Punitive taxes will not tempt exiles back


monacomonaco1Ian Cowie wrote in the Telegraph last week about the increase in tax-driven emigration between the 2008 and 2009 tax years. Under Labour, the tax system became more complex and the stance of the HMRC more hostile towards wealthy individuals. And as a result, many non-resident Brits have severed their financial ties to the UK rather than negotiate complex and punitive taxation rates delivered by HM Revenue & Customs.

The good news is that the Coalition government has shown a willingness to address this by setting the Office of Tax Simplification. But any ex-pats reading shouldn’t get too excited – we are still a long way off a fair and simple tax system. The Coalition’s stance is ambivalent at best: Vince Cable is making noise about the need to take a hard line with the wealthy, Capital Gains Tax has been hiked to 28%, and the 50% tax rate for top earners has been continued. It’s a tempting idea to whack up the tax rate to fill of the black holes in the government’s finances, but why on earth would highly mobile investors and wealth creators choose to stay in the UK under this regime? The private sector will be the one to lift the country out of recession, and yet our tax system makes us far less appealing for private investment or residency than tax havens like Monaco or the Isle of Man.

As the Laffer curve shows, higher taxes do not necessarily mean that people pay more. The tax exodus experienced in the UK illustrates the fact that, if the rate becomes too high, some individuals will simply choose to avoid it. And it’s not only the tax rate that is driving people away, but also the cumbersome nature of UK taxes. Uncertainty and complexity make the tax system incredibly hard for individuals (and even their accountants) to understand. I think the best solution (as Eamonn has blogged) is for the UK to adopt a simple, flat tax rate. If a rate of around 20% were adopted, the tax system would be easy to understand, low enough to undermine avoidance, and would be likely to foster dramatic economic growth.