxes in their native countries. Since tax codes allow individuals to file by how much time they spend in a country, many multi-nationals often spend only a few months here and there to avoid this residence requirement. By lowering individual taxes, this could potentially bring in an additional £200-500 billion into the UK govt as these "multi-national" individuals voluntarily leave tax havens to file in the UK instead.

The Labour Party is dealing with the problem of tax havens by raising tax on middle class people and hoping that a free education and free childcare will follow in the pattern set by Nordic nations such as Sweden and Finland. However, the problem with this strategy is that the UK has been involved in numerous foreign interventions, leaving a huge gaping hole in govt funds, whereas Nordic nations typically stay out of America's War on the Middle East.

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The Conservative Party wants to develop the shale gas industry in the UK by allowing fracking all over the land, potentially causing water contamination, rise of birth defects and radiation exposure.

However, I do not think the Labour Party's taxing of the middle class further will work towards Britain's benefit nor will the Conservative Party's plan to make the UK into a toxic wasteland by allowing fracking to happen all over the nation, potentially creating a future society that will be further mired in the national deficit as they try to clean up the inevitable fallouts from radiation poisoning from the uranium utilised by the fracking industries.

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A young family in North London, living in poverty. The working and middle class Brits are the hardest hit with taxes and many families cannot afford the basic necessities. FinTech industries cannot survive in a nation in which a significant portion of the population is poor.

If we take an example of what is occurring with our FinTech industries, and examine why unicorn companies such as POWA technologies recently collapsed into insolvency, we will find that the underlying reason why many in this sector are not able to survive in our era is simply because the majority of the people in Britain are, in fact, poor and cannot afford to use their products and services. Creating more multi-millionaires in our society will also ensure that our financial institutions will not fail. But of course, the question is how can we create more multi-millionaires in our society?

The answer is surprisingly simple, lower personal income tax for individuals and small businesses and create legislation to stop multi-national companies from utilising tax havens.

A NEW TAX SYSTEM FOR BRITAIN AND A VAT FREE NATION

Currently the UK corporation tax is 19%. However, this system doesn't really benefit small businesses. Let's take an example of a small business with 10 employees making a profit £2 million a year. At first, a £2 million profit may sound like a lot, but if the business employs 10 people, it would hardly have any overhead, be able to engage in any R&D activity and just be able to barely survive in the British economy if they had to pay a 19% tax. For small businesses, a 19% tax is a significant amount of capital they could potentially utilise to grow and expand their business. Instead, I think a better tax system would be:

Proposed Corporate Taxes

for businesses with profit less than £20 million - 10% tax

£20-50 million - 20% tax

£50+ million - 30% tax

This tier-strategy tax system would allow the UK to still be competitive with the rest of the world whilst still promoting growth in the small medium business sector, and the 10% tax rate or startups or growing businesses would allow Britain to retain its best, emerging talent so that more founders and small business owners would be likely to launch businesses in the UK as opposed to other places, such as the United States or Germany. At the same time, a tax increase on businesses making more than £50+million whilst eradicating the VAT (Value Added Tax) altogether will set UK businesses for a time of extraordinary growth. The VAT brings in about £80-100 million of revenue for the UK government per year. This amount would instantly be replaced if the corporation tax for those businesses making £50+million in annual revenue will see an increase of corporation tax to 30%.

Let's take another example: Harrods Group in 2016 had an annual revenue of £1.44 billion and recorded profit of £178.1 million. Under the current 19% tax scheme, they probably paid around £34 million in taxes not excluding tax refunds, tax reliefs or tax breaks they might've received. Under 30% tax, which is still a competitive rate in Europe and America, they would've paid £53 million, a difference of £19 million, an amount which is between 17-20% of the total VAT revenues the govt collects just from the increased tax payment of one company alone. Eradicating the VAT will also increase revenue to the retail sector and to companies like Harrods because more people in Europe and in the UK will purchase more goods in Britain if they are not liable to pay a 20% VAT on all goods. Getting rid of the VAT whilst at the same time, raising the corporate tax to 30% for companies that have a profit of £50+million would drive up growth and revenue.

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Post-Brexit, a VAT free nation would drive up growth and revenue for UK businesses.

However, companies that make more than £50+million in profit would probably not be pleased to hear of a proposed 10% tax hike; however, if VAT were also eradicated, that could potentially drive up their revenue exponentially, it is what I surmise is a small price to pay for growth which I extrapolate a CAGR of 4-6% annually. Now, this might seem like a high rate of growth, however, if we were to compare growth in sectors that do not have VAT, they are at much higher rate of growth because globally, people tend to avoid paying VAT on items and will go to nations that do not have a VAT: such as China and the US.

In a Post-Brexit world, now that Britain is moving out of the European Union, it is time to get rid of the VAT. The VAT (Value Added Tax) puts a burden on people with an added 20% tax on everyday goods that does not discriminate between the different social classes. In addition to the high personal income tax an individual must pay in Britain, on top of that, the individual must also pay a VAT for everyday necessities and other goods. The VAT system unfairly punishes people from lower socioeconomic classes who are paying for everyday items such as food, and stultifies the growth of small and medium sized businesses for services they provide, making them less competitive on the global stage.

TAX HAVENS

Whilst keeping taxes low for small and medium sized businesses with a moderate increase in taxes for high earning companies, I think it is also important to pass legislation to prevent tax havens for various institutions, such as in the financial sector to shift the burden of taxes from individuals to multi-billion pound corporations. UK banks have posted a profit of £18 billion in tax havens last year, so that they were able to avoid paying the 19% tax in the UK and instead paid 7% tax in tax havens such as Bermuda, the British Virgin Islands, Cayman Islands and the Crown dependencies. If these financial institutions had paid their share of taxes, it would've brought in £3.4 billion into the UK and if they had paid a 30% tax, it would've brought in £4.4 billion, which is way more than enough to pay for NHS, social programmes and invest in the growing infrastructure of the UK.

Prime Minister Theresa May, who herself, comes from a banking background, would prefer for financial industries to continue on with their tax havens, making it easier for them to pay less taxes, whilst feebly attempting to create a tax haven in the UK. This strategy would only result in the destruction of the fabric of British society by allowing these tax havens continue to exist, and attempting to draw blood from the working and middle classes by cutting social programmes and putting taxes on the elderly (eg, "dementia" tax) and paradoxically preaching that "money doesn't grow on trees." If financial institutions paid their taxes without the use of tax havens, there would be more than enough money to fund social programmes in the UK without putting the brunt of the tax burden on individuals and small-medium sized businesses.

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Actress Emma Watson utilised a tax haven in the British Virgin Islands to legally avoid paying a 40% Capital Gains Tax on a multi-million £ property she bought in London as the Panama Papers revealed. Lowering the capital gains tax and individual personal tax will allow high earning individuals to voluntarily leave tax havens to pay UK taxes.

However, the reason why this methodology shouldn't follow for individuals to stop using tax havens is that several reasons exist for this potential legal imbroglio. First of all, as mentioned previously, wealthy people consider themselves "multi-national" in order to avoid paying taxes in their native countries. Attempting to prosecute the millions of individuals under this code would create an unnecessary burden on our legal system and ambiguity in the law regarding many different nations would inevitably create a potential legal nightmare if multitudes of people are prosecuted in various jurisdictions whereas for corporations, the legal structure is more clearly defined and already has a set precedent with many nations cooperating together. That is why I think lowering individual income taxes will allow the "multi-national" individuals to voluntarily leave their tax havens without fear of retribution and file in the UK tax code, and this will be more effective than attempting to prosecute them all into submission.

MONEY DOESN'T GROW ON TREES

In the UK, the majority of the MPs (Members of Parliament) voted to engage the nation into several foreign wars and interventions. The war on Libya cost UK taxpayers £950 million at a conservative estimate in 2011. Why didn't Theresa May who was Home Secretary at the time, say then: "Money didn't grow on trees," when she approved of the spending on the war on Libya, a war that has been said to have created more terrorist factions as the recent terrorist attacks in London have recently transpired?

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This £950 million instead could've been utilised to fund education, pensions, elderly care and the NHS, instead these funds were taken from the public to launch a war in which the majority of the population had protested against. It would only have cost £88 billion more by 2067 to fund the entirety of NHS, at a rate of £1.7 billion per year, yet MPs decided to spend £950 million on a fruitless war instead. Only 15 Members of Parliament voted against a fly-zone in Libya, and one of them was Jeremy Corbyn. The 557 MPs, including Theresa May, who voted for the war on Libya should be held accountable for the lack of funds that British society now faces for its social programmes as a result of that extraordinary expenditure in 2011.

SCHOOL LUNCHES

Jeremy Corbyn has said it would cost £11 billion to make university education free in the UK and that would be money "well spent," and I think this is the right adoption of policy in order to make sure our students are given opportunity that is commensurate with their natural talents even if they cannot afford university tuition. However, I do not think adding a VAT tax on top of private school tuition fees in order to pay for school lunches is at all, fair. Private school education is expensive enough without another added 20% VAT.  As I mentioned before, I think eradicating VAT altogether post-Brexit would make Britain more competitive in Europe and Asia. In addition, some parents are not keen on school lunches and do not want their children to eat the fatty, unhealthy foods that are often served at schools.

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A typical school lunch in the UK is primarily composed of fatty, junk foods like nachos, hamburgers, pizza and sweetened milk with perhaps some unappetizing pieces of plain lettuce for decoration.

Instead of putting a VAT on private school tuition to pay for school lunches, I think perhaps subsidizing agricultural industries, such as as those companies in the food sector would be money better spent. Instead of putting a tax on VAT, the UK govt could utilise tax dollars from the eradication of financial tax havens and invest it into companies making organic produce and fruit and send weekly delivery boxes of fresh organic veg and fruit to families in need.

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Imagine if as part of a social programme if families in need received a fresh box of organic produce and fruit each week. Subsidizing agricultural industries by supporting organic farmers would allow the UK to be able to deliver food to needy families.

A single mother on minimum wage who is raising 3 children alone in England will have a hard time to afford the basic necessities, especially with another 20% VAT added on everyday items. If instead, the UK govt supported industries that are producing organic produce, and subsidize them for weekly deliveries, this would ensure that the lowest socioeconomic members of our society are never left hungry or have to pay expensive market rates for food in addition to supporting our argricultural industries that support a healthy lifestyle. Families in need that have their basic necessity for food met through this system can then choose whether or not their child can take a homemade lunch to school or patronise the school cafeterias that often serve unhealthy fast food.

BENEFIT FOR FINANCIAL INSTITUTIONS TO PAY THEIR TAXES

Now, you might wonder if you or someone you know are part of any industries that have been in a decade long pattern of tax avoidance through legal loopholes, shell corporations and tax havens why they suddenly would want to pay a 30% corporation tax? What would be the ultimate benefit for them?

I don't think there is a person out there who doesn't want to make the world a better place and to increase the standard of living in Britain, where we have seen a disintegration and breakdown of society. However, our system of shareholders at corporations only see the bottom line figures and there is a set pattern of regularly suing and holding leaders accountable in corporations who refuse to maximise their profits in the short-term. So then, what would be the ultimate benefit for financial institutions and others to pay their share of tax without some utopian banter about making the world a better place?

It's quite simple. By creating a society that has more millionaires than billionaires; many industries, including the financial industries will ultimately benefit in the long-term.

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A British artist portrays Labour leader Jeremy Corbyn as legendary Jedi master Obi Wan Kenobi in Star Wars near Old Street, London.

Currently the financial banking industries serve only a small percentage of the British population with a high net worth. However, if the majority of British society had a significant level of disposable income, then financial institutions would gain a large proportion of people who previously could never afford financial products and services. If just £3-4 billion in corporate tax haven funds could be redistributed to support services and products by small-medium businesses in the UK, and attracting a high standard of living, financial institutions can grow their revenue by at least a projected 500-700% of their current revenue each year in the next two decades. This shift in society would produce a nation in which a significant portion of multi-millionaires would exist in British society (rather than a small fraction of billionaires who exist now) who would then become future customers to the products, packages and services that financial institutions can provide for the general public, and not to a small percentage of elite. £3-4 billion in taxes annually is a small price to pay for what could lead to a £10+ trillion increase in revenue in the next two decades.

LONG TERM VALUE (LTV) vs LONG TERM COST (LTC)

Long Term Value is what the company or nation accrues over time, how much the company is worth. Long Term Cost is what the company loses over time, how much the company or nations would have to pay. According to my calculations, the UK would have a much higher Long Term Cost if fracking were allowed to continue in the UK due to the projected costs in cleaning the water and food supply, destroying many of UK agricultural industries as a result. This Long Term Cost could move into the £ trillions as losses in various sectors would be projected as one of the consequences of poisoning the water and soil supply in the UK in comparison to the short term profit it would generate in the £ billions. Although the Conservative Party manifesto says it wants to enact environmental groups to regulate fracking in the UK, one accident alone could cost £billions. It is much more cost-effective to avoid the possibility of an accident altogether as what has happened all over the United States and instead ban fracking as other European nations, such as Germany and France have done.

CORBYN VS MAY FOR STARTUPS

The Labour Party has long been in need of reform, and gone are the days of Tony Blair who lead the UK disastrously into America's wars. Although Jeremy Corbyn might not be the perfect candidate, and a proposed 60% tax on £80K income would be detrimental for the British workforce within emerging industries, I think for UK startups, and small and medium business owners, Mr. Corbyn is still a far better choice than Prime Minister Theresa May, who is only looking at the short-term of what is necessary for Britain post-Brexit. By proposing to frack away all of the UK and cut social programmes and benefits for the entire society, the Conservative Party is destroying the very architecture and blueprint of British Society. They have sprouted their mantras "money doesn't grow on trees" for far too long even after the disastrous costs of war they have accrued so quickly after launching missiles on other nations and expect the public to pay for what they have chosen without regarding the public's choice in the matter.

Britain's current tax system - the 19% hasn't worked out so well for tax avoiders nor for society; that is why I think there needs to be multi-level tier strategy to the tax system, so that individuals and small and medium sized businesses are not left with the brunt of the tax responsibility. Although the Conservative party wants to lower the tax rates to 17% for all corporations by 2020, I think this strategy would further exacerbate the current situation in which the majority of the population in Britain will remain poor. As a society, we have to support our growing industries and also make certain that our population is supported with a high quality and standard of living. Instead a 3 system tier strategy so that the middle-class are not left with the burden of taxes is what is necessary to grow Britain's industries. Without a strong and stable middle class, society would become stratified in a world in which billionaires avoid tax schemes and the rest are left to carry the burden.

60% of the British population is employed by small-medium businesses and they pay the majority of taxes whilst multi-billion pound corporations avoid tax altogether through tax shelters. Both the Labour and Conservative Party should amend their tax system to exclude small and medium sized businesses from a heavier tax burden, because for many, that will be the deciding factor in how they vote.