How to tax the rich, and how not to
Labour and other parties of the Left are playing a dangerous, and hypocritical, populist game with their Non Dom and other tax hike plans. Will they ever understand that soaring taxes can easily lead to less revenue as incentives to pay tax and earn income in Britain are reduced?
Taxing the rich is extremely popular with the main political parties. It is based on two propositions. The rich have more money to tax. Taxing the rich is popular with many who are not rich. So what could go wrong?
Most of us agree the rich should pay more, and that income tax should go up with income level. The problems come about because the very rich have more scope to decide where to live, where to work, and where to pay taxes.
If a country overdoes its taxation of the rich, as France did recently, many of them go and live, work and earn somewhere else. The ones who stay employ better tax lawyers and accountants to minimise their bills.
Nor is heavy tax on the rich popular with everyone who is not rich. Some aspire to be richer later in life. Others are not jealous and see nothing wrong with people having more money if they are better footballers, singers, business people or whatever and earn more as a result.
Labour under Blair and Brown decided they needed more rich people in the UK, and needed more rich people to work, risk and venture. They decided to continue with the outgoing Conservatives 40 percent top rate of Income tax. They brought Capital Gains Tax down to a more competitive 18 percent.
They allowed Non Doms to come and live in the UK, paying full UK tax on all their earnings, savings and ventures in the UK but avoiding tax on assets and income they had elsewhere. This Labour system worked well, and the rich made a substantial contribution to tax revenues as a result.
The last days of Gordon Brown, followed by the Coalition, changed this approach. Mr Brown put Income tax up to 50 percent. Mr Osborne brought it back down to 45 percent, where more money is collected than at 50 percent.
CGT was put up by the Coalition to 28 percent, where it collects far less revenue than at 18 percent before the crash. This is despite share and property values now being back above the pre crash levels.
Mr Brown introduced a Non Dom tax or payment to allow people to live here and only pay on their UK income and assets. Mr Osborne increased that payment substantially.
Mr Osborne changed the rules over the payment of Stamp Duty on homes bought through companies. He also imposed large rises in Stamp Duty on the more expensive properties. Income from Stamp Duty as a whole has risen.
The art of taxing the rich is to choose rates which bring in large sums without triggering an exodus from the UK, or without allowing too many ways to pay less, often by earning and doing less.
This election is seeing an auction of promises by parties of the left to tax the rich more. There are promises to raise Income Tax to 50 percent, to increase property taxes, bring in a Mansion tax, and now the abolition of Non Dom status.
They run the risk of taxing the rich less, as there will be fewer rich people to tax, and the rich who stay may generate less income and venture less of their wealth for higher returns.
The abolition of Non Dom status was opposed by Mr Balls throughout his government years, and condemned by him quite recently, stating that it might cost the Treasury lost revenue.The first round effect of abolition is to cut revenue, as the Treasury loses all the Non Dom special payments for Non Dom status.
The second round effect depends on how many people decide to leave rather than pay tax on their non UK interests, and how many deciding to stay can rearrange their non UK assets and income to minimise UK tax. The scope to lose revenue out of this change is considerable.
Mr. Redwood's writing is re-posted here by his kind permission. This and other articles are available at johnredwoodsdiary.com
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