Over on my blog, I write a lot about tax on education, which is close to home – I’ll be clobbered for tens of thousands of pounds if we have to pay VAT on the kids’ school fees. If we don’t, and start getting school for free paid for by the taxpayer, then the silver lining will be the lifetime saving of hundreds of thousands pounds. Mrs Chips or I (or both of us) gets the opportunity to quit or go part-time, and reduce our lifetime tax contribution by hundreds of thousands of pounds.
Today I want to write about the tax on non-doms. Unlike the tax on education, it only affects me indirectly. Like the tax on education, it’s a terrible idea. I’m going to explain why it’s a terrible idea, why I care so much, and what the so-called Conservative Party should do about it. If you need a primer on non-doms, I can’t do better than this article at the Chartered Institute of Taxation.
The Laffer Curve
Both the tax on education and the plan to remove non-dom status brings into play the Laffer Curve, which is one of the simplest ideas in economics. The more you tax an activity, the more likely people are to avoid the tax by: 1) reducing or stopping the activity; 2) hiding it in the black economy; or 3) moving the activity abroad. The net gains from increasing the rate include the losses on reduced activity. There is some ‘peak revenue’ tax rate – beyond that point, the losses exceed the gains so increasing the rate means less revenue.
A few nuances:
- We don’t just care about maximising tax revenue, we also care about the impact on the private sector. For any useful activity like working, investing or educating children, the goal for society is not ‘peak revenue’ for the Government, but balancing the societal cost (reducing useful activity) with the societal benefit (whatever Really Good Idea the tax revenue pays for). The optimal point is therefore some lower rate of taxation than ‘peak revenue’.
- The claim is seldom that “tax cuts pay for themselves”. The general claim is that tax cuts do not cost as much as a narrow analysis indicates, and in reverse, tax hikes do not generate as much as you might think. That said, the famous 45p or 50p top rate of income tax (which, lest-we-forget, is complemented by 2% employee NI and 13.8% employee NI) was said by the IFS and OBR to be “strolling across the summit of the Laffer Curve”.
- Of most relevance to non-doms is that economic actors and their activity are not created equal. Some people have greater capability than others to change their behaviour. If you have three passports, for example, you have easy options to move overseas. If you’re on a higher income, it’s easy to work less and still get by – most simply, you can just switch cheaper forms of leisure and consumption for more expensive ones. If you’re paying for private school, there’s a
freetaxpayer-funded place theoretically available at much less stress than trying to earn fees from after-tax income.
The fiscal impact of ending non-dom status
Non-domiciled U.K. residents don’t pay tax on their income from their holdings in (say) Malaysia unless they bring that income into the U.K. That’s the bone of contention for the Labour party, which has been eyeing up that Malaysian shoe factory for years. Over the last couple of weeks, it’s been rumoured that the so-called Conservative Party is following them down the same rabbit hole.
But the Laffer Curve will apply as described here. Non-doms are by definition highly-mobile – if they don’t like what this country offers them, they’ll take steps to change things. And if they do, it hurts, because in all the hullabaloo we forget that they pay U.K. tax on their U.K. labour and investment income. According to the Chartered Institute of Taxation, non-doms paid £8.5bn in payroll and capital gains taxes in 2022 – £120k each – which makes them pretty useful to the Exchequer. Further, they pay a charge of £30-60k a year to maintain their non-dom status (around £2bn total). And finally they do pay tax on their global income if ever they bring it into the U.K. or if it enters a U.K. bank account.
I’m pretty confident the bean-counters at the Treasury are capable of taking some of those effects into consideration. They’ll be weighing up:
- The benefits of taxing £10.9bn of offshore earnings
- Against the loss of the non-dom charge which presumably won’t exist, plus the loss of onshore taxation if non-doms leave
I’m less confident they will think of:
- The loss of U.K. value-creation by non-doms’ labour and investment activity. As noted above, we care about this as well as the tax they do, or don’t, pay. If Bob’s paying £120k associated with onshore activity, that hints at a ton of related customers, colleagues, employers and employees all paying related taxes, which disappear if Bob heads to the Cayman Islands.
- The ability of non-doms to restructure their overseas holdings: if Bob doesn’t physically move himself to the Cayman Islands, he might suddenly realise he should move his Malaysian shoe factory to the Cayman Islands for tax purposes. I’m no expert, but I think that’s what people do.
I don’t have a crystal ball, but I can see these latter two effects wiping out the expected revenue.
The moral case
Money aside, it’s rather boring that all our politicians’ take on tax is “if we can tax it, we should”. We’re desperately short of a spirited moral defence of low taxation. Here’s a couple of thoughts:
- Two of the more robust arguments for progressive ‘taxing the rich’ are: 1) they benefit disproportionately from property rights; 2) their economic activities accumulate resources whose supply is inelastic, such as housing, which harm opportunities for others. Obviously, those claims have zero validity as regards Bob’s Malaysian shoe factory or the profits from it as long as they stay offshore. British society at large has no conceivable claim on value generated in Malaysia.
- If we’re concerned that our Government doesn’t always spend money well (to put it mildly), we should welcome tax competition. A tax is the price a Government charges for a person or firm to reside, and if people are able to choose it forces governments to compete to provide value. If rich people spend or invest their money, and can choose where to do it, we should be delighted they do it over here.
What the U.K. Government should do
- First, just make the U.K. an attractive place to invest – for Brits and foreigners, resident and non-resident alike. That’s going to make a hundred times more difference than piffling around with non-doms.
- If we were clever (just imagine if we were clever), we’d note that not all non-doms are created equal. We’d make non-dom status conditional on some measure of economic value-added, such as evidence of inward investment or volume of direct tax contribution. We wouldn’t just let people buy up Chelsea in order to qualify for a tax haven.
- Then we’d allow everyone, including home-grown Brits, to purchase that status. Think of that: once you’re paying (say) 10 times the average tax contribution, you can invest offshore to your heart’s content, then we’ll only tax you on it when you bring home the bacon. What an incentive for talent and investment to move here; what a recognition of the importance of value creation; what a way to export soft power as the home of outbound investment for the world.
I’m sure it’ll catch on, what with the loud pro-prosperity voices echoing the corridors of Whitehall.
Mr. Chips is a pseudonym for an employee of a private school. He writes on Substack.
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The actual issue here is workers in the UK are taxed off the face of planet earth. It’s only remarkable anyone bothers to work. All should enjoy low tax rates and we should stop giving money to dossers who don’t work. Also the NHS should be privatised and we should move to an insurance based model. The dossers should get basic just above 3rd world level of health care free off the state. As well there needs to be mass layoffs in the public sector plus the abolition of all state final salary pension schemes.
Mass murderer Blair’s devolution and supreme court of communists also need to be abolished ASAP. Obviously the green theft from the taxpayer should be scrapped too. It’s called creating the right incentives/restoring a civil society. Presently for most ppl the state is merely a Ponzi scheme. Simply amazes me ppl who claim to believe in freedom under limited government are not loudly arguing for all the above.
Thanks, I quite agree. Broadly, the answer to “non-doms get treated better than me” should be “so treat me better”. Not “treat them worse”.
Beautifully put Mr Chips.
Giving taxes to the government is like giving more alcohol to an alcoholic.
The more money our government takes the more in debt it seems to get.
It doesn’t solve any problem clearly.
Why would anyone want to give any more.money to these irresponsible, incompetent, degenerate spenders?
OPM.
Marvellous stuff.
I recall that all Westminster parties have been completely relaxed with interest and rent from HMG among others being paid without withholding tax to tax haven owners.
Non-Doms pay tax in their home countries on money they earned in that country, and pay tax here on money earned here. Cancelling it is simply the politics of envy