February 12, 2008
They’d none of them be missed?
There has been a big hue and cry about Chancellor of the Exchequer Alistair Darling’s proposals for increasing the tax burden on those that are resident in the UK but not domiciled for tax purposes in the UK.
As the law stands today, the remittance basis of income taxation applies when an individual is resident in the UK but non-domiciled for income tax purposes. Tax domicile is a fuzzy concept. Even if you live most of the year in the UK, you could be considered domiciled in another country if you were born in that country and express the intention of being buried there. You can be non-domiciled for income tax purposes even if you live in the UK and have British nationality. Under the current law governing non-domicile status, certain non-UK income is excluded from UK income taxation if it has not been remitted to the UK. It’s a pretty strange part of the income tax code, but as it is a free option for those eligible, you would be mad not to sign up for it if you could. I certainly did when I returned to the UK in 1994, even though I had/have negligible non-UK income and remit to the UK what little there is.
The government proposes that from April 2008 on, when an individual has been resident in the UK in at least 7 out of the 9 tax years immediately preceding the relevant tax year, they will be subject to UK income tax on their worldwide income unless they pay a £30,000 annual charge. For me that makes it easy. As of April 2008, I shall no longer claim non-dom status.
The £30,000 annual charge is per person, not per family unit, so a couple of Greek ship owners with three adult kids working in the business would have to pay £150,000 extra per year. If they own just a few small ships, this may well cause them to consider relocation to Athens.
In addition to the £30,000 annual charge, the proposed new legislation also closes a lot of loopholes that in the past made it possible to effectively remit income earned abroad to the UK without incurring income tax. For instance, it would make subject to UK income tax (even when they accrue to non-doms) income in kind and gifts remitted from abroad as well as capital gains on UK assets parked in non-resident (offshore) trusts. This appears to be the part that truly upsets non-doms with serious amounts of assets that are currently beyond the reach of the UK tax authorities.
From the among of media noise generated by the issue you might infer that millions of unfortunates are about to be take to the cleaners and that the foundations of British prosperity are being undermined. It turns out the number of those directly affected is tiny, about 130,000. But the people in question are often very wealthy and well-connected. They lobby very effectively and can orchestrate/pay for an explosion of unrest bordering on hysteria in the media, amidst the representatives of the UK tax avoidance industry and among the UK-based providers of luxury goods and services who would lose business if the non-dom community were to become non-res as well.
So up to 130,000 (most likely far fewer) non-domiciled residents (quite a few of them high earners) would leave the UK. Would they be missed? Is it on the contrary mostly a case of good riddance to bad rubbish? Or doesn’t it matter very much? Probably a bit of the first two and most of the third on balance. Would I be sad if Roman Abramovitz were to leave, or other conspicuous consumers and beneficiaries of wealth of possibly questionable provenance? Probably not. I am an Arsenal supporter after all.
The main indirect effect of the proposed increase in taxes on the non-doms (if they were to leave and not spend as occasional or even regular visitors as much as they now spend as residents) is through their consumption of non-traded goods and services, including charitable giving – a form of conspicuous consumption unless it is double-blind. The demand for magnums of 1961 Petrus (at £18,000 a bottle) would suffer. So would a few luxury shops, restaurants and studs. Upper bracket property prices in London and the home counties would fall. With a bit of luck, the fall in property prices would spread more widely.
Anything that lowers London house prices is probably a blessing from a social point of view. For the quality of life in this city, it is much more important that its key workers (teachers, police, fire fighters, nurses, bus drivers and train drivers etc.) be able to afford a home reasonably close to their places of work than that a few millionaires/billionaires be willing to honour us with their presence.
The effect of the proposals on the supply of highly skilled (or at any rate highly paid) labour (financial wizards, star lawyers, fashion designers, pop stars and tennis gods etc.) is likely to be limited. You only get hit if you have had non-dom status for at least 7 of the last 9 tax years. Most financial geniuses suffer burn out in less than seven years. Tennis and pop careers are even shorter.
The notion that if the non-doms were to be taxed the same way everyone else is, there would be some massive brain drain from the UK that would make those left behind in this country noticeably worse off is laughable, self-serving cant.
The manifest unfairness of a tax regime that favours the rich and the internationally mobile through loopholes and strange domicile rules is likely to undermine tax compliance and respect for the law among the population at large.
If I were the Chancellor, I would not bother with the £30.000 annual non-dom fee. Instead I would simply abolish non-dom status. I would also actively pursue the closure of as many offshore trust loopholes as possible. It would of course be preferably if this could be done in an internationally coordinated manner, beginning, say, with the EU, the US and Canada.
UK residents should be taxed on their world-wide income, regardless of there they keep the assets/earn the income. That’s the sensible principle applied in the US (the US then rather goes and spoils it by taxing US citizens - even green card holders, I believe - who are not resident in the USA, on their worldwide income anyway.)
Let the non-doms who don’t like this take off to their tax havens. They can have the tedium of Monaco, the bland boredom of Switzerland, the stifling autocracy of Singapore and the expatriate bubble-wrapped society of Dubai. I’ll stay in London.
Bang on the nail Mr Buiter. The key is international co-ordination of tax authorities. Don’t let the footloose rich divide and rule but rather induce them to pay their fair share even if it has to be divided up amongst several countries. Even an agreed international minimum of say 10% is better than the close to zero many of the uber rich pay. That way the rest of use may be able to pay a little less. The average UK tax rates of those on quite modest incomes is a scandal.
Posted by: Ian Joslin | February 13th, 2008 at 10:16 am | Report this commentThis tax is not just about a “few millionaires/ billionaires” but will affect the economics of thousands of workers in the city that contribute greatly to the dynamism of Britain, its competitiveness and its prosperity at a time where the rest of “old-Europe” is bleeding wealth to emerging poles of economic activity all around the world
Although an adjustment of the non-dom status is not without merit, the tax has been ill-conceived, ill-executed and is frankly driven to respond to a populist instinct. Mr Buiter’s misguided and superficial ranting is but a confirmation of that instinct.
make no mistake - Britain’s unprecedent economic boom of the last 20 years is at stake
Posted by: sobhi hatem | February 13th, 2008 at 11:11 am | Report this commentAgree that special tax status for “non-doms” in UK is unjustified. Mr Joslin, however, is wrong for calling for closer coordination, or collusion rather, of tax authorities. Governments of the developed world should compete to attract residents by offering low tax rates and efficient public services instead of conspiring to milk their citizens dry. Mr Brown’s reckless stewardship of the UK’s public finances is a case in point. Citizens of fascist kleptocracies like Russia, who are most likely to have made their money in suspect ways should be kept out or charged admissions tax to the civilized world.
Posted by: Svend Svendsen | February 13th, 2008 at 11:16 am | Report this commentAs the uncle of someone doing a good job in London in one of the useful but not particularly well paid professions (who is also a mother of young children) I am aware of what may happen if the subsidy she gets from her father’s estate, via capital receipts after she has nominally earned income in her country of domicile, is diminished by the treatemnt of that income as taxable in the UK. Her mortgage payments alone may force her to move out of London and that will affect her employability as well as start another round of searches for good schools. But there is at least some logic to that. There seems to be none in the proposal to allow those rich enough to treat £30,000 a year as a fleabite to exempt themselves from the new regime.
Posted by: Jim Vincent | February 13th, 2008 at 11:31 am | Report this commentWillem is right, of course. But I notice that one correspondent has described the post as “misguided and superficial ranting”. So here’s my challenge to the writer of that coment (Sobhi Hatem?). Spell out precisely why a tax on the worldwide earnings of people resident here for more than seven years, to be paid at the same rate as British citizens (i.e. a top rate of 40 per cent), will destroy the British economy.
Where will these people go? What tax will they pay when they get there? How many are likely to go? What, precisely, will the economic effect of their departure be? And, not least, why should they be entitled to make their home in this country and not pay the same tax as everybody else? The US would never put up with it. Why should the UK?
Posted by: Martin Wolf | February 13th, 2008 at 11:35 am | Report this commentDear Sir,
I cannot blame the current government for taxing people who cannot vote in general elections. From a politician point of view, it is a very logical thing to do.
I would like to ask you two questions:
1) Are you sure that you are dealing here with some lofty tax matters or rather some very crude electioneering?
2) Should we be surprised that this issue emerges as both parties are gearing up for a general election?
Best regards from a non-dom who has no other wealth than what he earns in the UK (like the bulk of the other non-doms by the way), pays his taxes like everyone else and hates being a punching ball for both parties trying to woe the middle-class.
P.S.: May I also point out that your comment on “financial geniuses” burning out in less than a year was rather crass?
Posted by: Julien | February 13th, 2008 at 12:40 pm | Report this commentMartin
London’s stature as a premium financial center may decline but not necessarily symmetrically to the emergence of an alternative center. A more likely scenario could be a delocalisation of the financial activity to local and regional centers (as one key incentive of being based in London goes away, making it on balance less attractive for certain people to be based here), the impact of which would trickle into the numerous sectors servicing the financial sector and then to the economy as a whole.
The point is not whether the non-dom status is unfair or not (frankly a lot of non-doms have benefited greatly from the prosperity created in Britain in the last 20 years or so, through house price increases, or other ways), but the manner in which adjustments are made to it and the communication around it. Abrupt changes in tax laws do not convey seriousness and professionalism and to a lot of non-doms the changes come across as a populist knee-jerk reaction targeted against a law-abiding and hard-working and ethnically foreign minority (a lot of people in the city are all 3). It does send the wrong signal about the UK’s openness.
Posted by: Sobhi Hatem | February 13th, 2008 at 12:49 pm | Report this commentMartin Wolf is absolutely right. A tougher stance should be taken on these non-doms, if you wish to live in the UK, then pay UK taxes like everybody else, full stop. Or go. There are worse tax regimes elsewhere in this world.The Chancellor should stick to his guns and not be swayed by media hsyteria. Call the non-doms bluff, then we will see their true colours!
Posted by: Don Thornicroft | February 13th, 2008 at 12:52 pm | Report this commentDoes anyone know how senior non-dom investment bankers receive their bonuses, incentive shares and the like?
Do they pay UK tax on them?
Posted by: james c | February 13th, 2008 at 12:57 pm | Report this commentI agree fully with Sobhi Hatem on the manner in which these changes were introduced. Exactly the same point applies to the changes in capital gains tax. Then look at the (mis)handling of Northern Rock. The Treasury is clearly in a shambles. I presume this is because it has run out of ideas and, in the case of the non-doms, felt obliged to respond to the Opposition. That was (and is) a grave mistake, as a matter both of politics and policy.
Posted by: Martin Wolf | February 13th, 2008 at 1:11 pm | Report this commentMost of the argument is clearly Dutch continental-socialist. London and the UK’s economy will suffer for a paltry tax sweep, period. Why ? Because we provide a far too generous benefit/health support system to all, including migrants. Time to cut benefits, reduce anti-social crime, and not RAISE taxes, doh !
Posted by: Barry Taleghany | February 13th, 2008 at 2:13 pm | Report this commentYou’d rather Abramovich left because you’re an Aresenal supporter and therefore want him to lose non-dom status and you’re happy for house prices to fall.
Pretty much sums up the petty class jealousy underlying this piece of “cant”.
If house prices fall by the margin that rich hating socialists desire, then we will all be in ruin for we shall be in a great depression. How can a professor of economics not get that?
It’s also not surprising that an academic would completely miss some of the real issues with the whole non-dom debate. The biggest issue here (and with CGT) is tax stability, rather than what a particular group may see as “fairness”.
Who in their right mind would want to invest in a country that has arbitrarily changed they tax on capital gains by 80% and the tax on non-doms (after 150 years of stability) due to political and not economic pressures?
It is as unfair to non-doms to change the laws after such a long period of time (150 years) as it is to other domiciled tax payers to have the non-dom distinction. The difference is, the non-doms can and will leave if the law changes and no one will replace them. The doms probably won’t if the law doesn’t change, but they will suffer some effects, including a fall in their personal wealth (due to falling house prices), a higher cost for highly trained staff (to make up for loss of non-dom status) and a loss of wealth generally in the UK due to the non-dom departures.
Posted by: Michael | February 13th, 2008 at 2:22 pm | Report this commentIs there not an anomaly in your piece? You say on the one hand that an exodus of non-doms would have little material effect on the economy, yet on the other hand you say that the removal of one of them in particular would have a material effect on Arsenal FC’s fortunes.
For what it’s worth, As someone who works among many non-doms in the financial services industry, I believe you to be wrong on the first point as the dominance of London as a financial centre (and therefore its contribution to the rest of the economy) is as much a result of its benign taxation regime as anything else.
As an Arsenal fan myself, I believe you to be wrong on the second point as well: Our team is (currently, without extrapolating, at the time of writing and may not be at the end of the season etc.) top of the league and 8 points clear of Chelsea, despite having a manager who spends so little on buying players he often turns a net profit on his player portfolio. Besides, by encouraging one football chairman to reside elsewhere, you proposal might backfire by encouraging a certain football manager to return to Monaco…
Posted by: Justin | February 13th, 2008 at 3:24 pm | Report this commentOh, I should have added Death of London as a Shipping Centre. Ten years ago Athens had no infrastructure. It doesn’t matter if you “own just a few small ships” or more, now there’s no reason to hang around here with the deals on offer there. Tell that to the army of tax-paying shipping brokers, bankers and solicitors who will see their jobs erm, ’shipped’ out.
Posted by: Barry Taleghany | February 13th, 2008 at 3:46 pm | Report this commentProf Buiter is probably correct to argue that non-doms are statistically irrelevant to the UK economy.
However, the moral debate should not be about whether non-doms should lose their privileges and be taxed like everyone else at a 40% marginal rate on income from savings. Rather, it should be whether it is appropriate to tax returns from income which has already been taxed at source when earned, once it is in the form of savings. On this basis one should argue for extending the privileges of non-doms to the rest of the UK population rather than abolishing them for non-doms.
Future long term financial market returns are expected to be around 7% nominal for equities, much less for bonds or real estate. Inflation is at 3%. If taxed at a marginal rate of 40% this implies real investment returns net of tax of 1% or less. Is it then at all surprising that the UK has a low savings rate, large private indebtedness and huge imbalances threatening long term growth? Could ‘overshooting’ in the wrong direction be the end result of the current tax policies on UK savings?
While statistically irrelevant in the context of the UK economy as a whole, non-doms form a significant proportion of certain UK communities. One of these is (quality) higher education. For example, non doms represent a significant proportion(a majority?) of Prof. Buiter’s students at the London School of Economics, a significant proportion (a majority?) of LSE graduates entering the City or the professions and a significant proportion (a majority?) of donors to the London School of Economics.
Switzerland may be blandly boring, but the skiing makes entirely up for it.
Posted by: Andrea Moreggio | February 13th, 2008 at 5:46 pm | Report this commentI totally agree with Mr Buiter’s observations despite the fact that as a Non Dom I will be negatively affected. The proposed levy will not really have any substantial impact on the very rich.
Posted by: Mike Antonis | February 13th, 2008 at 7:45 pm | Report this commentThe Non Doms with more modest wealth and income such as Mr Buiter and myself will still have three choices; pay the levy, become domiciled for tax purposes or leave the UK. I venture to suggest that only a very small number of Non Doms will choose the last option as most will not solely reside in the UK because they have been able to get Non Dom status. The financial benefits of Non Dom status are usually just icing on the cake.
I can none the less understand the hue and cry of elements in the city who dislike any tax changes that may negatively impact their future business prospects and income.
If anybody doubted the all prevailing influence of the City on politics in the UK this furore surely demonstrates it.
Yes, I am an industrialist based in the “regions” where we actually make things you can touch for export across the world.
For all the fuss there seems to be a lack of logic in the discussion. The Chancellor is welcome to tax non doms if he can. If he cannot, because a significant number will be able and willing to move to lower tax centers, then he cannot. Professor Buiter seems to be confusing Positive and Normative.
Posted by: Ian | February 13th, 2008 at 8:31 pm | Report this commentWillem does not understand how important the tax advantages of the non-doms were in the growth of London’s financial market, art market shipping market, insurance market etc. Throughout the 1990s non-doms from all over the world wanted to be located in London for its tax advantages: investment banks found it difficult to recruit the best people to work in Paris or Frankfurt: they all wanted to be in London and to have their teams in London. Hedge funds and private equity managers knew they should be located in London. The consequence was not merely the growth in their businesses but also the spin offs in terms of art, culture restaurants and bars.
If these advantages are now taken away then the most enterprising and creative non-doms should leave to come to Dubai and bring those who want to leave with them. Here they will find plenty of highly trained, well qualified people and senior and junior level, a vast pool of people from India (including the best financial people in the world) at a attractive labor rates, proximity to Asia and Europe and direct flights to everywhere in the world. Here there are all the facilities of a major financial center, no Heathrow hassle, no flight connections center, low crime, no traffic jams, better housing, schools, health care, excellent internet and telecommunications and quite frankly you will be able to afford to take a private jet to visit your erstwhile colleagues in London several times a month if you wish. And don’t worry about restaurants, bars (yes bars), cinemas, opera, museums and theaters and shopping: there are all here and if they’re not then they are on their way: they go where the money is and not vice versa. This is the place for new start ups, for people interested in building services industries that are connected with India and China and the booming economies of Asia. London’s rise was only ever based on tax advantage: who on earth wanted its poor transport, its cost, drunken slobs, dirt, poor healthcare, crime and red tape?
For further information on Dubai see: http://www.difc.ae/.
Posted by: Thomas Blasquez | February 13th, 2008 at 8:56 pm | Report this commentWill this new tax regime destroy London as the number one financial center in Europe? Probably not.
Posted by: Fred Levy | February 13th, 2008 at 9:40 pm | Report this commentWill this additional red tape and burden reduce its attractiveness? Definitely.
The rise of the City over the last 20 years is based on two simple ideas : an attractive tax regime as well as a relative absence of red tape.
Start messing with one of those two parameters, and Britain will revert to what it was 30 years ago : a post-war economy with 15% unemployment and no industry.
Attacking the nondoms is just the beginning of a long slide for the country. It is simply a sign that the country has decided to normalise itself, become more of a social-democrat regime. Then will come higher taxes for all of us, more red tape, more deficits, and again more taxes to fight those deficits…
The timing is also nicely chosen when you consider that we are on the verge of the greatest post war financial crisis…
The confusion and differing views on the non-dom question are understandable, as there are actually several issues at stake here. First, the amount of tax non-doms currently pay compared to “regular” UK citizens. This is quite often inversely correlated with income levels - i.e., many of the rich & super rich non-dom hedge fund/private equity partners & bankers pay relatively little as they are able to benefit from sophisticated off-shore trust schemes, with the help of expensive tax advisors and compliant employment conditions, while regular employees are stuck with paying full tax on their UK earnings. The new non-dom tax law is trying to address this by closing down some of these off-shore trust loopholes, which is the real reason the top income earners (most of whom would hardly notice the £30k flat fee) are annoyed. On the other hand, the new £30k flat fee will hurt those lower income earners who are already paying more than their fair share of UK tax relative to the rich non-doms..
The second issue relates to the indirect benefits these rich non-doms bring to London and the wider economy. This needs more rigorous study but I would argue it has been considerably over-estimated, based on the fact that:
a) The large profits made by hedge funds & private equity actually come from a very small number of employees. (Regarding private equity’s contribution to indirect employment, the jury is still out on the extent to which it adds or sheds jobs when a company is taken over.)
b) Rich non-doms spend the majority of their income on large assets that are of use only to them (houses, yachts, expensive cars etc). Relative to their income and the cost of house price inflation to the less well-off, the extra spent on eating out, nannies, luxury goods etc is pretty small;
c) As anyone who deals regularly with hedge funds/private equity/bankers will tell you if they are honest, the argument that this is a “tax on talent” is quite exaggerated - only a minority of those who have chosen such professions really add value - i.e., are truly talented, the majority being quite replaceable..
I would also argue - as others here have - that London has more to offer those super-talented people than particularly beneficial non-dom tax status.
Posted by: Marc | February 14th, 2008 at 8:01 am | Report this commentThose who argue that changing non-dom tax status will be the end of the British economy should dare to take their argument to its logical conclusion. What about a progressive negative tax rate (i.e. a subsidy) for non-doms?
Posted by: Martin Wolf | February 14th, 2008 at 6:34 pm | Report this commentThe UK could offer the subsidy at a zero rate up to £100,000 per annum, then at, say, 10 per cent up to £1m per annum, 20 per cent up to £100m and so on upwards. Let’s start thinking big here: why shouldn’t the UK even try to corner the world market in billionaires? Think of what that would do for the art market!
Why spend so much time and effort on this issue which has pro’s and con’s for the rich, middle and lower classes that they probably balance each other out in the end?
Why isn’t the treasury spending so much time and effort on pushing subjects that are really important such as additional funding for education, public transportation, better healthcare and of course policing the crime that has swept over the UK like a tidal wave with no end in sight.
If Alistair Darling wakes up in the morning with the first thing on his agenda being tax for non-doms or nationalizing Northern Rock rather than pensions or health or policing or military or education then he and his boss needs to be fired. I think somehow the priorities have been mixed up due to delusions of grandeur government officials have found themselves in which will be shown in full at the next general election.
I am British but frankly speaking the UK is an incredibly unattractive place to live and work and not because of this non-dom issue.
I guess the N millions spent on producing a document of proposals that is likely not going to happen could have been spent similarly on a document of proposals that could and should happen (subjects in the previous paragraphs) and that will have an impact at the elections because they are what really matter in the end to the ‘people’ of a Britain that was once great. The government treasury are so out of touch with reality it’s not even funny.
I read an article somewhere where it’s possible to get a degree at university in the subject of ‘David Beckham’. Unrelated subject but it seems all the institutions in their madness are linked somehow. What has happened to this once great country?
Seriously on the grand scale of things, who gives a **** about the non-dom issue when there are 10 or more other things that are more pressing?
Move over Labour, forget the Conservatives and other muppets, boycott the elections and bring back the Queen!
Posted by: Bring back the Queen! | February 19th, 2008 at 5:01 am | Report this commentDear Willem,
Is there not a case for selling non-dom status to the highest bidders?
Posted by: james c | February 19th, 2008 at 1:40 pm | Report this comment