Wednesday, March 20, 2013

Cyprus and the UK - time to collect foreign rents?

Parochialism in the public debates in both and the risks letting rich foreigners off the hook

What do Cyprus's apparently defeated bank levy proposal and the UK opposition's also defeated proposal for a 'mansion tax' have in common? Although on markedly different levels, both proposals very quickly met opposition on the grounds of hardship. In the Cypriot case that is perhaps more obvious or direct, but the mansion tax too it is claimed could lead to personal hardship for some individuals. Whilst Cypriots threatened to bulldoze their banks over the bank levy, a Radio 5 live phone in a couple of weeks ago was dominated by the hardship theme. What the two proposals also have in common is the dilemna now facing governments who, in different respects, have become attractive havens for money and investments from wealthy individuals in foreign climbs.

40% is the key figure. It is the percentage both of Cyprus bank deposits held by Russians and, coincidentally, of new properties built in London which are snapped up by foreign investors, often with no intention of living in them, so actually further exacerbating the UK housing shortage. Wealthy individuals from countries where investments are less straightforward have chosen both of these countries in their different ways for essentially similar reasons of security and future stability for their gains. This has enormous benefit if you are a Cypriot bank or a UK construction firm, but it has issues too; in Cyprus we end up with a top heavy banking sector in a tiny country, and in the UK we could say that these property investors are not paying their way for the privilege of buying the nation's leaseholds and freeholds.

The common denominator in both cases is that attempts to get these sometimes shady investors to pay into the countries from which they benefit get muffled in debates which focus on the hardships of the locals. We shouldn't belittle that. In both cases a suggested solution has been a higher threshold. Not many with savings of 100 000 or higher or with a house worth, say, £5 million or more, are going to be worrying about where their next meal is coming from (some of thee properties invested in are worth more than fifty times the 2 million threshold!). There is a reality that a pensioner who's saved all their life to have a few thousand in the bank, or a homeowner who is (only in a sense) a victim of rocketing property prices and the considerable expense and taxation associated with running a large home would suffer personal trauma under the original proposals, but the other reality, of wealthy foreign citizens who take advantage without taking responsibility, must not be ignored.

Of course there is a problem. As the Cyprus proposal shows, a more obviously targeted proposal risks making relations problematic with the governments of countries where politics, business and goodness knows what else are seamlessly intertwined, and there is no taboo about making such issues political. However, there is a deep need to reframe the debate, to educate people about the perhaps uncomfortable truth about the ways in which their countries have changed, and why it is only fair and reasonable that these people be taxed. Otherwise, we really are hurting the little guy, our ordinary citizens, whilst the big guy (crooked businessmen, even criminals) continues to fatten himself abroad unimpeded, much as he has quite likely already done back home. 

Of course the governments of free democracies, in states with free media, must listen to their citizens, but it would be a pity if, whilst having those values, we decide simply to give a free ride to dodgy individuals from the countries to our east where the media is muzzled and national parliaments are little more than corrupt dysfunctional rubber stamp institutions devoid of such social conscience. Not to mention the real little guys, millions living in poverty because of corruption, criminality and stolen state assets that have enriched many of these individuals. Surely its only right that these investors pay their way somewhere along the line.

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