I was surprised to see The Times run a front page, a three page feature and a leader on tax avoidance yesterday. The arguments used by The Times, and the specific examples highlighted were particularly puzzling.
The leader states: ‘The wish to better oneself materially is benign and admirable. Realising that goal by tax avoidance is not.’ Try telling that to the teacher who takes out pension AVCs so that she can have a more comfortable income in retirement; or to the labourer who brings back 500 cigarettes from Europe to avoid our punitive tax rates. There may be some forms of tax avoidance that are moral grey areas, but most tax avoidance is done for reasons the government applauds – that is why tax reliefs are provided in the first place (whether they should be provided is a different matter).
There are some legitimate debates in the tax avoidance/evasion debates such as the use of transfer pricing by corporations, but the particular focus of The Times was as bizarre as its arguments. Their target was British citizens living in Monaco; their policy prescription was, in effect, to tax emigrants from Britain at British tax rates.
The Times suggested that the draconian US system of taxation that involves taxing citizens on their worldwide income, wherever they live in the word, should be considered. This is completely unjustifiable. What possible reason can be put forward for somebody who lives in one country but who has citizenship of another country paying tax in the latter country? The citizen does not benefit from the social security provision, welfare provision, policing, infrastructure and so on in the country in which they do not live. To require tax to be paid both in the country of citizenship and the country of residence would be still more unjust. The best argument The Times could muster – indeed, the only argument - was that British citizens living in Monaco benefit from the protection of the British army: surely protecting British citizens in Monaco cannot be an especially large budget item for the UK government.
The companies owned by many of these British citizens who live abroad pay tax wherever they make profits – this cannot be reclaimed even by non-taxpayers. No further tax is paid on the remitted profits or capital gains if these British citizens are not resident in the UK. Of course, no further tax is paid by any other foreign owners of businesses that operate in Britain either. Businesses operating here do, of course, pay business rates and employers’ national insurance contributions as well as corporation tax.
But, there is no case for taxing people who do not live here as if, somehow, non-resident British citizens form part of a worldwide virtual community that benefits from all the things on which the British government spends money. I have a friend who is a British citizen who lives in Singapore. The Times’ proposals would mean that she would pay UK income tax rates on all her earned income in Singapore. First, she would pay Singapore rates of tax and then she would pay the difference between UK rates and Singapore rates. The US has shown that enforcement of this system requires draconian measures. However, any such policy also removes the relationship between taxation, the provision of services and representation. This person, for example, would have to pay UK rates of tax to finance the National Health Service which she does not use and then also pay into the various self-funded social insurance systems that Singapore has for health and pensions (and, if there is an exemption from this for ex-pats, she would have to make private provision, of course).
An examination of the particular cases cited by The Times suggested an overwhelmingly weak argument. Martin Coward, for example, spends 20 days a year in Britain – apparently, he should pay tax to the UK government. Easyjet’s founder, Stelios Haji-Ioannou has hardly ever lived or worked in the UK in his life and spends four to five days a month here on business – he too, apparently, should pay UK tax.
Of course, there is room for discussion about precisely what constitutes a ‘resident’ or ‘domicile’ for tax purposes, but the idea that mobile people should be taxed both wherever they roam and also from wherever they have come has no place in justice or good tax economics. Such people, in fact, do the rest of us a favour. Tax competition, encouraged by mobile factors of production, prevents the state from taking even more in tax than it currently does – and the state taxes way beyond the optimal point. Tax exiles provide a positive externality. Perhaps they should be subsidised!