P.S. Bob

My concern about Bob Diamond’s financial plight is growing. As you know, the CEO of Barclays needed the bank to cover his tax liability incurred when he was forced to relocate to London to take up his duties as chief executive.

Well, that’s not quite the spin the bank is using to explain why it paid the U.K. tax authorities £5.7m on Bob’s behalf. As I explained in the previous post, I am really worried about the tax advice Bob has been getting. That is, if we can trust everything we are being told by Barclays.

Pondering more on Bob’s remuneration package and how he’s being employed by Barclays, it has now dawned on me that Bob is alarmed also about how he’s going to make do when he’s retired and no longer a master of the universe.

How do I arrive at that assumption? According to Barclays they don’t actually employ Bob; he’s just assigned to the bank and is, in fact, employed by a Delaware-based company called Gracechurch Services Corporation, admittedly a subsidiary of the bank. Gracechurch is just lending Bob to Barclays, which is awfully good of them.

The Guardian noted that this assignment agreement “appears overly complicated” but Barclays told the newspaper that it employs a number of its bankers this way to allow them to keep continuity of U.S. benefits, particularly for healthcare.

And that’s when it became clear to me. Bob is concerned about his old age. Well, aren’t we all with the ending of final salary pensions and the financial crash ruining our stock portfolios.

So, as I read it, being employed by a U.S.-based company allows Bob to do a couple of things: 1. Continue paying into U.S. social security and securing a waiver in the U.K. on paying national insurance contributions; and 2. Maintaining his Medicare contributions so that it will be there for him when he retires.

It is nice to know that a master of the universe is hedging his bets, so to speak. No doubt the outcry over the pension given to disgraced banker Fred Goodwin, formerly a “Sir” and top dog at the Royal Bank of Scotland, gave Bob pause for thought and convinced him that he might not have the wherewithal to afford great private health insurance when he’s retired. Yes, better to make sure you will definitely get a full pension from the Feds, about $22,000 at the moment, and be eligible for Medicare.

But even here I am not sure Bob is getting good advice, that is, if Barclays is telling the truth. You see, Bob is almost certainly vested in Medicare already – you only have to work for about ten years in the U.S. to reach that status. And, any payments into the U.K. national insurance program could be counted in as U.S. social security contributions, if he were short of the necessary when it comes to his Fed pension.

Barclays mentioning of health care benefits could mean also that Bob was worried about breaking continuity when it comes to private medical cover. Here an explanation is needed for the Brits. In the U.S. you don’t want any break in private health coverage. If there is a break of more than 60 days, when you come to apply to a new insurer for coverage, then they can write out pre-exisiting conditions.

One key aspect of the Obama health care reform would, of course, change that by stopping health care insurers from rejecting an applicant because of pre-existing conditions or refusing to cover those conditions. That will come into effect in January 2014, if the Supreme Court doesn’t strike down the health care reform.

But again the advice to Bob was wrong. Barclays could have gone to a U.S. insurer to secure international coverage for Bob that wouldn’t have broken continuity of coverage. Cigna offers such a policy. Also, Barclays could have gone to BUPA or PPP in the U.K.. Several of their policies are recognized by U.S. insurers and would not have jeopardized coverage continuity in the U.S..

Now, of course, I am basing all of this on taking Barclays at face value. Maybe there is more here than meets the eye – as with Bob’s tax situation.

That aside, Bob has managed to get from me lots of counsel for nothing. And I am not going to ask Bob for a salary or a bonus. But I was wondering if he could pay my taxes for me. They will just be a tiny fraction of what Bob got from Barclays

Bob Diamond Should Phone My Tax Accountant

I am very worried for Barclays’ CEO Bob Diamond. I don’t think he’s securing the best tax advice that’s out there, and would like to recommend my own excellent tax adviser, the Alexandria, Virginia-based Braxton Moncure of Ross & Moncure, the accountant of choice of many journalists, foreign and otherwise, plying their trade in Washington DC.

From what I can see in the current brouhaha that’s erupted in London over Barclays helping Bob out by paying his U.S. taxes, he appears to be oblivious, as does Barclays for that matter, to the double tax agreement between the U.S. and the U.K. that protects anyone – peon like me to a master of the universe like Bob – from having to pay tax on both sides of the Atlantic on the same income.

For those of you who have not followed Diamondgate, let me briefly recap. This week, Barclays revealed that Bob had to make do in 2011 on a mere £17m in pay, shares and perks.

Of course, his compensation package underlined for many the scale of multimillion-pound pay deals still being handed out to top bankers.

But what has triggered even more fury is that Barclays paid £5.7m to cover Diamond’s U.S. tax bill. That disclosure came hot foot on the recent news that Barclays has been mired in a row with HM Revenue and Customs over a couple of tax avoidance schemes that were designed to save the bank about £500m.

The news of Bob’s nice tax perk prompted Liberal Democrat peer Lord Oakeshott to remark: “The only tax Barclays pays seems to be for Bob on his bonus.”

And some institutional shareholders – including Standard Life, Aviva and Scottish Widows – are threatening to vote against Diamond’s remuneration package at the bank’s annual general meeting later this month.

Their disapproval has mounted since the Association of British Insurers announced that the package possibly breaches corporate governance codes. The ABI is concerned about the scale of the remuneration package given that Diamond himself acknowledges the bank’s performance last year was “unacceptable”. In February, Barclays reported a three percent fall in profits. The Daily Mail has a nice little graph here showing how Bob has profited while the bank’s share price has tumbled.

And the association suspects that the decision by Barclays to pay UK tax authorities £5.7m on behalf of Diamond may fall foul of their guidelines that companies “should not seek to make changes to any element of executive remuneration to compensate participants for changes in their personal status.” Whether anything comes from shareholder ire, who knows. Last year, the ABI and some institutional shareholders protested at the remuneration packages of top Barclays executives but nothing much came of it.

Bob’s UK tax bill was incurred when he relocated from New York to London on his promotion to CEO in January 2011. The bank has an agreement with Bob to compensate him, if he has to pay tax on the same income twice — in the UK and US.

And this is where it gets all very odd. Why did Bob have to pay tax to both the US and UK on the same income? Since 1975 there has been a double tax agreement between the US and UK to prevent double taxation on income and capital gains. That agreement has been added to over the years and with big changes in 2001.

Presumably, using this treaty Bob did not have to pay any US federal income tax. And that may well have happened. But state taxes are not covered by the double-tax treaty.

Barclays has not been clear about what taxes Bob incurred that required him to pay tax twice on the same income, but it is likely that they were New York state and city taxes. The top New York state tax rate is 8.97% and the New York City rate is 12.62%. Capital gains and dividends are taxed as ordinary income. But long-term capital gains may be taxed differently.

But why was Bob paying these taxes? He relocated in January 2011 – U.S. tax years run in calendar years, unlike the UK, which runs April to April.

Under New York state regulations: An individual is a New York resident if one (1) of two (2) conditions is met: 1) If an individual is ‘domiciled’  in New York, such individual is a New York resident. And domicile is defined thus: “Domicile in general, is the place an individual intends to be his permanent home – the place to which he intends to return whenever he may be absent NYCRR 105.20(d).”

2) “If an individual is not ‘domiciled’ in New York, such individual is a New York resident if s/he both ‘maintains a permanent place of abode for substantially all of the taxable year’ and spends in the aggregate more than 183 days of the taxable year in New York. New York Tax Law § 605(b)(1)(B), New York City Admin Code Section 11-705(b)(1).”

So the questions start to multiply. Did Bob spend more than 183 days in 2011 in New York when he had officially relocated to London?

Why has Bob not made a declaration via an efficient accountant to the New York tax authorities that while he maintains a home in New York he doesn’t consider this to be his permanent home? Hence my urging that Bob speaks with my accountant, Braxton Moncure.

As Bob – a dual UK-US citizen – has not apparently, according to Barclays, claimed non-dom status in the UK, which he could easily do, it would be simple, as long as he is not spending more than 183 days a tax year in New York, to prove that he is no longer domiciled in the Big Apple.

So why hasn’t he done so? And whatever the reason, why should Barclays be paying up when Bob could easily get out of the tax liability? And should a man who can’t seem to navigate efficiently an easy international tax thicket be the CEO of Barclays anyway? Or is there more than meets the eye here?

Phone Braxton, Bob!

 

 

Independents Like Obama But Favor Opportunity Over Fairness

Independents are likely to be crucial in deciding whether Barack Obama secures a second term in the White House or whether his likely GOP challenger Mitt Romney ousts him. A new poll released today and conducted for the moderate Democratic Third Way think tank suggests that Obama is sitting pretty when it comes to independents in battleground states. Fifty-seven percent of swing independents view the President favorably compared to 41 percent being inclined to Romney.

Further good news for the Democrats comes when the pollsters drill down on the economy. The two parties are in a statistical tie when it comes to whom independents trust to manage the economy; and on taxes, traditionally a GOP strength, Obama has a six point lead over the Republcians.

But the President’s support is soft. A key finding generally is that swing independents are concerned with opportunity more than fairness. According to Third Way co-founder Jim Kessler, “What they’re really worried about is the country slipping. They’re not sure their family is going to reach the heights they expected. They’re relatively sure China will have the world’s leading economy in 15 years. They’re looking for someone to answer that.”

And the President doesn’t so that when he stresses fairness more than opportunity. It is something the Republican group Amrerican Crossroads has picked up on. It plans to launch an ad blitz  and according to one of the organization’s strategists, Steven Law, the spots will go softly on the President to avoid offending independents with too much negativity but will question whether Obama is up to the job of fixing America.

GOP and Wealth: The Party of Main Street, Not Wall Street

Posting my latest City Focus piece published by the Daily Mail yesterday. It examines Mitt Romney’s private-equity past – did he destroy jobs or create them? And it looks at the attacks by his rivals, notably Newt Gingrich, on his time as head of Bain. It suggests also that his economy policy is vague in some key areas — e.g. how he would pay for income taxes.

Dollar or Pound?

A relative wrote me to ask whether she should change pounds for dollars on the grounds that the dollar has weakened during the debt ceiling showdown and would likely increase in value once a compromise had been struck in Washington DC. This is what I replied:

“I am glad you are so confident that a last-minute deal will avert a technical default. I think a lot could go wrong before then. And if a deal is struck, it will be the two-part Reid-Boehner compromise that in effect will kick the can down the road and will merely delay the reckoning. In other words, this failure of mature government is to be repeated in a few months time.

On the macro-level, I agree with Mohamed el-Erian (PIMCO’s CEO) that long-term damage has already been caused to the U.S. and that international investor confidence has been shaken by what has been taking place in the past few weeks. It is quite likely that the rating agencies will downgrade the U.S., even if the Reid-Boehner compromise is agreed. That will knock the value of the dollar.

Despite the awfully slow economic growth in the UK the last quarter, I still believe that the Coalition is basically on the right track – UK debt reduction is essential and more necessary than debt reduction in the U.S.. For example, the U.S. deficit could disappear with an increase in government revenue, i.e. tax increases. That is off-the-table, alas, at present because of the economic illiterates in the GOP House caucus, who believe incorrectly that any tax increase will restrain economic growth.

In other words, I think the pound is a better bet than the dollar in the medium term. Could you make a small profit by buying dollars now and maybe in a few days time, if a deal is struck, see a dollar value rise and be able to exchange back to pounds beneficially? Maybe you could, but it is a risk and I am not sure that you should be risking your capital.”

And what happens if a deal is not done, even the Reid-Boehner plan? I know there is a temptation to risk but I myself would avoid it.”

 

Labour Turns The Clock Back

Well, if the election of Forrest Gump (err, sorry, Ed Miliband) as the new Labour leader isn’t enough to have put paid to the British electorate embracing Alternative Voting – that is when the country is asked in a referendum whether it wants it to replace the current first-past-the-post system for general elections — then nothing will.

“Red Ed” owes his election entirely to Labour’s skewed AV system, one that saw his brother, David Miliband, win on first preference votes and secure the backing of party members and MPs. Ed can thank a gaggle of militant union chiefs for his victory. It is a turning of the clock back for the Labour Party, which only after the herculean efforts of New Labour and a succession of leaders – John Smith, Neil Kinnock, Tony Blair – escaped the grip of union chieftains.

“I’m nobody’s man. I’m my own man and I’m very, very clear about that,” Ed Miliband claimed yesterday in a BBC interview. His insistence with the inclusion of “I’m very, very clear about that” seemed a little as though he were trying to convince himself.

For all his talk that he won’t be in the thrall of the unions and lurch the party to the left under his leadership there was little in the way of details to support this in the policies he has been trotting out. He wants new taxes for higher paid workers, an assault on City bankers and new trade union rights for employees. And he will oppose Coalition plans to reform extravagant  public sector pensions. He wants deficit reduction to be slower than is currently the plan of the Coalition government.

Max Hastings nailed what Ed’s election means in his column today in the Daily Mail. “The party Ed Miliband’s supporters expect him to lead wants to address how taxpayers’ money is spent – not how it is earned. It esteems fairness above excellence and care of the disadvantaged minority above the interests of the majority. It values the protection of perceived losers above the advancement of strivers and winners. It is, in other words, the old party of Callaghan, Foot and Kinnock.”

And Max is right, I think, when he maintains that Ed’s pledge to fight for the “squeezed Middle” is meanginless until “Labour discovers the honesty to acknowledge publicly that Britain is broke because the Blair-Brown governments saddled it with wholly unaffordable – as well as inefficient and wasteful – public services.”

Wow — Obama is Anti-Colonial!

Senator Jim DeMint likes to claim that Barack Obama is to the “left of Europe.” In this Daily Caller opinion piece I argue the Senator should actually acquaint himself with what is going on in Europe — and, as an example, in the UK — if he cares to be tethered to reality.  While Obama wants to prolong the Bush tax cuts for all but two percent of Americans, the Conservative-Liberal Democrat Coalition in Britain is hiking taxes, fees and levies at every turn. Obama wants to cut small business taxes. In the UK small businesses are under a greater tax burden. You get the point.

But I wish Obama opponents would agree on the most appropriate epithet to hurl at the President. One moment he’s a Muslim, a Socialist, a National Socialist, a Marxist, a European-style Social Democrat, a Liberal, etc. Oh, yes, he is apparently steeped also in anti-colonial thinking! As my novelist friend Jim McKean points out, when was that a bad thing in America — I thought that was the whole point of the American Revolution.

Would Stubborn UK Inflation Have Anything To Do With High Taxes?

Now why would UK core inflation remain stubbornly high? Anything to do with high income taxes, high business rates and high sales tax and government and local government fees slapped at every twist and turn? Plus government consistently over-paying for staff, services and vendors. What remains amazing is how the British press, including Conservative papers, seldom make the link.

The U.K.’s Consumer Prices Index has remained at 3.1pc for the sixth month running. Obviously there is a connection with higher international commodity prices – for example, cereals have gone up because of wheat price increases partly as a result of this summer’s forest fires in Russia.

But services inflation climbed to its highest rate since February 2009. It is now well above its low of 2.3pc in November. At least the Daily Telegraph noted that there might be a link with the upcoming jump in VAT (national sales tax). It quotes a retail expert, Neil Saunders of Verdict, suggesting that shops are already beginning to increase prices ahead of next year’s VAT increase to 20 percent.

Animal Spirits, Economic Growth – No UK Will Just Rebalance

All the talk from Britain’s Chief Secretary to the Treasury, Danny Alexander, is about rebalancing and getting the country’s public finances in order. All very important, of course, but what remains utterly depressing is the Coalition’s tax position. In an interview today, Alexander confirms that the Treasury is not thinking of reducing taxes on the middle-class and high earners. He says it as unlikely that there will be any tax reductions for the next five years.

Now there is nothing wrong with trying to get to grips with Britain’s £155billion budget deficit — unlike the U.S., Britain is taking decisive action to rein in public expenditure. But retaining the 50p top rate of tax and the higher 20 per cent rate of VAT, which kicks in next January, is going to do little to inspire the animal spirits and will only hold back economic growth — yes, it is the private sector that is going to be the engine to power the U.K. out of the doldrums, if it is allowed.

Politicians just seem intent on making the mistakes that worsened and prolonged the Great Depression back in the 1930s. As Arthur Laffer has noted: “The damage caused by high taxation during the Great Depression is the real lesson we should learn. A government simply cannot tax a country into prosperity.”

And some off-setting expenditure cuts? Don’t build the two new aircraft carriers and forget a Trident replacement!

Closing the Gap

Why should the British middle-class instantly reach for their wallets whenever they hear a British politician talk about closing the gap between the rich and the poor? Nick Clegg, the U.K.’s deputy Prime Minister, demonstrated exactly why in London today with his speech on creating a more socially mobile society. The rich quickly morph into the middle class, and so what he really means is closing the gap between the middle-class and the working-class. The real rich, as we all know, will just move overseas, if there is too much redistribution out of their pockets.

Of course, Clegg can’t say that, especially as he is in coalition with the Conservatives, but that is what he means.

I am all for greater social mobility – that is one of the driving reasons I, British-born, embraced the United States – but “wealth” redistribution is not the way to do it, or shouldn’t be the main driving force. Britain has been trying that since the Welfare State was established in the wake of the Second World War and as studies have shown it hasn’t been so successful. The increased redistribution primarily from the middle-class to the working-class and tremendous subsidies to geographically poorer areas of the UK under the Brown government failed dramatically to close the gaps dividing north from south or the one separating the middle-class from the working-class.

The review the Coalition government is undertaking now of the universal benefits system is a good thing – the well off surely should not be receiving subsidies in the form of child credits and heating allowances they don’t need. But how much is going to get taken from the middle-class at the same time as they are facing higher taxes before they decide either that they have had enough of the Coalition government or decide to trigger a 1970s-style brain drain?

Social mobility comes with providing fine schools, access to excellent higher education and the economic, commercial and regulatory circumstances that encourage entrepreneurialism, wealth creation and prosperity. And as history has shown, countries that declare war on their middle-class tend not to do so well when it comes to economic growth.

Arguably, Margaret Thatcher did more than Brown or Blair for social mobility and encouraging working-class aspirations. She did it by allowing council houses to be bought by their occupants at below market value – a policy fought tooth-and-nail by the left and center-left in British politics. She did it by welcoming success, encouraging entrepreneurism, keeping taxes low, reducing public expenditure and ceasing the British industrial habit of propping up lamb-ducks. She was also more heavy-handed with high-blown, snooty and traditional institutions than many Labour ministers were before her and have been since. And aspiring working-class voters loved her for it – that’s why she was re-elected.

Obviously, it was good to hear Clegg saying that the Coalition government aims to assist social mobility by improving people’s lives rather than by providing hand-outs, but sadly missing from the Clegg speech was anything about lower taxes — just more stuff about “fairer taxes”, in short more taxes on the middle class.

And this on the day when an excellent economist, Danny Blanchflower, a former member of the Bank of England’s monetary policy committee, urged the Coalition government to cut taxes or face another recession.