Good morning from New Economy Brief.
Rumours have been circulating that the Labour government may water down their plans to scrap the non-dom tax loophole amid fears it could cause a ‘wealth exodus’ and end up not actually raising any money to fund public services.
Does the evidence support this? Or are the risks of capital flight just more self-serving noise from the tax-averse super-rich? This week we dig into the debate around the non-dom tax regime and outline the economic case for ambitious reform.
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What is a ‘non-dom’?
The non-dom scheme, which is almost unique to the UK, dates back to the introduction of income tax in 1799 and was designed to help colonial investors avoid paying UK tax. A ‘non-dom’ is a person who lives in the UK but claims that their permanent home/domicile is abroad, and that they plan to move abroad eventually. They enjoy a tax break which lets them avoid paying any UK tax on foreign income or capital gains, unless they bring these into the country. Research from CAGE at the University of Warwick shows that most of those who benefit from ‘non-dom’ status are very rich. They make up ~30% of people with incomes over £5m, compared to ~0.3% of people with incomes below £100,000, and include the highest-earning bankers, oil industry executives, top film stars or sportspeople.
The politics of non-doms. Labour originally proposed scrapping the non-dom status, but then-Chancellor Jeremy Hunt made a surprise announcement in the March 2024 Budget that the Conservative government would phase out the non-dom tax regime by 2028/29, raising an annual £2.7bn. Since then, Labour has pledged to remove concessions and loopholes in Hunt’s plan that give current non-doms a 50% discount in the first year and protect them from paying UK inheritance tax on foreign gains and income held in trusts. The new Labour government calculated that this tougher crackdown would bring in £1bn in tax in the first year to fund public services, like universal school breakfast clubs and more hospital and dental appointments.
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Watering down to stop capital flight?
However, in recent weeks rumours have been circulating that the plans risk being watered down. The Guardian reports that “senior government sources said they feared the Office for Budget Responsibility (OBR) may forecast that the measure would cost the government revenue rather than raise it, because of the number of non-doms expected to limit their time in the UK”, while the Telegraph warns of a ‘wealth exodus’ if millionaires migrate to more competitive tax jurisdictions. But while it is understandable that those facing higher taxes might tell journalists they will leave, is there any reason to believe them?
High earners won’t leave, actually. Looking at the evidence, perhaps not. The UK made the regime more restrictive in 2017, limiting post-tax incomes of non-doms by almost a fifth – and yet this only led to an extra 5% of non-doms leaving the country. This means the reform resulted in a net gain in revenue, but Centre for the Analysis of Taxation (CenTax)’s Arun Advani argues that “the striking thing about the people who left in response to the tax reform is that they were the ones who were paying the least tax anyway, so it actually doesn’t cost much to lose them”. Most non-doms have very highly paid jobs in the UK, so leaving just to pay a little less tax on their foreign investments doesn’t make financial sense.
Non-dom’s don’t migrate for tax reasons. Furthermore, researchers from the London School of Economics interviewed affluent Britons and concluded that “tax is not a key consideration for wealthy and high-earning individuals when considering emigrating from, or immigrating to, the UK”. Most were far more concerned about the risks to their careers, the upheaval to their families, the pain of leaving their homes, the punishing amount of admin to be done – even the risks to their reputations. The research found a “powerful stigma” attached to those who change country based on taxes alone; interviewees saw them as “unduly economically self-interested or accepting boring and culturally barren living environments”. Indeed, non-doms want to live in London, drawn by factors like its vibrant cultural scene or ability to access good healthcare and private schools.
What do the wealthy think? Many wealthy people want to pay their fair share and invest in the UK. But by giving tax breaks to investments made in other countries, it actively discourages non-doms from putting capital to work. With public services desperate for more money, inequality accelerating and private investment at record lows, it isn’t surprising that the new government is looking to ‘those with the broadest shoulders’ for more revenue. Gio Notarbartolo, a non-dom, impact investor, entrepreneur, and member of Patriotic Millionaires, concurs that “the trickle of stories about people leaving say more about their resistance to change, and to a fairer society, than they do about what the majority of wealthy people think. Believe me when I say that there is a growing community of wealthy people, like me, who love living here and want to see and contribute to greater investment in this country. And we aren’t going anywhere.”
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Models and behaviour
Finally, this case offers an interesting perspective on two idiosyncrasies around the politics of taxing the very richest in the UK. First, those who oppose such tax proposals often do so by speculating about behavioural impacts of tax changes (for which there is often little evidence), rather than by arguing the merits of the change itself. Often this happens via intermediaries – here, observe the role of wealth advisors who, for obvious reasons, may not be totally impartial on the topic. A similar pattern has played out over the proposed change to VAT on private school fees.
Fiscal rules. The second point worth making is that, because the government has limited headroom against its fiscal rules, the OBR’s assumptions really matter. Its calculation of how much revenue removing non-dom status could raise (again based on behavioural assumptions and limited evidence) makes a huge difference for a government that is trying to meet its own fiscal rules. The public debate would be much better informed if there was more transparency around the assumptions and uncertainties inherent in such models.
Health and work. After the Prime Minister promised in his Conference speech to ‘get the welfare bill down’ by tackling long-term sickness and supporting people back into work, Gaby Hinsliff’s latest Guardian column looked at the links between economic inactivity, sickness and social security. She references a new joint report from BCG, the Centre for Growth and the NHS Confederation, which argues for a whole-government approach to tackling the problem.
Economic growth needs a proper long-term plan. Labour doesn't have much time to show its economic approach is delivering growth – and it has even less if public investment stays low, writes Christine Berry. She argues that without a clear strategy to deliver growth, the government will inevitably start focusing on quick fixes to deep-seated problems, rather than addressing their root causes.
More room for investment. With reports that the government is considering tweaking its fiscal rules at the upcoming Budget, the Institute for Fiscal Studies (IFS) surveyed the Chancellor’s options. Its new analysis focuses on possible changes to the debt rule Labour committed to in its election manifesto, which could allow more borrowing for investment.
NWF compared to the EIB. UK in a Changing Europe looks at Labour’s plan for a National Wealth Fund (NWF) and compares it to the European Investment Bank’s (EIB) public investment in the UK before Brexit. The analysis finds that, while the NWF will allocate £7.3 billion over the five-year parliament, before Brexit the EIB was investing the equivalent amount in the UK every year.
The OBR’s multipliers are too low. A new paper from the National Institute of Economic and Social Research (NIESR) argues that the Office for Budget Responsibility’s (OBR) methodology is too conservative when calculating the impacts of public investment on the economy. They suggest the OBR underestimates the effect more public investment has on increasing growth and reducing debt.
Taxing capital. A new essay by Stewart Lansley for the Fairness Foundation looks at how the UK tax system could be improved to adequately fund public services. Lansley, a visiting fellow at the University of Bristol, argues that a ‘modest and phased tax shift from income to capital’ is what’s required.
