One of the big political challenges with a five-year deficit reduction plan is that, while spreading it out makes sense in terms of weaning the economy gradually off public sector support, the government pushing the cuts through can face the death of a thousand cuts. Every time a cut happens there will be journalists willing to showcase the story, and vocal pressure groups putting their point forcefully across. The recent row about policing numbers over the weekend was a good example of a minor spat, and Dame Elisabeth Hoodless firmly put the boot in this morning on the BBC.


One perfectly natural response is to argue that, instead of cutting spending, the government should increase revenues from taxation. But no-one is really willing to take that on the chin; the recent report from the IFS that around 175K people will see their marginal tax rate double drew the usual shocked responses. So, instead, protestors have focused recently on companies and individuals that enjoy non-domiciled status.

These non-doms, be they corporate or individual, typically escape taxation on their non-UK assets under the current rules. Boots came under flak for registering its holding company to Switzerland, thereby saving lots of tax. Cue protestors outside its Oxford Street branch last month, which the police had to disperse. The Lib Dems, meanwhile, have non-dom individuals firmly in their sights – Lord Oakeshott, their Treasury spokesman, has described the current arrangements as a 'flea bite' (non doms who have lived in the UK for seven years or more pay £30K a year). Rumours are rife that Osborne will increase and extend non-dom taxation in the upcoming Budget.

The problem is that squeezing non-doms in this manner may not achieve much, and could make the deficit worse. The most governments can do about foreign-based corporations is put pressure on the host governments to raise their own tax rates, something which smaller countries like Ireland are fiercely proud of. But, even if the low-tax Swiss canton of Zug does make Boots pay more, the company is highly unlikely to move back to the UK. Once the move has happened, it does not swiftly reverse – something that the previous administration learnt when its plans to tax worldwide income were dropped after they hastened the relocation of various multinationals offshore.

The same is true for non-dom individuals. Increasing taxes on them could well act to drive them away to other, lower-tax, countries. All the better, some might say. But the problem is, a country is nearly always better off with non-doms than without them.

Non-doms, by their very nature, tend to be quite rich. By definition, you have to be a resident of another country and maintain that residency while living in the UK. Two of the most conspicuous industries that have lots of non-doms – hedge funds and private equity – are hardly flavour of the month either, despite the fact that neither were responsible for the financial crisis we have all just lived through (the banks managed that by themselves). They are an easy political target.

Hedge funds make money by betting on financial markets – and the managers are only paid well if they deliver returns. Private equity has a similar compensation model, with the key difference being that they make money by building up and selling on businesses. This typically either involves buying a company out of administration – which does lead to job losses, but far fewer than if the company had been left to fail altogether – or building up companies and creating jobs. While we all know about EMI, private equity firms have also backed companies like Agent Provocateur, Fat Face, LOVEFiLM, Pret a Manger and even the West Cornwall Pasty company (a personal favourite). Even if the individuals concerned don't pay all the income tax they could, fundamentally they make money from building up these businesses that employ thousands of people (who also pay a lot of tax). And that is before these rich individuals spend their money in the UK, further boosting the tax coffers at HMT.

Now suppose the non-doms weren't here – or, worse, that private equity more generally focused outside the UK. What if Red Driving School and Crown Paints had been allowed to go bust? What if the London Eye had never been supported after BA dropped out? The result would have been fewer jobs, and a bigger deficit. Chasing these individuals and industries away would be counter-productive.

The bottom line is that, while it may not seem fair that certain wealthy individuals don't pay a lot of UK tax on their non-UK incomes, driving them away is not the answer. Many of these individuals – occasionally I can get one of them to buy me lunch – are already thinking seriously about moving to Asia. Tighter rules on non-doms could make that decision for them, leaving the UK economy as a whole worse off. The unpalatable truth is that capital is still more internationally mobile than labour – and given that we need the former to create jobs for the latter, the Government should be doing all it can to keep foreign capital, and the non-doms that bring it, here in the UK.

Comment Here!

comments