Lansons Conversations

Don’t do it, Darling

The subject on everyone’s lips in the City this week is the Pre-Budget Report, and whether the Chancellor will act to stop the conversion of income tax into CGT currently being planned in accountancy firm nerve-centres across the country. Cynical observers grumble that scheming, cunning bankers will employ even more scheming, cunning accountants to cut their tax bills and thus deprive the state of much needed public funds. Noble defenders of the City argue that raising taxes simply drives away from our island those great minds who have built their fortunes by innovation, entrepreneurship and the application of their considerable intellects, the like of which we cannot live without. Facetiousness aside, just why do people resent paying tax so much as to potentially leave the country in order to avoid doing so? Surely Hollywood stereotypes of the city are in the minority rather than being the norm – you can’t take it with you after all? It’s fair to say that the majority of people agree that tax is necessary and important to the functioning of the state, but that many people feel that their taxes are not spent wisely or efficiently. As such, people begrudge paying tax at rising rates. But what about if you give the taxpayer more control over how their money is spent, and even a degree of input into the operation of the outlet engaged to do so? There is a rapidly-growing sector of wealth management which has the infrastructure in place: philanthropy. Take a wealthy individual working in the City who will comfortably be above the £100,000 threshold for the highest rate of income tax as of April 2010. At this level of wealth, there is now a growing trend to minimise the tax you pay, and channel an appropriate amount into philanthropic organisations as a more personal form of taxation. Surely our innovative, entrepreneurial City brain would be encouraged to stay if the state actively encouraged them to give to these organisations as a proxy for higher tax rates? We’re likely to hear plenty in the coming days, weeks and months about income and capital gains tax, whatever the content of Mr Darling’s speech on Wednesday. Clearly a structured fiscal policy is essential, and not everyone can choose where their tax funds should be spent, but wealthy individuals need not be driven from our shores by steepling tax rises. If the right incentives can be found, there could be worse policy ideas than formalising the funding of philanthropic organisations to stem a ‘brain drain’ from the City of London.