Taxes and the little people

by Henry Farrell on March 10, 2008

Martin Wolf, whom I frequently disagree with, but always find worth reading, had an “excellent piece”: in last Thursday’s _Financial Times_. It was about the quasi-hysteria in the UK press over the prospect that ‘non-doms’ – wealthy foreigners resident in the UK – would be obliged either to become taxpayers or fork over 30,000UKP per year after they had lived there for 7 years.

As Wolf puts it:

The view that only little people pay taxes has been advanced with passion. Does the private equity business pay tax on its income at 10 per cent? Quite right too. Do entrepreneurs turn their income into capital gains, also taxed at 10 per cent? Right, again. Do 130,000 people live in the UK, many for decades, without paying tax on their foreign income. Absolutely right. Change these arrangements and the sky will fall in, we are told, or at least it will be the end of the City of London, the art market and the business of luxury.

… some non-doms have asked: what has the British government ever done for us? We do not use its lousy state-run schools or hospitals. … Yet this argument, too, cannot be limited to non-doms. … The same argument can be made by wealthy British people. … why should they pay tax? … It is Helmsley’s wisdom, then, that is animating the intense lobbying … She pronounced the principle that has been behind the screaming: only the little people pay taxes. … Rich and successful people are too important, too valuable and, not least, too mobile to be expected to do so.

What Wolf diplomatically fails to note (although it surely hasn’t escaped his attention) is that his newspaper has played a key role in supporting this lobbying campaign. There was a period a few weeks ago where it seemed that the FT had one or two new stories every day about the horrors that would ensue were non-doms taxed (the FT is a genuinely excellent newspaper, but you still should treat any story that touches directly upon the financial interests of the City with at least a modicum of suspicion). Indeed, Monday’s edition has a “prize example”: of the genre, written at feature length.

Until last October, no big country was as famed for the tax privileges offered to foreigners as Britain. … Some of these privileges are set to be swept away in Wednesday’s annual Budget … Britain’s renunciation of some of the tax incentives that have helped it attract wealthy individuals and investment has delighted rival jurisdictions. Its willingness to tinker with a source of competitive advantage has also surprised them. … many non-doms feel their legitimate expectations have been unfairly dashed. … Whatever the final shape of the legislation, many non-doms are fed up with the aggression of the British tax authorities. Len Durham of Stonehage, a wealth management group, says: “It is the perceived hostility of the Revenue – the impression that they are out to get you – that has created more anxiety and annoyance than anything else.”

… the extent of the exodus can only be guessed at. … Brendan Barber, leader of the Trades Union Congress, has urged ministers not to “swallow the line that this move will hit business or the nation’s prosperity”. Instead, there “would be substantial benefits to the UK economy from abolishing the domicile rule”. But most economists are extremely cautious about predicting the impact of the non-dom changes on the national economy or public finances. Stuart Adam of the Institute for Fiscal Studies, an independent think-tank, says: “There are so many unknowns, either because people have not done the research or, to some extent, because there is no research you could do.” Mike Devereux of the Oxford University Centre for Business Taxation says: “I don’t think anyone has any idea what the economic impact will be. The only information the Treasury has is the numbers claiming non-dom status. Everything else is a guess.” Martin Weale, director of the National Institute for Economic and Social Research, says the non-dom rules mean that taxpayers are subsidising exports of financial services. It is unclear whether this generates more revenue for Britain than the cost of the subsidy, he says. “The truth is we don’t know.”

… Some of the most damaging aspects of the tax changes could take years, or even decades to materialise. The Treasury has long maintained it wanted to strike a balance between competitiveness and fairness. Its quest for greater fairness is unlikely to leave Britain’s competitiveness unscathed. But it may not ever be possible to judge exactly how big the impact has been – or whether it was a price worth paying for a fairer tax system.

This article really is a small masterpiece in its own way. I don’t know which bit I enjoy the most. On the one hand, there’s Le[o]n[ora] Durham’s wonderful dismay at a Revenue Service that is out to get you (which I read, perhaps unfairly, as dismay at a Revenue Service that is actually doing its job). On the other, there’s the quite remarkable way in which the author of the article marshalls quotes from economists about the lack of evidence regarding the fiscal consequences of the new rules when it suits her rhetorical purposes, but concludes by rabbitting on about the likely harm to UK competitiveness, how the worst damage could take decades to materialize &c &c &c. These arguments are not only unconvincing, they’re not in the long term interests of any even vaguely enlightened and self-aware form of capitalism. As Wolf (channelling Polanyi and Dani Rodrik) suggests,

I am deeply sceptical of special interest “the sky is falling” pleading. More fundamentally, I am opposed to this particular pleading because it is subversive of any enduring political compact among citizens. If we take the principle that successful people are too important and too mobile to pay tax to its logical conclusion, political community will collapse.



Martin Wisse 03.10.08 at 11:02 am

What’s so obnoxious though is that this sort of baseless chicken little propaganda works, as witnessed by the climbdown over marginally raising profit taxes.


P O'Neill 03.10.08 at 12:40 pm

One of Wolf’s more general points is that the affair stands as an example of how badly the UK is being governed. There are many ways they could have curtailed the non-dom abuse without the very blunt instrument of a flat fee — it’s not clear why they thought a bigger relative tax on lower income non-doms was the way to go, but that’s what they came up with. It seems that (as with other issues) they didn’t want to lose the initiative on a populist issue and botched splitting the difference between likely Tory and Lib Dem positions.


Mikhail 03.10.08 at 12:43 pm

What usually goes unnoticed and unmentioned every time this sort of issue comes up whether it being the non-doms or the wealthy or the big earners, is that these people benefit the economy immensely NOT by paying or not paying taxes, but through their spending and their businesses and investments. The wealthy people often drive certain segments of the economy almost single-handedly and leave large amount of money in spending. Their businesses create job that all the “little people” can be employed in… and their investments power pension funds, etc. This is never mentioned for some reason. Now, of course, the change in non-dom status will not lead to a huge exodus from London, but it will hurt both the city and the overall UK economy as the benefit you’d get through taxes is almost negligible compared to all others that arise from having wealthy people in your neighbourhood…


Henry 03.10.08 at 12:52 pm

Their businesses create job that all the “little people” can be employed in… and their investments power pension funds, etc. This is never mentioned for some reason.

mikhail – trust me – this _has_ been mentioned in the debate. Again. And again. And again. And again. Which is why Wolf devotes some time to rebutting this specific point.


Dave 03.10.08 at 12:59 pm

I so *love* the “little people” argument – make all those *other* people pay for the state structure that prevents them from shooting their way into our mansions and disembowelling us with our own diamond-studded cutlery…

The rich really aren’t like other people, are they?


Alex 03.10.08 at 1:57 pm

Am I being thick here, or is there no reason to think that becoming a non-dom involves bringing one’s business here, as opposed to one’s home? As far as I can see, you don’t have to bring TLA Financial Corp with you, just your fat arse.


Mikhail 03.10.08 at 2:06 pm

#4 Henry, I’m not well familiar with Wolf’s point of view and his arguments, but in the articled linked to above there is absolutely NO argument per se. Just raving, I’d say. There isn’t a single number or reason. This question is often enough viewed in terms of righteousness and fairness, whereas it should be viewed in purely economic terms. I guess we just don’t like it when some people get benefits unachievable by ourselves… In my opinion, the argument that we should subsidize high-earners and compete for their business and skills is a very valuable one.


franck 03.10.08 at 2:31 pm


Isn’t that government influence in the free market, though? Why should the British government distort the market for marginal benefits? I’m also curious how exactly to subsidize these people even if they don’t spend most of their money in Britain.


Great Zamfir 03.10.08 at 3:28 pm

Mikhail, you might not have noticed, but high-earners are already ‘subsidized’. Through their high earnings.

There is no clear cut economic argument that lowering taxes for high earners will always produce net benefits to the rest of society.


novakant 03.10.08 at 3:29 pm

A little bit of outrage is fun, sure, but one has to make a rational calculation of what the potential financial gains and losses created by such a policy would be. From what I’ve read, I think it’s pretty clear that any such gains would be vastly offset by the loss of foreign investment, spending and talent, which has to do with the fact that the UK is heavily dependent on the influx of foreign capital.


Mikhail 03.10.08 at 3:30 pm

I’m not suggesting we pay them money, of course. :) But it’s silly to expect them to pay the same taxes as the rest of the population if they spend less than half time in the UK. There can be many schemes in place, starting with the most obvious one – invest a certain amount in the economy to maintain the non-dom status… Also, I don’t think it’s meddling with the free market, because if this is, then taxation is also meddling… :) Besides, governments do not care about free market. They do what’s best for them.


Tomas 03.10.08 at 3:33 pm

Ah yes, lets all compete to have rich people live in our community. I suggest we use the states monopoly of violence to impose slavery on the little people. Oh, not all of them, but just the pretty ones that might provide pleasure and amusement for the wealthy. I am sure we can find a good segment of the wealthy who would love to be able to own their help or have the fight for sport.

Such state sanctioned action will undoubtedly attract wealthy inhabitants and their amazing powers of wealth-creation which will trickle down to the little people who will then pay taxes to run the slavery program. Everybody wins!

You see the market seems to not sufficiently reward the socially valuable activities of deriving rents from state supported property right. Nor does the activites surrounding the amazingly wellfunctioning corporate governance with pays salaries to insiders not at all based on rentseeking behavior by managers/board or by excessive risktaking with other people money.

That will create a better and richer world, if we just could get all states to enter into a zero-sum game of pleasing the internationally mobile rich.


ajay 03.10.08 at 3:36 pm

these people benefit the economy immensely NOT by paying or not paying taxes, but through their spending and their businesses and investments. The wealthy people often drive certain segments of the economy almost single-handedly and leave large amount of money in spending.

Well, actually, mikhail, the poor are bigger spenders than the rich – they spend a higher percentage of their income, rather than saving it and investing it outside the country. (They also drive certain segments of the economy almost single-handedly; the discount grocery business, for example.) Much better to have ten people earning £20k than one earning £200k, ceteris paribus.

Nor do the investments of the rich “power pension funds” in any sense at all. Pension funds are powered by people contributing to their pension plans – i.e. most of the population. The rich put their investments elsewhere. (Of course, some of them have become rich by managing pension funds, but that’s rather different).


Mikhail 03.10.08 at 3:55 pm

:) It’s not better to “have ten people earning £20k than one earning £200k, ceteris paribus”. Simply because a rich person would decide to redecorate and just by doing that dwarf the spend of 10 20K people. It’s sad, but true… One must remember that we’re not looking at % of income, but at absolute benefit/spend in this case. Even if a billionare spends here only 1% of their income a year, that’s already 10 million… Also, keep in mind that spending perculates down the chain – you buy an expensive car or yacht, the dealer orders the services of local people to build another one, they in turn spend it on movies and groceries (for example). So, one large spender actually benefits a lot of people, MOST of whom they’ve never even come in contact with!

As for pension funds, obviously, I’m not suggesting they invest in them. But they often provide what the funds invest in – namely shares, property, etc. Also, through their own investments, they drive the value of existing ones up. ETc. etc. Again, it’s a cumulative effect.


Righteous Bubba 03.10.08 at 4:00 pm

Also, keep in mind that spending perculates down the chain

I believe the accepted UK version of this is “tinkle down”.


Great Zamfir 03.10.08 at 4:09 pm

Mikhail, the problem with trickle-down theory is that it relies on the assumption of unused potential in the economy. In that case, a rich guy ordering a Bentley will utilize unused resources and unemployed people. But in a reasonably well functioning economy it will just mean that resources are used on Bentleys that would otherwise be spend on, say, Volkswagens.


urbell 03.10.08 at 4:10 pm

I’m pretty sure that you are just wrong. Sure, someone making 200k per year might decide to spend a tonne of money redecorating, but on the average the ten people making 20k will spend more. Plus, spending by the wealthy doesn’t really percolate down through the economy, spending by anyone provides economic stimulus, and if there is evidence that spending by the very rich provides more bang for the buck than spending by poorer people, I’d love to see it.


Dave 03.10.08 at 4:21 pm

And there is the small but significant ethical point that being told we can go f*ck ourselves because we’re not rich enough to count isn’t nice. If your argument boils down to ‘the more money you have, the more power you deserve, and the less responsible to anyone else you have to be’, you’re just making the argument for socialism, in the same way Marie-Antoinette made the argument for the French Revolution.

And on the point of non-dom flight, where are they going to go? Surely if there was a better ‘ole they’d already be in it?


franck 03.10.08 at 4:43 pm

Taxation is meddling in the free market, of course. What you are suggesting is meddling to support the transfer of wealth from everyone else in the UK to non-doms through differential taxation schemes. That’s rather a different order of meddling. It’s still difficult for me to understand why we would subsidize through tax differentials fabulously wealthy people.


Uncle Kvetch 03.10.08 at 5:00 pm

It’s still difficult for me to understand why we would subsidize through tax differentials fabulously wealthy people.

You must have an extremely hard time wrapping your head around political debate in the US, then.


gastro george 03.10.08 at 9:12 pm

mikhail’s trickle-down theory is transparently wrong, as low wage earners spend a higher proportion of their earnings (they have a lower savings ratio) than high wage earners. Further, high earners are less likely to spend a fortune on decorating than spend a fortune on a new house. This just promotes asset inflation which contributes little to the economy.


christian h. 03.10.08 at 10:13 pm

Mikhail and Cie. have a point. It’s up to us to make sure that it’s of absolutely no benefit for the rich to show workers the finger and avoid paying taxes. A nice wave of crippling strikes might do the trick. Some direct action could be involved.

Clearly, New Labour is doing the absolute minimum they think they can get away with, and the insanely rich won’t even accept this much. Well, they have to be made to accept much more. If they think revolution is around the bend, they’ll come around.


nick s 03.11.08 at 8:22 am

I suggest we use the states monopoly of violence to impose slavery on the little people.

Or, alternatively, channel it in other ways, by haveing a lottery whereby one unlucky non-dom is chosen to be released to the mob in Holland Park, pour encourager les autres.


bad Jim 03.11.08 at 8:27 am

Values of ß will give rise to dom

and then this discussion strongly suggests that “dom” is the sort of term that ought not to be tossed about without disambiguation.


james 03.11.08 at 1:12 pm

Any argument of the form “its good to have rich people because they spend lots and that spending trickles down and benefits everyone..” is (even if its true that rich people do spend proportionately more, which is dubious), of course, open to a simple reduction ad absurdum argument… how do we decide who gets a low burden? I’m a tiny bit above median income, so should I get taxed less as a boon to society? You end up with just the poorest person in society paying all the tax so he (or more likely, she) can bask in the benefit of everyone’s spending – lucky her!


Jack 03.11.08 at 7:11 pm

Some context .

It says even if you went domiciled you’d still be better off than working in New York. Willem Buiter is a non-dom and not complaining.

Still becoming even more of a giant Hong Kong style enterprise zone and tax haven had much to be said for it and we are now supposed to be celebrating huge salaries.


nick s 03.12.08 at 12:11 am

we are now supposed to be celebrating huge salaries.

I’m sure that’s a great comfort to John Hutton’s constituents, including my sister, in one of the north-west’s least wealthy areas.


Mikhail 03.12.08 at 10:14 pm

Apart from playing the devil’s advocate, let me point out a couple of thing to my ardent critics. :)

The “trickle down theory” is not wrong, it’s called the multiplier effect and you learn it in Economics 101. Any spending gets redistributed either in the form of income and wages for other people and then taxed thereby putting money in the gov. budget, or as investment it fuels the economy, thereby also providing benefit for the country and people. This is why the US weathers any recessions much better than any other country – the population spends! Also, those tax cuts “for the rich” that Bush instituted, actually did stimulate the economy apart from creating a lot of consternation among the public. :)

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