Michael Fallon MP: The dangers of taxing non-doms

Michael Fallon is MP for Sevenoaks and a member of the Treasury Select Committee.

A few years back the then governor of the Bank of England coined a metaphor.  The City of London, he said, was like Wimbledon: we might not have the best players but we had the best tournament.  Ownership wasn't the issue; foreign banks might dominate the City or buy up all the British banks but London was where everybody wanted to play.  And UK plc got the benefit.

A better analogy might be Silverstone. It's our Grand Prix but it doesn't have to be here.  Many newer places - in the Gulf states, the Far East - would like to host one.  Get the supporting infrastructure wrong - too much tax and tape - and Bernie gives it to somebody else.

That's where the non-doms come in.  Many are the people who make the City tick. They're not all Greek shipowners or Russian billionnaires: they''re just as often the supporting cast.

And they're highly mobile. They know how to live in Geneva or Dublin, Luxembourg or Dubai. Private equity houses or hedge funds don't have to be in Mayfair.

Labour's proposed tax would be disastrous for the City.  It's sent out a clear message that in seven year's time we simply don't want the non-doms here.

After eleven painful years, we expect Labour to be bad at tax.  The pensions tax, the CGT fiasco, the stealthy shifting of millions into the higher bracket - these are politicians who've never actually understood how the real world works.

But the real lesson of the non-doms row isn't for Labour - it's for us.

An annual levy combined with a guarantee of no intrusion is certainly more attractive than Darling's proposal.  But it only gives certainty for a single Parliament - perhaps three or four years after our first Budget.

Non-doms who've chosen to work here are looking for certainty. They now see two policies, each of which is a proposal. They worry that either party could tweak its policy again.

We need to be careful about soft targets, careful about taxing anybody just because we need the money rather than from principle, and above all very careful not to do anything that might undermine the one bit of our economy that really works.

Comments

[Alan S]

A terrific piece. Let's think of ways of keeping wealth creators in Britain instead of new ways of taxing them.

[We should tax non doms.]

I support non dom taxes. They work here should pay tax. There are plenty of people who can do their work. Since when was Monaco or Stizerland a rival the city. What next will the government pay people with high IQs to emmigrate here. By the way the tories thought of the idea. It is their fault. LOL LOL

[Ian Parker]

I find the phrase, “An annual levy combined with a guarantee of no intrusion" quite interesting, particularly the no intrusion part. Presumably, that is an acknowledgement of certain tax fiddles to which we should turn a blind eye as these people are creating wealth (very often their own, of course).

[Yogi]

George Osborne set an excellent trap and Darling and Brown fell into it. NuLab has been stealing our policies for too long and then claimed those to be their own.

Even this one, both Brown and darling were repeatedly asked whether they had thought about it before Gideon's Balckpool speech and both sai in the affirmative.

The funny thing is that most of us knew that this wont work - but the arrogance and impetuosity of Darling and Brown means that they have got themselves into a fine mess.

This government is bereft of any ideas and none of them are capable of organising the proverbial ****up in a brewery. It is a shame that we have to put up with this lot for another 2 years.

[Malcolm Dunn]

A subject worthy of debate during which I hope I learn something. At the moment I'm not convinced that the idea of allowing often wealthy people taking advantage of the British state but paying often virtually no tax is a good one. Equally I need to be convinced that all these people actually 'create wealth' for British citizens and that they would quit Britain to avoid paying £30,000 a year.

[Tax slave]

Tax is theft...full stop

http://en.wikipedia.org/wiki/Anarchy,_State,_and_Utopia#Distributive_Justice

I suggest conservatives read the above book summarised on wikipedia and take note!

[Tax non doms now]

Osbourne has criticised the chancellor for bringing this idea forward and yet he is the one who thought of the idea. The tories have tried to outflank labour and have just lost support from their core, LOL LOL, and allowed labour to tax rich tax avoidance schmes Mnay millionaires in the country pay tax why do some not have to. We have enough clever people in the UK to do their work.

[Tax is not theft]

14:23 If all tax is theft then how do we support an army or police force or a NHS, or a school service. How we stop ineqaility in society

[tax really really is theft]

" How we stop ineqaility in society "

Voluntary behaviour creates inequality...why else do chavs plead poverty yet can spend their money on getting ipods, video games etc. Why should we try to offest voluntary activity (in this case, inequality) with the earnings of others?

[Bill]

Taxation in this country (and the benefits system) are a complete mess. Lawson's attempt to simplify our tax system was superceded by the stealth taxes of John Major's premiership which Labour turned into an art. We now have a highly complex tax system which falls most heavily on those in the middle and bottom (if they are working).

What we need is a low rate flat tax on income, a low rate for CGT and a generous allowance for IHT. We should keep it simple.
Instead we have massive tax breaks for the rich; benefits for the poor and little for those in between.

[Pay tax if you can afford it]

14:50 Because they cannot get work. Not every unemployed person is a chav often they are people who have depression or had their ambition destroyed by life. Look at the multi millionaire soccer players many of them are chavs. Look at the Bullingdon boys are they just upper class chaves.
14:54 That is why we should cheer the current move to tax no doms. We should not fall for their pleading. We do not have 90% tax rates for the rich the balance has gone the other way now. Ordinary working and middle class people have to pay tax why should these people avoid it. It is not fair, equal or efficient on hard working people of this country who do pay tax. But they have huge ammounts of money and can whip up a fake anger on the issue, and fund people to make claims that it would destroy the economy if they pay a small tax revenue to the UK. They live here they get the benefit "they should pay tax, if they can afford it".

[Michael McGowan]

Aren't you missing the point? While the jury is still out on how many actually leave the UK, those that do move will take their assets, income and spending with them. Far from raising more tax, the UK Treasury will be worse off (less income tax, less National Insurance and less VAT). Those that cannot leave easily (i.e. middle and low earners) will have to make up the difference and the Swiss tax authorities will be very happy.

[Bill]

Michael

I nearly always agree with you. And we have to be pragmatic. The non-doms situation needs to be considered objectively, as does private equity. But I know and I am sure you know that
many rich people do not pay what many ordinary people would consider their fare share. Our tax laws are grossly unfair. In forty years we have gone from super-tax on the rich to making it almost optional for some. Even in the bad old days I studied with a friend who managed to get a grant notwithstanding the parents being (I assue non-dom) multi-millionaires. I have (admittedly grudgingly) paid 65% tax and less grudgingly 40%. But some people who can afford it but don't want to avoid paying any tax. Of course we are all entitled to avoid tax but there must be equity. Why should relatively average earners pay 40% when others (not necessarily non-doms) can almost get it own to zero. The UK is a tax haven for the rich and almost hell for the rest of society. It's not good for social cohesion. Remember Tocqueville.

[Alex]

In principle we should be aiming for a tax system which is simple, transparent, features broad bases and low rates - and as few loopholes and special arrangements as possible. This is important both for equity (preventing rent-seeking special interests) and economic efficiency (minimising distortions to decision-making).

The more exemptions and loopholes and special interest provisions you introduce, the more you drive up the marginal rate on what remains of the tax base - often for no good economic or other reason - and the more decision-making becomes distorted by the tax system, so that people do what is tax-efficient rather than economically optimal.

From this standpoint, the taxation of private equity partners was anomalous because they have been able to use the 10% CGT rate to avoid paying the applicable income tax rate (by classifying what is effectively income as capital).

Generalised attacks on private equity are unwarranted and smack of class warfare. But there was a good economically liberal case for addressing their tax privileges. The devil, of course, is in the detail - and this is where Darling tripped up with his crude CGT change.

A similar argument applies to the non-doms, and, alas, there is a similar danger of a populist response from politicians.

[John]

Britain is slipping back to the bad old days which took years for Maggie to sort out from 1979. Socialist policies of envy just like the seventies most of the wealthy will desert Britain once it becomes uncompetitive. Darling’s stance will not hit the billionaires it will hit all the nom doms that work hard every day in the City of London which is the engine room of Britain. The moronic rulings on days of travel will just persuade people to avoid the UK. Darling will not be happy until every thing is down to the lowest common denominator and perhaps get Britain back to being the poor man of Europe. The tax burden in Britain is heavy compared with the eighties and nineties with all the stealth taxes. Labour are not capable of any entrepreneurial ideas they are wealth destroyers that inherited a wonderful economy from Ken Clarke and are now indebted to record levels. It is one great big mess .
With the Channel Islands prospective I feel Darling’s back room boys saw an opportunity to tag on lots of petty little rulings like hit all the near travel destinations with cutting out the day of travel even when one is passing through Britain. They do not realise they are just hurting their own economy in true Socialist style they will never learn why change a system that is working? only the idiots of Labour could be so stupid.
Business will go to Switzerland and other areas like Ireland in fact if you are British you can be a nom dom in Ireland with all the benefits that one derives from the old British system.
The Conservatives will now benefit from the statements made by Lord Paul, Lord Jones, the Lord Mayor and Dermot Smurfit just to mention a few and make sure their scheme does not include any of the no brainers created by Darling.

[Chad Noble]

"Labour's proposed tax would be disastrous for the City."

LoL. It was a Tory proposed tax, designed by Osborne whilst sitting on the beach according to him.

Remember Labour only plan to grab 650million off the non-doms, Osborne plans to grab 3 and a half billion off them.

[Ian Parker]

It can be seen clearly that Labour's taxation regime has undermined enterprise in this country. Much of what they have done has been anti- small business in particular. Combined with an ever-increasing bureaucratic burden, Britain is now a very unattractive place in which to start or, indeed, continue to run a business. Underlying all of this is a desperate need for revenues from a government that has sought to move certain liabilities ‘off balance sheet’. So, along with hurting the long-term prospects of the economy, Labour have also succeeded in undermining public finances to a degree greater than commonly acknowledged.

But, are the Tories committing themselves to reversing Labour’s latest tax grab?

[Mark Williams]

If foreign citizens want to live in the UK they should be taxed on the same basis as all other residents. That is the way they would be taxed in every other country where they might take up residence.

The idea that these people are wealth creators is a nonsense. UK tax laws ensure that non-doms maximise their wealth by investing their money offshore where it stays outside the UK tax net.

Did New York grow to be a major financial centre on the back of low taxation? No, in fact NY had some of the highest state and city taxes in America while the US taxed resident aliens and US citizens on their worldwide income.

[Stephen Tolkinghorne]

Possibly Osborn and the Tories might get a little more support by articulating an intention of removing a large number of the low paid from direct taxation on income altogether, and at the same time making working worthwhile again for those likely to only be able to earn low wages. Thus getting them off of benefits.

You'd have thought that it'd be only too obvious. But no, Osborn just witters on about avoiding taxing the mega-rich - once again, a wide open-goal missed by this bunch of prancing ponies.

As for the wit-less Fallon, make no mistake, the 'non-doms' most certainly are not 'soft targets' - indeed, they're very difficult targets. It's the 'Ordinary Joe', doing an average or low-paid waged job who is an 'easy target'.

[Yet Another Anon]

Labour's proposed tax would be disastrous for the City.
At best the Conservative Party proposals to have a charge on Non-Doms is no better and may be even worse.

[Yet Another Anon]

So what is Conservative fiscal policy now, they advocated charging non-doms then criticise a much less radical policy on it and having said they would match Labour spending plans for 3 years, now they would only be commited to matching any plans a few months into a Conservative government (this is the case for nearly all incoming governments as there is inevitably a delay while a budget is produced) - the question is whether there are ambitions to make savings in public spending in a first budget and use money saved to cut the deficit and even cut taxes.

[Alex]

It seems the reason the City was up in arms was the implicit threats from the Treasury that non-doms would not be left alone once they had paid the £30K charge - rather than the charge itself, which might put off non-doms earning more modest amounts but not the super-rich.

But it's interesting to note that Osborne is (was?) planning to raise a much greater amount from the non-doms than Labour by imposing the charge straight away, not after 7 years like Darling suggested. Even so, most commentators suspect his arithmetic is optimistic.

If Osborne has to revise his own plan, presumably he will have to find a new way to fund his IHT pledge.

[Chad Noble]

"The idea that these people are wealth creators is a nonsense."

Tell that to London estate agents! They'd split their sides laughing before driving off in their new Porsche.

What happens to the millions of pounds the nondoms spend into the economy on houses and other items?

Does it magically disappear Mark?

Remember, the nondoms *are* taxed on uk earnings just like any other UK worker, it is the income not generated here that incurs no taxation, and if it did, they'd move out and stop spending in the UK.

[Mark Williams]

@Chad Noble

Put that in perspective. The 2% fee that an agent gets for selling a £10 million house to a billionaire (£200k for those doing the math) is nothing compared to the tax at 40% that the billionaire would be paying on his income (perhaps £100m per year) if it was all taxable in the UK.

The simple answer to your point about UK income is that many of these non-doms (I can name a few but that would be a breach of client confidentiality, so let's talk about the ones who aren't my clients) own large portfolios of UK property through offshore companies which are in turn held by offshore trusts for the benefit of the UK non-dom and family. The property companies receive rent and pay interest to banks, and the companies pay no tax because they have no net income after interest, capital allowances and other expenses, but the companies also benefit from appreciation of the property. When the property is sold (or more typically the company owning the property is sold to reduce stamp duties), the offshore vendor is outside the scope of CGT. The profits are then routed back onshore by the old "return of capital" scam or the "buy it on a foreign credit card settled from a foreign bank account but delivered in the UK, so that it doesn't count as UK income" scam.

If non-doms are such a good idea, why aren't we paying them more to come here? Perhaps we should give them free cheese every Tuesday and send them our youngest unmarried daughters to work as indentured labourers. Wouldn't that boost the economy?

[Michael McGowan]

We can all decry the non-dom rule as much as we like (yes, it is an anachronism and yes, it does work regressively). However, the world of global financial services knows that it does not owe the UK a living. It remains to be seen how much of an impact these changes have. However, if they lead to significant amounts of mobile capital leaving the UK, as well as the owners of that capital, then the tax take will go down and there are no prizes for guessing who will be picking up the tab, because all the three major parties are committed to very high levels of public spending. They are certainly not committed to reducing the tax burden, least of all on the middle classes and the relatively low-paid who are a soft target.

[Chad Noble]

"is nothing compared to the tax at 40% that the billionaire would be paying on his income (perhaps £100m per year) if it was all taxable in the UK."

But they wouldn't be here of course if that was the case of course, so their benefit to the economy would be zero.

Suddenly that 200k in your example looks a rather huge amount compared to the tax paid by the average person in a year, doesn't it? So despite all the schemes you note, they may still be paying far more into the UK economy that almost all other taxpayers.

They're *only* here because of the non-dom rules, not here no matter what, so your "if" would never occur. Introduce more taxes on them and they just head of to the next best location, Andorra, etc etc, and the UK loses all income it gained from them. Good work.

"If non-doms are such a good idea, why aren't we paying them more to come here..."
Green-eyed monster at work here I think...

[Mark Williams]

@Chad Noble: "But they wouldn't be here of course"

The premise behind the taxation non-doms is that they intend to depart for the foreign country to which they claim a nexus. If they are going to leave then let them. If they are going to stay for ever, then under the law as it stands, they lose their non-dom status.