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!

 

 

Animal Spirits?

Writing in the latest issue of the (UK) Spectator (the article is hidden behind a pay-wall), the magazine’s editor, James Forsyth, maintains that Osborne has been radical with yesterday’s Budget. The article is entitled “Osborne goes for growth.” And he says among Treasury officials “there’s a realization that three percent growth won’t come without reform: there’ll be no reward without political risk.”

And the reform he’s talking about? The cut in the higher rate of income tax and the two percent reduction in the corporation tax rate. As I argue below, both were sensible cuts but hardly radical and should have gone further. They are not going to secure for the country three percent growth per year. Much more than that is needed to unleash the animal spirits.

Democrats: You Only Have Yourselves To Blame

And it comes down as the clock ticks closer to a shutdown to several social policy riders introduced by House Republicans to a continuing resolution. The most controversial is to pull federal government funding from Planned Parenthood.

Planned Parenthood receives about a third of its money in government grants and contracts. In fiscal year 2008 it amounted to $349.6 million. Pro-life groups have long contended that the federal government shouldn’t be providing any funding to Planned Parenthood. They say that despite the fact that Planned Parenthood is prohibited from allocating any federal money for abortions, the very act, according to Indiana Republican Mike Pence, of giving the organization funds “frees up” money for abortions.

Should this issue be part of this debate now? Isn’t it an act of provocation by some Republicans to push this rider at this juncture?

Agreed the wider debate about the size and responsibilities of the federal government needs to take place. There will have to be cutbacks – we all know that, even many people who favor an activist government realize that. But the social policy riders don’t help the Republicans with independents.

Of course, the Democrats could have avoided all of this if they had been more responsive to demands for bigger cuts with this retrospective budget. And even more to the point they have only themselves to blame by failing to pass budget last year when they controlled both the executive branch and both chambers of Congress.

Yea, great leadership from both sides.

 

Congress Gets Paid But the Military Won’t!

So if the government shuts down the military won’t get paid but members of Congress will! There is apparently a constitutional reason for this: Section 6. Clause 1. “The Senators and Representatives shall receive a Compensation for their Services, to be ascertained by Law, and paid out of the Treasury of the United States.”

It is automatic.

Even so this can’t play well outside the Beltway – especially with the 800,000 government workers who won’t be paid. Nor with the military and their families for that matter.

What is also shocking is that the House Speaker John Boehner was unaware that members of Congress will continue to receive their pay.

On ABC’s Good Morning America” he said: “Members of Congress are elected by their constituents. If there is a government shutdown, not only will Congress not be paid, but federal employees will not be paid.” Later he had to correct himself, saying that members of Congress should not be paid.

One lawmaker said they could not afford not to be paid. California Democrat Linda Sanchez said she had financial obligations. Hmm, tell that to military families.

Neither side of the aisle come out of this confrontation well. What we are witnessing is a lack of leadership from both the Hill and the White House. Shouldn’t they be able to debate the debt and the deficit without shutting down the government and causing massive disruption for ordinary Americans? And all this hoopla over cutting a tiny amount from the budget? What a lot of posturing!

 

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.

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.

All So Obvious — UK Brain Drain and Taxes

Back in April I blogged on what the consequences of Britain’s tax hikes would be: businesses packing up and leaving. Today a survey published in the Daily Telegraph suggests that hundreds of businesses are thinking about exiting and setting up overseas, and one-in-five entrepreneurs say they would not consider starting up in the UK again.

When will politicians learn that we live in a wired world and that tax competition strengthens the link between diminishing returns and high taxes. Meanwhile, Britain pours out money for military adventurism abroad — Iraq and Afghanistan — and is planning to spend billions on an updated nuclear weapon — all to prove Britain still rules the waves. And we lecture Putin that national greatness should not nowadays be equated with military greatness.

More on Taxes

You would have thought that Brown and Darling would have learnt a lesson about tax hikes. Back in early 2008, Britain’s Labour leaders had to back-track on some of their plans to “crackdown” on rich foreigners resident in the UK but not domiciled there for tax purposes. Inadvertently, he provided a major object lesson on the importance of tax competition.

Unnerved by the Conservatives, who promised that in government they would impose a levy on rich foreigners, Brown and Darling, announced just before Christmas that come spring, tax rules on foreigners resident in the UK would change. Under the previous regime, foreign residents could claim “non-domiciled” status and avoid paying tax on overseas earnings and offshore assets. Only money brought into the UK or generated there was liable to income tax or capital gains tax.

Brown’s new proposal would have all non-domiciled foreigners resident in the UK for more than 7 years paying an annual tax charge of 30,000 pounds (now about $45,000 but then $60,000).

According to the government’s theory, hugely wealthy foreigners wouldn’t up and leave just because of a mere $60,000, although, of course, for families it could be a lot more than $60,000, if spouse and adult children were taken into account.

To make matters much worse, the British government also started to talk about introducing new residency rules and rules on taxing offshore trusts.

In February 2008, I wrote this for the Cato Institute blog: “Government spokesmen, along with supporters of the tax crackdown, including rather strangely the editorial writers at the Financial Times, pooh-poohed the notion there would be an exodus of the wealthy and entrepreneurial just because of the tax changes. They have been arguing that London is too important, what with its deep pool of financial and international legal expertise. Low-tax cantons in Switzerland or non-tax Monaco or offers of generous tax treatment in, say Greece, would hardly compensate for what London has to offer.

Foreigners apparently have been thinking otherwise. Many of the country’s richest foreigners have already started to relocate to Geneva, Zurich, Barbados or Ireland. This week, Irish paper king Dermot Smurfit announced he was planning to move to Switzerland and there were reports that dozens of Greek shipping magnates were exploring the possibility of moving back to Athens – a transfer that would cost the British economy annually $10 billion alone, and in the long term maybe two or three times more. The $60,000 annual levy per non-domiciled foreigner would bring in annually $1.6 billion.

Belatedly, the alarm bells have started to ring. The British government is poised to announce, possibly tomorrow, an embarrassing back-down. Taxing offshore trusts is now likely not to happen, although the $60,000 levy per non-domiciled foreigner will remain.

The reversal highlights the importance of tax competition. But there still might be long-term consequences from Brown’s botched handling of the affair. Non-doms who have already moved overseas are unlikely to return and the London-based Greek shipping magnates, who control a quarter of the Greek shipping industry, are now being courted energetically by Athens, with offers of generous tax treatment and subsidies.”

The Law of Diminishing Returns

Bad news for Britain’s Labour government right on the eve of tomorrow’s unveiling by Chancellor Alistair Darling of the annual Budget.

The IMF now estimates that the cost of the bail-out of Britain’s banks will amount to 13.4 per cent of the UK’s entire economic output of £1.46 trillion in 2008. Of OECD countries, only Ireland will pay more as a percentage of its output to rescue its banks. So much for Prime Minister Gordon Brown’s proud boast of having ended boom and bust cycles.

And the respected British think-tank the Institute for Fiscal Studies has warned that tax hikes are unlikely to help pay for the bailout or mitigate the consequences of recession. The institute warns that raising the top rate of tax to 45p as proposed by Brown will prompt an exodus of top earners as well as greater use of tax avoidance schemes.

The Treasury has sniffed at the institute’s prediction, saying ,“The Treasury remains confident in its forecast revenues for the new 45p rate of tax as set out.” Now is that the same Treasury that came up with all those glowing forecasts about how Britain under New Labour had found that magic to escape busts?