Both the Labour and Conservative parties are engaged in an unedifying bidding war as to which of them will tax rich foreigners the most. The war on non-doms makes for crude politics and dire economics.
This is a rather small number of people. There are 68,800 non-doms living in the UK under a permanent, settled arrangement. That means an opportunity – which 37,000 out of the 68,800 make use of – to claim the special ‘remittance basis’ tax status. Under that arrangement, they still have to pay UK tax on their UK income. But they can pay tax on their foreign income in the country in which they are domiciled – their permanent, long-term home country. If this is a ‘scandal’, it has been going on for over three centuries without any secrecy. If it is a ‘loophole’, it strikes me as one of the more reasonable ones amidst the brain-numbing complexity of our tax code.
Anyway, the idea of fleecing these 37,000 visitors has risen up the political agenda as the salvation to our financial woes. The reasoning is flawed. For a start, they are already being fleeced quite a bit. According to the Institute for Fiscal Studies, they contribute over £6bn annually in UK income tax, National Insurance contributions and capital gains tax – an average of around £170,000 each. A simple thank you would suffice. They don’t have to live here. They are also probably not a great burden on the NHS – which they are providing a lot of funding for.
So what? You might say. They can afford it, so why not sting them for a bit more? But almost by definition, these rich foreigners are particularly mobile.
Suppose you are a Mongolian tycoon, where the top rate of income tax is 20%. Perhaps you divide your time between the UK and Mongolia and you have income from both countries. If you spend 183 days or more a year in Mongolia then you can pay the tax on all your income there and still spend the rest of your time here without the need to bother with this non-dom arrangement. If the UK Government is imposing a hostile financial environment, then a modest rearrangement in such a schedule might well seem prudent.
Yet in the Budget last month, the Chancellor of the Exchequer Jeremy Hunt declared:
‘We will replace the non-dom regime with a modern, simpler and fairer residency-based system… after four years, those who continue to live in the UK will pay the same tax as other UK residents. Recognising the contribution of many of these individuals to our economy, we will put in place transitional arrangements for those benefiting from the current regime. That will include a two-year period in which individuals will be encouraged to bring wealth earned overseas to the UK, so it can be spent and invested here – a measure that will attract onshore an additional £15bn of foreign income and generate more than £1bn of extra tax.’
Of course, the motive was political, to ‘shoot Labour’s fox’ by copying their economically illiterate class war populism. The last Labour Government didn’t adopt the plan because, as Ed Balls, who went on to become the Shadow Chancellor put it, ending non-dom status ‘will end up costing Britain money’. But Labour has now grasped it as an expedient answer to questions regarding how they’ll pay for whatever their latest spending wheeze happens to be. Hunt put this (supposed) extra revenue in the Budget already.
Labour has now responded by saying it would still gather in more revenue by a more punitive approach. The BBC reports the ‘alternative plan’ from Rachel Reeves, the Shadow Chancellor, includes strengthening the Government’s proposed replacement of non-dom rules. Labour claims these changes could bring in £1bn in one year.
Let us suppose for a moment that Reeves’ estimate is realistic. That these 37,000 non-doms hang around and take their punishment. It would still be a round error given that the state spending is £1,226bn this financial year. If we squeeze an extra billion out of these people, it would not be transformational. In fairness, nor would it be disastrous to the public finances if many of them did scarper and we end up losing a billion or two – which is a more plausible scenario.
The greater harm is that this is displacement activity. When politicians play this sort of game with each other they do so with a nod and a wink. The idea behind the charade is that the voters are fools who can be distracted by such nonsense.
If the Conservatives attempt to compete with Labour in the politics of envy it will never end well. Even when Labour is in boring reassurance mode, they will always come up with some way to outbid the Tories – as we have seen in this instance. So the Conservatives are not being as clever as they imagine by getting embroiled in these cynical gestures. It is not only unprincipled but politically inept.
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