Will Sunak test the love of Britain’s Top 1%?

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When British Prime Minister Rishi Sunak imposed a windfall tax on oil and gas companies in May, Labor leader Keir Starmer – who had advocated for the tax for months – claimed a moment I told you so. Now Starmer has his sights set on what would in many ways be a bigger turnaround from the rookie prime minister: closing the loophole that allows the international elite in the UK to shield foreign wealth from the tax.

Last week, Starmer claimed that ending the benefit would bring in £3.2bn ($3.8bn) in revenue a year. Sunak has risen to the challenge, but it is clear the government is falling behind as it finalizes the November 17 budget statement. Sunak is under pressure to come up with new taxes that the public will swallow.

To be clear, there have long been strong arguments in favor of abolishing the regime both for reasons of fairness and in the interest of simplification. If Sunak does eventually relent, he will be making a politically popular choice that will allow him to claim a high moral position, distance himself from accusations that he is protecting the super-rich, and deprive Starmer of another stick with which to beat conservatives. This combination can be hard to resist. But despite the best efforts of economists, the economic argument is far from clear.

Those who are not domiciled in Britain for tax purposes (non-doms, as they are known) can choose to exclude foreign income and gains from UK tax unless remitted to the UK . Obtaining the status is complicated, but it essentially signals the taxpayer’s intention to one day return to their country of residence, although there is no obligation to do so.

The system undoubtedly helped attract the likes of steel billionaire Lakshmi Mittal and Russian oligarch Roman Abramovich (before he was sanctioned out of the country). But these are just the names of the titles. More than 20% of top-earning bankers have claimed non-dom status at some point, according to a study by researchers from the University of Warwick and the London School of Economics, who came up with a figure of savings of £3.2 billion.

Not all non-doms are into finance. Much of the top 1% earning more than £125,000 a year in other industries – including two-fifths of the top earners in the oil industry and a quarter of the top earners in the car industry – are no -doms. Sports, entertainment, construction, architecture, and even mining all have non-doms in the upper corporate echelons. About 80% of non-doms have income from work as their main source of income; 93% were born abroad.

The system was introduced in 1799, when the UK was at war with Napoleon, so those who owned foreign property could shield themselves from a series of wartime taxes. Critics say it provides an unfair haven for those who are decried by Theresa May as citizens of nowhere. Advocates have long argued that the program attracts revenue and talent and that shutting it down would cost more than it would bring in.

For years, both sides pledged to report Virtue to their respective bases, then agreed to disagree. But the argument is harder to dismiss now that people are facing a cost of living crisis and rising taxes and the government needs to find ways to raise revenue.

The claim that the Treasury would bring in £3.2bn a year from changing this system is largely based on an estimate of undeclared overseas assets and the response to the 2017 reforms put in place by the Chancellor of Exchequer George Osborne, who ended the “permanent”. ” non-dom status and increased costs for those who wanted to claim status. Despite concerns about an exodus, there was not much evidence of it. Those who later became “deemed domiciled” — that is, who were previously treated as non-doms for tax purposes — contributed more to the tax than the lost income of non-doms.

This has spurred calls to scrap non-dom status or limit it to the first five years. But this is based on an extrapolation from very limited data. The Osborne reforms left plenty of incentives for non-doms in place, including long exemption periods. And there was a major loophole allowing non-doms who would lose their status to shelter income that might otherwise be taxed in offshore trusts. The taxes paid by this group have increased significantly, but it is far from clear if they would have remained without the protection of the trust.

Labor knows this is embarrassing for the British Prime Minister. It emerged earlier this year that Chancellor Sunak’s Indian-born wife, Akshata Murty, is a non-dom who has received millions in dividend income (about $15.3 million in 2022) from stocks. of Infosys Ltd., the Indian company founded by her. dad. The optics were dire at a time when the Treasury was raising taxes to pay for pandemic-related expenses. Under intense media scrutiny, Murty announced in April that she would pay UK income tax on her aggregate income.

That doesn’t mean all non-doms will be happy to do the same. They may decide that the combination of lifestyle, educational and cultural offerings justifies higher taxes (bearing in mind that they are already paying a marginal rate of 45%). This is the assumption integrated into many reasonings. But if they decide it’s best to leave, it will leave a hole in income and talent.

Equally important is whether so many people would continue to arrive. Most non-doms have been UK residents for five years or less, which seems to support the argument (including, it seems, from the Inland Revenue) that a longer tax-free window short would pull people in while dragging many other existing non-doms into the tax net. Those who work with non-doms (who, it must be said, pay dearly for the services of tax and wealth advisers) fear that they will be less likely to come to the UK and settle there if the tax exemption is so fleeting. Nowadays, with many countries (France, Italy, Belgium among others) offering comparable tax incentives, good schooling and quality of life, non-doms also have other options.

After Brexit, there was not the mass exodus from the City of London that many had predicted. But thousands of jobs have disappeared and new recruits have often moved to other financial centres. Meanwhile, Europeans who felt less welcome stopped coming. It wasn’t the pop of a popped balloon but the sound of air slowly hissing from a flat tire. For this reason, Sunak the Brexiteer should also be wary now.

It is naïve to assume that there would be no behavioral response to a change in incentives. If Sunak is not careful, he could hunt much-needed talent and income while further damaging the UK’s global reputation as a place where an international elite want to be.

More from Bloomberg Opinion:

• Sunak must exercise caution on capital gains tax: Thérèse Raphaël

• Indians have good reason to celebrate Rishi Sunak: Mihir Sharma

• City of London bankers better check Rishi Sunak’s interference: Paul J. Davies

–With the help of Elaine He.

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Therese Raphael is a columnist for Bloomberg Opinion covering health care and British politics. Previously, she was the editorial page editor of The Wall Street Journal Europe.

More stories like this are available at bloomberg.com/opinion

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