As I predicted, British Labour's "new soak the rich foreigner tax" is soaking a lot of middleclass foreigners as well. And it's driving many of them out of the United Kingdom.
Until now, the U.K. has been a major tax haven, but with a different twist. The U.K. gave major tax breaks to wealthy foreigners who actually made their homes there. Under U.K. tax law, anyone living in Britain, "rich" or not, who was not born there had the legal right to choose what is known as "non-domiciled" tax status. By claiming that right, foreigners only had to pay taxes on income earned or actually brought into the U.K.
That meant scores of billionaires and millionaires living there only paid tax on the relatively smaller amount of money they actually brought into the U.K. each year. They paid no U.K. taxes on their larger worldwide earnings.
These rich foreigners spent billions on real estate, goods and services and invested heavily in the United Kingdom. According to British Treasury figures, about 112,000 people claimed non-domiciled status in 2006. These rich foreigners reported £9.8 billion (US$19.9 billion) in U.K. earnings and paid taxes on those earnings. But their wealth from overseas income undoubtedly was much greater. "Non- doms" already contribute about 2.7%, or £4 billion (US$7.9 billion) of the U.K.'s annual income tax revenue, the Treasury said.
Now the Labour government has imposed a tax of £30,000 (US$60,000) on any foreigner choosing the non-dom tax status who has lived in the U.K. seven years or more. The higher taxes will cut deeply into the income of middleclass earners like college professors and writers.
It's predicted that the annual cost of tax preparation will double to about £2,000 (US$3,900). As a result, foreigners in the U.K. of all levels of wealth are packing their bags and planning to move to far better tax havens, such as Monaco, or to places with lower taxes, such as Switzerland.
Non-doms who move away may sabotage the plan by cutting the existing tax revenue, said Philip Keevil, senior partner at Compass Advisers LLP and former head of European mergers and acquisitions at Citigroup Inc. The government estimates about 3,000 people will leave Britain because of the new rules.
"It won't take many to leave for the amount the Treasury loses to exceed the amount they will gain from those staying and paying,'' said Keevil, 61. He blames "the politics of envy'' for the notion that foreigners evade taxes.
"Confusion over the rules is blunting London's attractiveness as a place to settle and do business," said David Treitel, a tax director at U.S. Tax & Financial, a London-based accounting firm, adding: "The politicians think the non-dom changes affect only the wealthy.''
What Labour Party politicians don't seem to understand is that taxes are a cost of living and doing business, just like any other cost. When individuals or businesses move away to a tax haven to cut down on costs, they stop paying taxes to the big-spending politicians left at home.
Some long-established U.K. residents say moving to Ireland may be a good option. "Ireland offers the non-dom everything England is taking away," said Jim Ryan, a personal tax partner at Ernst & Young Tax Services in Dublin. Non-doms in Ireland still enjoy the breaks that are disappearing in the U.K. The Irish government estimates that more than 7,000 people live in Ireland as non-doms.
So it looks as if British Labour has finally put an end to "tax haven England." Britain's loss could be Ireland's gain.
This British tax imbroglio serves as a classic example of why tax competition among nations is a positive. It allows individual freedom of choice and curbs the welfare state's rapacious appetite for more revenue and spending.
© Copyright; Foundation for Economic Growth and various authors. Individual authors retain their own copyright.
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