When he announced Labour Party proposals for changes to the non-dom rules, Ed Miliband tried very hard to be as misleading as possible without lying. He seems to have failed.
He said that non-doms ‘aren’t required to pay taxes like you and me’. They are. Non-doms are required to pay the same UK taxes as the rest of us on their UK income and foreign income remitted to the UK. Most of us don’t have any non-UK income, let alone non-UK income which we do not wish to remit to the UK (regardless of the tax treatment, it would mean we couldn’t spend it here) and therefore we do not pay tax on unremitted non-UK income either.
Clarity on the current rules is really important for what could be a question worth billions to the UK exchequer: will this measure raise revenue?
After all, non-doms do create revenues for the UK government in three ways: taxes on their consumption; taxes on the UK income and foreign income remitted to finance that consumption; and taxes on the economic activity that consumption creates (e.g. the wages in jobs it creates, which obviously matter for other reasons too). If they leave in at all significant numbers then that might outweigh the revenue gains from higher taxes on those who stay here. Until we have proper research on all three of those channels, the right assumption to make in commenting on these proposals is probably that they are as likely to reduce overall receipts as to increase them.
What Miliband was trying to get at in his comment is that the non-dom rules do mean a very rich non-dom with a large international income will pay less than a very rich ‘dom’ with a large international income. That feels unfair to some very rich Britons and the announcement therefore appears to have won him Duncan Bannatyne’s vote. It has nothing to do with you or me, though.
The question to ask is why this ‘arcane 200-year-old loophole’ with nothing to recommend it politically has lasted. It has lasted because if you are an Indian billionaire – say – who has built a business empire in India and then moved to London, while it might feel fair to pay tax on the money you earn in, bring to, or spend in the UK, it might not feel so fair that the HMRC suddenly has the right to start claiming chunks of the empire back in India. Just having to report everything you do around the world might be an enormous administrative burden (which is why you might put up with the existing annual charge but not the removal of non-dom status). You might well choose to go elsewhere.
Successive governments have decided that making life considerably more difficult for non-doms who are often commercially, philanthropically and fiscally important to the UK is not worth the political satisfaction. The perfect tax system, redesigned from the ground up, probably wouldn’t include (or need) non-dom rules. But then there are lots of reliefs and exceptions in the over 17,000 pages of UK tax rules which wouldn’t be needed in an ideal world but are kept in the hope of limiting the burden of the unwieldy rules that – for now – we’re stuck with.
Isabel rightly argues that the Conservatives should be careful about the political effects of their response to these proposals. Labour should also be careful though. At the moment, both sides are losing the tax debate. The Conservatives might be largely losing the debate over the need to creative a competitive tax regime for mobile labour and capital and encourage people to do business in Britain. But Labour are losing the debate, or not even fighting it, over the increases in taxes on ‘you and me’ which would be needed to finance their supporters’ aspirations for public spending.
There is no tax system out there which leans more heavily on the rich and raises a higher share of national income in tax receipts than that of the UK. The countries that raise large amounts in tax, like the Nordic states, rely on higher taxes on people earning ordinary incomes. It is unclear whether Labour’s proposals so far would add to or reduce overall revenues once all the dynamic effects have played out, but, even on their own sums, it is hard to see them adding up to more than 1 per cent of government revenue in total. Either they’re going to need to make some serious cuts in public spending, or they’ll need to demand more money from ‘you and me’ without any mandate to do so.