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Episode Six: The Non-Dom Tax Tunnel

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Ed Miliband’s intervention on the subject of abolishing non-dom status is interesting. The non-dom loophole is flagrantly unfair and has corrosive effects on social cohesion: nothing more overtly shows that we aren’t in it together. Look at the upper reaches of the Sunday Times rich list and it’s full of non-doms. The richest people in the US are American, the richest people in France are French, the richest in Germany are German, and so on. The richest people in the UK are from countries where you learn never to ask how somebody made their first million. The reason this loophole has survived – though it’s bigger than a loophole, it’s more like an enormous tunnel – is always officially said to be because the non-doms spend so much money here, and generate so much economic activity, that they end up benefiting the UK exchequer. I don’t buy that line, because if it were true, other countries would have copied us. No other big country in the developed world has chosen to be a residential tax haven for the super-rich. It isn’t a joke or a riff or a slogan to say that the UK has a different law for the rich: the UK actually does have a different law for the rich. London is a wonderful city in many respects, but from the tax point of view it is Monaco-on-Thames.

The non-doms have long been the subject of all kinds of threatening noises from opposition parties, who then tend not to do anything about them when they get into power. A big role in this is thought to be played by donations from non-doms: Greek shipping magnates are said to have talked the Tory government out of fixing the hole in the 1980s, and it’s known that a number of prominent non-doms made multimillion pound donations to New Labour. There were 67,000 non-doms when Blair came to power in 1997. Ten years later, the number was 137,000. Miliband owes nothing to people like that, just as he owes nothing to the right-wing press; this gives him a freedom of movement which for the most part he’s chosen not to take. As the polls stay flat and the demands for big gestures grow louder inside Labour, there may be more where this came from.

In the meantime, I would love the Treasury to make public its calculations on the costs and benefits of the non-dom loophole. There must be such a data set: working out the costs of tax policies is what the Treasury does all day, every day. Maybe they could share some of those calculations with the people who paid for them.

Comments

  1. streetsj says:

    The only non-Dom I know I know is my age (50ish) and has lived his whole life here. He inherited his status from his maternal grandfather (his mother having died horribly young). He has worked hard, been very successful and paid plenty of tax in the UK on his earnings. How many millions he has stashed in Switzerland I have no idea. Clearly it is ludicrous that he should have any tax advantage. Would he leave if they abolished his exemption? Possibly. He’s worked in both NY and Tokyo for several years. Would the economy suffer? Yes in a very minuscule way.
    On the other hand I don’t see why we should expect any “foreigner”, just because he is working here for a few years, to pay tax on his domestic investment income.

    Bottom line is that we should have a system not to discourage rich foreigners from coming to work here for a few years but any UK citizens living here should be treated the same as everyone else.

    But of course it’s all irrelevant to the election. I think though it does highlight a problem: there is an assumption that if only all these people paid more tax it would fund all sorts of grand plans. It’s simply not true: there are not enough of them and there’s not enough money. And the more you try and take the more likely their behaviour will change.

    In the TV debate there was talk of rich people paying their fare share. What is “fair” is subjective but what is factual is that the top 10% of earners pay x% of all income tax.

    (Now I’m going to look up x)

    • Adam Sorel says:

      “the top 10% of earners pay x% of all income tax” may be a fact but it is a classic dodge. If x is around, say, 50 it sounds unfair. The question is what percent of *income* the top 10% of *earners* make. If the top 10% of earners make 90% of the income and pay 50% of the income tax then your “fact” has a very different meaning, without getting into what’s supposedly just “subjective”.

      • markk says:

        Do get your facts straight. It may be a silly rule but the highest taxpayers already pay a worryingly disproportionate share of tax, and if we’re content to rely on this situation then it would be a mistake to drive them away from the UK.

        Here are the figures, from this week’s FT: “High quality global journalism requires investment. Please share this article with others using the link below, do not cut & paste the article. See our Ts&Cs and Copyright Policy for more detail. Email ftsales.support@ft.com to buy additional rights. http://www.ft.com/cms/s/0/0a9a826c-dd30-11e4-a772-00144feab7de.html#ixzz3WuUwS83V

        “Individuals with incomes in the top 10 per cent pay 58 per cent of income taxation, which is arguably acceptable since they control 34 per cent of income. The top 1 per cent pays 27 per cent of income taxation on 12.5 per cent of total income. How much the rich should pay is a political question, but the economic reality is that the present degree of concentration is a risk to the public finances. What seems a secure revenue stream can vanish, like corporate tax revenues from the financial sector in 2008-09.”

        • JWA says:

          The recent for the increased share of the total income bill is the consequence of growing levels of inequality, whereby the bottom 60% of the UK have seen no real-term increase in earnings in over a decade, while those at the top have (and considerably). They’re not being taxed any more than they were, (and with more dodges than ever before – just take a look at the charitable donations written off as income tax) – they’ve just got richer while the rest of the UK hasn’t. Presumably your partial analysis will be used to justify either cutting taxes for the wealthy – or raising everyone else taxes – to justify balancing ‘the funding distortion’. In other words its bull.

    • streetsj says:

      This data is from the ONS for 2012/13
      I have set it out in quintiles: bottom, 2nd, 3rd, 4th, top

      Original income: 3%, 7%, 14%, 24%, 51%
      Gross income: 7%, 11%, 16%, 23%, 44%
      Direct taxes: 3%, 6%, 12%, 23%, 55%
      Indirect taxes: 12% 14%, 18%, 23%, 33%
      Post tax income: 6%, 12%, 16%, 23%, 43%
      Final income: 10%, 14%, 17%, 22%, 38%

      Original income is earnings, private pensions, investment income
      Gross income is after benefits: state pension, dole, income support housing benefit etc.
      Direct tax is income tax, NI and council tax
      Indirect tax is VAT, duties, employers NI
      Final income is after adding to post tax income benefits in kind: NHS, schooling etc.

      Income tax alone: 2%, 5%, 11%, 21%, 61%.

      I didn’t know those figures before looking them up and think they’re quite interesting. Especially the fourth quartile which is almost perfectly consistent all the way down.

      I think the indirect tax number is a tricky one because its not clear to me whether higher is “better” or not.

  2. Callum Hackett says:

    I very much dislike that the prospect of this closed loophole having a negative net economic effect is being used to cast Labour as making a mere “political” gesture, as though moral principles have no priority over balance sheets when campaigning for public office.

    Now, I don’t for one second believe that the Labour party actually has any moral principles – like other parties squabbling over the minuscule centre-ground, it is a party of vacuous opportunism – but I keep awaiting those voices who will say, “Yes, we emphatically will close the loophole even if it does have a net negative effect because we will not be held ransom by rich people who demand special treatment in return for their activities.”

    It doesn’t matter if it raises more taxes, it doesn’t matter if it creates jobs, if these people are essentially blackmailing our government to give them immoral tax exemptions, they should be told to fuck off and take their money with them. As it is, we already have many other important avenues we should go down to improve the economy, such as sorting out our woeful levels of productivity; we should not be desperately prostrating ourselves before the super-wealthy, offering them ritual trinkets in the hope that their grace and presence will tricklingly improve the lives of the poor. It’s pathetic.

  3. John G Stewart says:

    What is missing from this debate is the treatment of American non-doms. Because the United States taxes all citizens on a worldwide basis, middle class Americans who cannot afford the non-dom fees, and who have been in the UK for more than X years, become subject to UK and US taxation on our world-wide income. And although the double tax treaty means that we don’t pay tax twice on the same income, the effect is that we pay the higher tax rate of the two countries on all income. And the UK tax authorities make us pay tax on most US mutual funds as if it is ordinary income, not capital gains. Plus the complexity of the two systems means we have to pay accountants to do our taxes in both places.

  4. break.itoff says:

    It’s hard to imagine that there are enough rich non-doms to make a big difference to the budget. It’s also quite hard to imagine that wealthy non-doms will be particularly fussed about the loophole: when you’re that rich, you tend to live where you want to live; there are enough sophisticated tax avoidance methods at your disposal that you are not really beholden to any national tax regime. So as a point of principle, by all means close the loop hole, but that’s likely all it is.

    What is more interesting I think is the claim that Miliband is unusually unbeholden to many of the people who typically dictate politics from stage left: the press, lobbyists for large corporations, and such like. I’ve seen it explored in the Spectator quite persuasively. If true, the prospect of Ed as prime minister is exciting. Perhaps because he could make real changes to the status quo, or perhaps because a genuine fight between a powerful public official and the other powerful groups has the potential for all kinds of pyrotechnics. It does seem hard to believe that someone who owes little to any powerful group will find himself in downing street, just by playing his cards right! Surely either he’ll be snuffled by the powers that be, or turn out to be less of a rogue than he is sometimes made out to be?


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