Abolishing non-doms; welcome to the Laffer Curve


It's election season so, yes, obviously, all sorts of things are going to be promised. Which gives us Ed Miliband's idea that Labour, if elected, will abandon non-domicile as a tax option. This is an interesting example of where reality meets the Laffer Curve:

The last Labour government toyed with abolishing the non-dom system but simply tightened the rules instead - which were then tightened further by Conservative Chancellor George Osborne.

That is because non-doms still have to pay tax on their UK earnings so successive governments have calculated that, on balance, it is better to have them here making a contribution to the exchequer than to see them flee abroad.

That's a wide reading of Laffer of course, that lower tax rates can lead to higher revenues, higher tax rates can lead to lower. It's something that is obviously true at the extremes and successive administrations, having done those scribbles on the back of the envelope, have assumed that taxing non-doms on their worldwide income would lead to lower revenues.

Miliband thinks this isn't true and so boo yah! to that. However, there's another point that we've not seen anyone mention as yet. Which is that residence and domicile interact in more than one manner. Yes, it is odd that the UK makes this distinction in a way that almost all other countries don't. But that interaction is more complex than just allowing non-doms resident in the UK to not be taxed in the UK on their worldwide income.

The complication is that the distinction allows many who are domiciled in the UK, but not resident, to still be claimed in part by the UK tax system. This is the situation with one of us in fact: not resident in the UK and hasn't been for a couple of decades, but still in part in the grips of the UK tax system as a result of continued domicile.

Further, there's many many more such domiciled but non-resident Brits out there (millions of 'em, million and millions of 'em) than there are the roughly 120,000 resident and non-dom.

Abolition of domicile as a determinant of taxation status would therefore have a much more complex effect than most seem to think. Logically, it might being that hundred thousand odd into the domestic tax net but it's equally going to release every expat from it.

That Laffer Curve really does exist you know, and even in the real world sometimes it bites.