Economics

Time to get tough on tax exiles

August 10, 2010
Life in exile: famous tax exile, Shirley Bassey, who currently resides in Monte Carlo
Life in exile: famous tax exile, Shirley Bassey, who currently resides in Monte Carlo

Though there is still disagreement over the speed and extent of the cuts planned by the coalition government, there is recognition across the political spectrum that the gap between government revenue and spending needs to be closed.

Ironically, evidence that the economy is recovering faster than anticipated has strengthened the case for a more ambitious deficit reduction programme, since it seems less likely that austerity measures will produce a “double-dip” recession. There continues, however, to be little debate about closing tax loopholes. This is a pity because one of the biggest loopholes, Britain’s estimated six million expatriates—many of whom have moved abroad to reduce their tax bill—represent a source of untapped revenue.

In contrast to Britain’s laissez-faire stance, the US takes a surprisingly tough line against those who emigrate solely to lower their taxes. Put simply, America requires those living in countries where the domestic tax rate is lower to pay the difference to the US treasury, as well as social security, if they are self-employed. Of course, this doesn’t apply if they move to a country with higher rates, and there is a substantial tax-free allowance (currently $87,600) to protect low and medium income earners. However, the US system gives the expatriate super-rich a blunt ultimatum:  meet their obligations or relinquish US citizenship.

There are, however, some downsides to such a policy. Forced to choose between renouncing citizenship and paying more taxes, many expatriates would undoubtedly select the former and cut their links entirely, permanently depriving Britain of valuable human capital. Many conservative economists would also argue that tax exiles reduce the ability of governments to over-tax their citizens. Richard Teather of Bournemouth University, and the economist Martin Wolf, both argue that tax competition plays an important role in keeping the state efficient.

However, these arguments are unconvincing. Even in the modern global economy, possession of a British passport remains a valuable economic asset, enabling the holder to return to Britain and granting them freer access to most of the major global economies than citizens of other countries. Moreover, those tempted to swap British citizenship for that of a low-tax country may also find that this is extremely difficult. For example, those wishing to gain Swiss citizenship may have to wait up to 12 years for naturalisation. Indeed, despite an increase in the top rate of tax from 31 per cent to 35 per cent, only 742 Americans gave up their citizenship in 2009. Similarly, even though competition between countries can act as an incentive to reduce government waste, it also threatens the implicit element of redistribution that is contained in every tax system.

Living in another country for a period of time is an increasingly important part of life for those in certain industries. However, citizenship involves responsibilities and obligations as well as rights and entitlements. Everyone who grew up in Britain will have benefited to some degree from its universal public services. It is therefore reasonable to require those now living abroad in low tax countries to pay at least a proportion of the difference between the taxes of their new country and those here. Given that the costs of bailing out the financial sector was one of the causes of the fiscal crisis, it is only fair that hedge fund managers and bankers, who make up a disproportionate share of tax exiles, pay something back.