(Bloomberg) -- Demetris Efstathiou, a hedge-fund trader and a Londoner for two decades, listened last week to Chancellor of the Exchequer Alistair Darling outline a plan to raise taxes on high earners. Then he decided to leave Britain.
“There is no reason for me to stay here anymore,” said Efstathiou, a 38-year-old Cypriot who moved to London in 1990. “This tax increase is the last straw. This government is no longer interested in the City.”
Prime Minister Gordon Brown’s proposal to boost the tax rate to 50 percent from 40 percent on income above 150,000 pounds ($220,000) pushed headlines about “class warfare” onto the front pages of the capital’s newspapers. It also prompted predictions from business groups that it would undermine the U.K.’s competitiveness and lead to an exodus of financial talent. Brown was portrayed as Vladimir Lenin in a cartoon on Page One of the Daily Telegraph.
The income-tax change, set to take effect next year, would give the U.K. a higher top rate than Spain, Italy, Germany, France and the U.S., according to KPMG, the accounting firm. Among the 30 members of the Organization for Economic Co- operation and Development, the country would jump to seventh from 19th in the rankings of tax rates, accounting firm Ernst & Young said.
The initiative is part of the government’s efforts to contain a planned budget deficit of 12.4 percent of gross domestic product, Britain’s biggest in peacetime. The Treasury expects the tax to raise about 2.2 billion pounds next year when government borrowing will be 173 billion pounds. Darling’s budget calls for 703 billion pounds of deficits in the five years through April 2014.
How Increase Works
Under the new rates, a banker making 350,000 pounds would pay 160,000 pounds in income-tax and national-insurance contributions, according to a government online tax calculator. That’s 22,600 pounds more than the current amount and doesn’t include the elimination of tax relief on the first 6,000 pounds of earnings and the reduction of breaks for pension contributions that Darling is also introducing.
About 350,000 people in the U.K. earn more than 150,000 pounds annually, according to the London-based Institute for Fiscal Studies. About 750,000 make more than 100,000 pounds, and their taxes will also increase after the government scrapped a personal tax-free allowance.
“There is a populist side to this message: Let’s over-tax the rich,” said French-born Philippe Houchois, 45, an analyst in London for Zurich-based UBS AG. The state is encouraging this anger “against banks, against the financial sector.”
Poll Shows Support
The proposal, part of the 2010 budget, is likely to go ahead after Conservative Party leader David Cameron said April 24 that reversing the 50 percent rate wasn’t a priority. About 57 percent of Britons have a “positive view” of the plan, a Populus Ltd. poll published the same day showed. Populus surveyed 518 adults after the April 22 budget speech.
Brown isn’t without supporters in the finance industry.
“We do have a major crisis,” said Bill Blain, a bond broker at KNG Securities LLP in London. “Taxes do need to rise. People in that bracket do need to pay.”
Fleeing bankers may find that taxes are also going up elsewhere. President Barack Obama wants to let the top two U.S. tax brackets increase to 36 percent and 39.6 percent from 33 percent and 35 percent. The top U.S. rate kicks in at $372,950.
Lower Taxes Elsewhere
Countries such as Singapore, where the top rate is 20 percent, and Switzerland have lower taxes. A single banker living in London and earning 350,000 pounds would pay about 40,000 pounds more under the new system than he would in Zurich, according to British and Swiss government figures.
“People are questioning their operations in London,” said Steven Bell, chief economist at the GLC Ltd. hedge fund in London. He was a U.K. Treasury official the last time a Labour government decided to raise taxes on high earners in 1976. The numbers leaving “will be significant,” Bell said.
The move reverses policies dating from former Prime Minister Tony Blair’s election in 1997 that rejected income-tax increases and encouraged wealth creation.
When the Labour Party was previously in power in the late 1970s under Prime Minister James Callaghan, the top tax rate was 83 percent on earned income and 98 percent on unearned income. These were cut to 60 percent and 75 percent when Margaret Thatcher took office in 1979. Blair said his party, re-branded as New Labour, wouldn’t return to the past.
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