Friday, November 21, 2008

OECD to peek at Hen-Wees

The Organisation for Economic Co-operation and Development (OECD) is, rightly or wrongly, the world's most powerful grouping advocating internatinonal co-operation on taxation. We think it is potentially a great force for the good, though we have remarked on its enormous shortcomings on several occasions in the past.

The OECD's Centre for Tax Policy and Administration has just issued invitations for public comments on its discussion paper on High Net Worth Individuals (HNWIs,) or as John Christensen has called them, Hen-Wees. These are commonly described as people with liquid assets worth more than a million dollars.

As the discussion paper notes:

"Tax administrations allocate significant resources to this segment. This allocation is notbecause taxpayers in this segment are necessarily less compliant in their tax affairs but is driven by a range of factors, including the amount of tax at stake, the wealth8 and increasing number of HNWIs and the potential impact of their non-compliance on the community."

The OECD says it's an open question whether Hen-Wees are less compliant than others. A recent US study might provide a clue, though. A news report about the study started like this:

"A new study based on unpublished Internal Revenue Service data shows the rich are different when it comes to paying taxes: They hide more of their income. The previously unreported study estimates that taxpayers whose true income was between $500,000 and $1 million a year understated their adjusted gross incomes by 21% overall in 2001, compared to an 8% underreporting rate for those earning $50,000 to $100,000 and even lower rates for those earning less."

The preamble to the discussion paper, based on the work of its Focus Group, contains various notable things, such as this:

"the Focus Group recognises that the situation of HNWIs is in many ways significantly different from the situation of large corporate taxpayers. HNWIs are much less homogenous as a group and show higher mobility. Moreover, large corporates are typically subject to a number of bookkeeping, accounting, filing and disclosure rules. They have extensive governance rules and a separation between owners/shareholders and managers. Large corporate taxpayers also have frequent and ongoing interaction with tax administrations (including e.g. VAT, wage tax withholding) while HNWIs may have far less interactions but face different or additional taxes (e.g. wealth taxes, estate and inheritance taxes). . . . furthermore, in the vast majority of cases the interaction between tax administration and HNWI will not be direct but will take place via a lawyer, accountant or other representative (e.g. a member of a “family office”) of the HNWI. Thus, unlike the situation of large corporate taxpayers with “in-house” tax capability, any relationship between tax administration and HNWI is likely to be implemented via the intermediary."

The existence of a pinstripe buffer between the Hen-Wees and our elected representatives carries great risks. And, in all this, we should not forget the political power of the Hen-Wees, described by David Rothkopf in his recent book "Superclass."

"Setting aside both the fanciful and the insidious theories of puppet masters and their cabals, we must recognise that there is something new afoot, a huge imbalance in the global distribution of power that concentrates great influence in among informal clusters of elites. These elites often transcend or supplant the insititutions of the past: national governments, systems of law that could not keep pace with global relaities, and even the earnest but incomplete efforts of the past half century at creating effective multinational organisations."

Will Hutton, writing in The Observer in May this year, before some of the most serious shocks in the current economic crisis, said this:

"The superclass is super-rich - the top 1,000 are billionaires - is super-influential and super-confident. There has not been a gap between the rich and poor on the current scale ever in history, warns Rothkopf. It is unstable. Sooner or later, there will be popular outrage and a political response. For the moment, though, it seems that a spell has been cast over the political process, at least in Britain."

The OECD project on Hen-Wees focuses on what it calls "co-operative compliance." In light of what Hutton and Rothkopf say, it is essential for the OECD to remember that when you are speaking softly, as the OECD has been doing for so many years, it is wise to carry a big stick. And when a crisis appears, use it.

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