More on Taxes

You would have thought that Brown and Darling would have learnt a lesson about tax hikes. Back in early 2008, Britain’s Labour leaders had to back-track on some of their plans to “crackdown” on rich foreigners resident in the UK but not domiciled there for tax purposes. Inadvertently, he provided a major object lesson on the importance of tax competition.

Unnerved by the Conservatives, who promised that in government they would impose a levy on rich foreigners, Brown and Darling, announced just before Christmas that come spring, tax rules on foreigners resident in the UK would change. Under the previous regime, foreign residents could claim “non-domiciled” status and avoid paying tax on overseas earnings and offshore assets. Only money brought into the UK or generated there was liable to income tax or capital gains tax.

Brown’s new proposal would have all non-domiciled foreigners resident in the UK for more than 7 years paying an annual tax charge of 30,000 pounds (now about $45,000 but then $60,000).

According to the government’s theory, hugely wealthy foreigners wouldn’t up and leave just because of a mere $60,000, although, of course, for families it could be a lot more than $60,000, if spouse and adult children were taken into account.

To make matters much worse, the British government also started to talk about introducing new residency rules and rules on taxing offshore trusts.

In February 2008, I wrote this for the Cato Institute blog: “Government spokesmen, along with supporters of the tax crackdown, including rather strangely the editorial writers at the Financial Times, pooh-poohed the notion there would be an exodus of the wealthy and entrepreneurial just because of the tax changes. They have been arguing that London is too important, what with its deep pool of financial and international legal expertise. Low-tax cantons in Switzerland or non-tax Monaco or offers of generous tax treatment in, say Greece, would hardly compensate for what London has to offer.

Foreigners apparently have been thinking otherwise. Many of the country’s richest foreigners have already started to relocate to Geneva, Zurich, Barbados or Ireland. This week, Irish paper king Dermot Smurfit announced he was planning to move to Switzerland and there were reports that dozens of Greek shipping magnates were exploring the possibility of moving back to Athens – a transfer that would cost the British economy annually $10 billion alone, and in the long term maybe two or three times more. The $60,000 annual levy per non-domiciled foreigner would bring in annually $1.6 billion.

Belatedly, the alarm bells have started to ring. The British government is poised to announce, possibly tomorrow, an embarrassing back-down. Taxing offshore trusts is now likely not to happen, although the $60,000 levy per non-domiciled foreigner will remain.

The reversal highlights the importance of tax competition. But there still might be long-term consequences from Brown’s botched handling of the affair. Non-doms who have already moved overseas are unlikely to return and the London-based Greek shipping magnates, who control a quarter of the Greek shipping industry, are now being courted energetically by Athens, with offers of generous tax treatment and subsidies.”

The Law of Diminishing Returns

Bad news for Britain’s Labour government right on the eve of tomorrow’s unveiling by Chancellor Alistair Darling of the annual Budget.

The IMF now estimates that the cost of the bail-out of Britain’s banks will amount to 13.4 per cent of the UK’s entire economic output of £1.46 trillion in 2008. Of OECD countries, only Ireland will pay more as a percentage of its output to rescue its banks. So much for Prime Minister Gordon Brown’s proud boast of having ended boom and bust cycles.

And the respected British think-tank the Institute for Fiscal Studies has warned that tax hikes are unlikely to help pay for the bailout or mitigate the consequences of recession. The institute warns that raising the top rate of tax to 45p as proposed by Brown will prompt an exodus of top earners as well as greater use of tax avoidance schemes.

The Treasury has sniffed at the institute’s prediction, saying ,“The Treasury remains confident in its forecast revenues for the new 45p rate of tax as set out.” Now is that the same Treasury that came up with all those glowing forecasts about how Britain under New Labour had found that magic to escape busts?

 

He Who Lives by the Blog Can Die by it too.

Gutter politics in London – shock! Gordon Brown had no choice but to sack his Downing Street press adviser Damian McBride after the leaking of a series of e-mails he sent to fellow Labour adviser Derek Draper detailing a potential smears campaign against top British Tories. If he hadn’t done so, the clamour would have only got louder.

But Draper isn’t helping Downing Street by arguing in media interviews that McBride shouldn’t have had to go, and his claim that this was just a matter of e-mails between some mates is absurd. They might have decided not to use the material they were concocting but the e-mails leaked to blogger Guido Fawkes show that McBride and Draper were getting down to tactical details on how to make the online smears campaign really work.

In the e-mail exchanges about what stories they could spread, initially by using Labour blogs they run, the two discuss how the stories should be deployed in sequence to maximise their impact, and Draper says he will think about the “timing and technology” in order to boost the credibility of the smears.

At no point in their exchanges do they voice doubt about the morality of what they are doing or embarrassment about making up vile allegations or adding lies to half-truths.

Conservative blogger Iain Dale – who himself has been a target of McBride and Draper – compares what the two were doing to Nixon. At first, I thought this was stretch. But thinking about the pattern of tactics employed in recent months against opponents by some at the heart of government, there seems some substance to Dale’s comparison. Like Nixon, there is total, unabashed ruthlessness when dealing with critics and a willingness to use, for example, the police on opponents – recall, for example, the calling in of the anti-terrorist squad into Parliament to root out who was leaking to the Tories embarrassing details about immigration cock-ups.

But the Web is the Wild West and e-mails and blogs can be turned around on you.