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…