On non-doms...and ceding the moral and intellectual ground
Unfortunately my thoughts on non-doms didn't make it to Jeremy Hunt's in-tray before the Budget, however the underlying economics are comparable to this blog's favourite topic: VAT on schools
I was asked to contribute this article regarding non-dom’s taxation. I highlighted the well-known Laffer Curve (raising tax rates has diminishing, and at some point negative, marginal revenue as people take steps to reduce whatever you are taxing) and a few slightly less well-known 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 always 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% employer 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.
I look briefly at some of the unintended fiscal consequences of removing non-dom status, such as the risks to the taxes they do actually pay (1) Average £120k of onshore income and capital gains taxes; total £8.5bn (2) £30-60k non-dom charges; I estimate worth ~£2bn (3) taxes paid whenever income is brought onshore. I conclude by encouraging the Government to make the UK more attractive for investment, and to provide a more competitive tax regime for us domiciled Brits rather than a less competitive one for non-doms.
So as you probably know already, the Chancellor didn’t take any of my advice. He’s adopted Labour’s policy on non-doms. This is probably bad news for the economy and the public finances (I say “probably”) because it’s “possible” all the non-doms obediently pay lots of extra tax and none of them move offshore or take other legal measures to reduce their tax bill…
….whatever. Of course they won’t pay / will move. As I say in the third bullet above, some people have greater capacity than others to change their behaviour facing a tax. Any self-respecting non-dom (remember, this is people whose new overseas tax bill alone can be assumed to be >£30-60k) probably has at least two passports, a few houses, a network of business holdings…and a good handle on which country will welcome them with open arms.
It’s the same conversation with VAT
If you’re a non-dom, by definition it’s “easy” for you to move overseas (or to hide your overseas income in some Cayman Islands trust). If you’re a private school parent, by definition it’s “easy” for you to stop paying fees and to demand a free taxpayer-funded school place that may or may not exist.
If you take up free taxpayer-funded school, then you’ll note a strongly positive “income effect” as you no longer need to find £XXXk across your lifetime earnings. You can respond to the income effect by buying more stuff, alternatively it’s “incredibly easy” to choose more leisure and thus substantially reduce your lifetime tax contributions by £XXXk.
Why I care about non-doms
School fees are close to Mr and Mrs Chips’ home. However neither Mrs Chips or I are non-doms. So why do I care about the non-doms so much?
As I’ve outlined above, this looks like a poor economic choice that harms the public finances and the broader economy. Nothing to celebrate.
Even if it was a breakeven or slightly tax-positive measure, it would still be spiteful, silly and divisive. I don’t want the UK to be that sort of country, and I’m disappointed in the “Conservative” party for taking that route.
Politically, every time the Conservatives concede this sort of ground to Labour, it makes it harder for the former to cite the Laffer Curve and to talk about the unintended consequences of excessive taxation.
The point I made about “useful economic activity” has been completely disregarded in the non-doms debate. And it applies even more strongly as regards the positive externality that arises when the private sector invests in human capital - in terms of productivity, current and future public finances, and citizenship, taxing education is bonkers. The optimal point for education is definitely not peak tax revenue or anywhere close.
As I wrote in the article:
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.
Cue Starmer’s gag that the Conservative Party will be in a position to tax education next. Bleeeuuurgh.