It Doesn't Pay to Have Money

As part of its continuing efforts to bolster the pound, Britain last month imposed a severe tax on all investment income exceeding $7,200. Though Brit ons have grown accustomed to bitter fiscal medicine, that dose has been particularly hard to swallow. Reason: the special one-year measure carries the country's progressive taxation to the point of confiscation, resulting in a tax bite that can, in higher income brackets, amount to more than 100%.

The new levy, which applies retroactively to the fiscal year that ended last week, is expected to raise $240 million of the $4 billion in fresh taxes provided for in Britain's latest austerity budget. By taking money from British pockets, the whole tax package is generally intended to dampen demand at home, thus help ease the country's chronic balance of payments deficit. The soak-the-rich character of the investment-income levy has the added political purpose of pleasing left-wing members of Harold Wilson's ruling Labor Party.

While the tax itself ranges from only 10% to a limit of 45%, it comes on top of Britain's already stiff regular income taxes. The result is that taxpayers now have to pay at least 690 on every dollar of investment income over $7,200. The total tax rate rises to 100%. when so-called "unearned income" reaches $43,200. After that, taxes actually exceed income. For example, people with investment income of more than $120,000 have to shell out at least $1.26 on every dollar over that amount, making it necessary to dig into capital to pay their tax bills.

The measure thus creates a situation in which it can be literally unprofitable to hold income-yielding investments. What especially disturbs many of the 95,000 Britons affected by the tax is the belief that they are, in effect, being penalized for investing in the very economy that the government supposedly means to help. Moreover, by making the measure retroactive, Chancellor of the Exchequer Roy Jenkins left them little time to minimize the burden by shedding their holdings. In defending his action, Jenkins pronounced it only fair that "fortunately placed individuals" make "some small contribution from their capital."

Some investors, to be sure, hurriedly sold stocks before last week's deadline-often at big losses--and put the money instead into paintings, antiques and diamonds, investments that yield no immediate returns. But many tax consultants advised against such action, reasoning that the investment-income measure is merely a prelude to a more sweeping "wealth tax" on all assets, whether they produce income or not. At a loss as to how to advise his clients in the meantime, one tax man concluded bitterly that "it just doesn't pay to have money."

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