Ed Miliband has laid down an enormous tax mine in the election field with his proposal to abolish non-domiciled status. Non-dom status allows people with a connection to another country to elect pay a £50,000 charge to exempt from tax money earned outside the UK so long as that money remains outside. They continue to pay tax on money earned in the UK and on money earned overseas but transferred or brought here.
The Labour blogger and tax lawyer Jolyon Maugham wrote a blog suggesting the move would raise £1 billion, which has been widely quoted, including by shadow chancellor Ed Balls on the Today programme. Labour itself say the change will raise "hundreds of millions". Maugham's approach is typically fair-minded and reasonable, but substantial doubts remain concerning his assumptions, some of which he has subsequently acknowledged. These problems are a shame, because what is at issue should largely be seen as an empirical question.
This is because almost nobody would consider the status quo to be conceptually ideal. It complicates the tax system and treats the same type of income from different people differently. Not only that, the advantage is given to people who are both rich enough for the £50,000 charge to be worthwhile and to some degree foreign. So, with such an obviously attractive political target for a tax rise which would simplify the system and remove some unfairness, it is worth stopping to consider why every previous government has concluded that it would be unwise.
There are four basic options for policy-makers to choose between:
- The status quo
- Abolish non-dom status
- Extend non-dom treatment (ie, not taxing foreign earnings so long as they remain outside the UK) to all UK residents (as suggested by the pseudonymous blogger Christie Malry)
- Abolish UK tax on foreign income altogether
To what extent would ending or restricting the status lead to non-doms leaving the UK and taking their existing tax revenues, jobs and prosperity with them? How much more money would those non-doms who would stay anyway bring into the UK if there was no tax advantage to leaving it outside? What would that effect be if we removed UK tax from everyone's foreign earnings?
Questions such as these must be answered first because while the status quo is messy and has unfair aspects to it, it cannot be fair to tell everyone else that they must pay even more tax to fund the shortfall that this idea might create. The point of the tax system should be to raise revenue in the least economically damaging, fairest and simplest way possible. It should never be used to create economic damage for its own sake.
This illustrates once again why the TaxPayers' Alliance has called for proper, dynamic analysis to be undertaken for every fiscal policy announcement. Taxpayers deserve robust and full analysis for all proposals before they are implemented so that problems are identified without leaving them a needless bill when it's too late.
We need comprehensive, full tax reform that makes the system simpler and fairer as well as reducing the burden on taxpayers and the economy. Our Single Income Tax published in 2012 outlines the reforms we need. Instead of tinkering with rules like this one at a time, the parties should look at the bigger picture and set out plans for a tax system for the 21st century.