NBTTT: The impossibility of taxing the rich

I know this is just what everyone wants on a Satdee, a long post about taxing the rich. But this keeps coming up on here and people keep repeating the widely held simple truth, that if you increase taxes on wealthy people, then they leave to live elsewhere, and you end up far worse off as a nation.

Well, knowing how open minded people are on the wrath, I wanted to share some fascinating analysis with you. If you actually engage with it, it will probably completely change your mind about whether stories of a "mass exodus" by the rich are true. (spoiler - they are not.)

I attended a talk given by Arun Advani recently. He is a researcher on the effect of tax policy on migration by the rich, is Director of the The Centre for Analysis of Taxation (CenTax) at Warwick University, and was a member of the recent commission on a possible wealth tax. He was presenting the findings of his latest paper. Link to the full paper is here. (warning - it's quite long and quite technical in parts, but the "real world" findings are well spelt out - Arun also really illuminated his findings well when he spoke.)

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Key thing for you to know - unlike most "studies" in this area, Arun's work is all based on actual HMRC data on tax returns, i.e. as a recognised researcher at a leading university, he is cleared by HMRC to have access to the anonymised database of all tax returns held by the HMRC. So the findings he is presenting are not his opinion, or the results of a secret survey of his clients. This is an analysis of the entire population of actual tax returns, and are not driven by any agenda or his opinions. (Side note - most of the evidence of a millionaire exodus comes from Henley and Partners, an advisory firm serving the needs of the super rich. I'll leave you to draw your own conclusions as to their incentives and the quality of their work vs Arun's.)

Anyway, for those of you who cant be bothered to read all 71 pages of Arun's paper, key points.

i) Arun's paper studies a change to non-dom rules that increased effective tax take on certain individuals by 19%. Clearly, a very highly material tax change, which most of us would expect to cause very many non-doms to leave, and according to the prevailing narrative, would have lead to overall harm to the UK.
ii) Arun did indeed find a spike in non-doms leaving immediately on the policy being introduced (compared to trend leaving rates). But the rate reverted to historic average in the following year. Indeed, if anything the rate of non-doms leaving was LOWER in subsequent years, which led Arun and his coauthors to conclude that the change in leaving was people who were planning to leave anyway bringing forward their decision to leave in response to the tax change.
iii) Keep in mind that non-doms are highly mobile. There is a material and persistent rate of non-doms leaving the country regardless of tax policy. A lot of people bigging up the exodus report these numbers as if they are caused by minor changes in tax policy, or signaled tax policy, but in the main this is just the nature of this mobile, international cohort.
iv) The vast majority of non-doms are high paid individuals working in finance and professional services. You need to think of high performance/high earning individuals working for banks, hedge funds, golden circle law firms, high end property developers. Unless we do something utterly penal, many of these people are going to come to the UK for a period of their career anyway, as they are attracted by the high wages paid to people like that, primarily in London (and mostly in the City).
v) The version of events where these people "just leave" completely is really false. Most of the people in this cohort have homes in several countries, and often multiple homes in countries. They tailor where they spend their time according to work demands, cultural activities of interest to them, where there family want to be. Think rich banker with homes in London, New York, Dubai, the North Norfolk coast, maybe in a few other places. When taxes regimes change, they dont "leave". They just shift the number of days they are here to affect where they pay tax. Most of these people have no desire to live permanently in Dubai, and love London for the culture, the sport etc. (Arun said "they're still going to be here for Wimbledon, but they'll happily use tax changes as an excuse to avoid going to Tarquin's school play!). Most people that adjust their residency days do so by a few dozen days a year, but still spend a great deal of time in the UK. Most still keep their homes with a staff. Most will keep their kids here in our excellent schools. Therefore even if people "leave" and exit the regime, they don't really leave the country and the majority of their spending in the UK remains.
vi) Non-doms invest very very little in the UK. as a non-dom your global investment earnings are tax free, but if you invest in the UK it is taxed in full. You would be an idiot to invest anything in the UK therefore, given how advantageous the tax regime is for investing literally anywhere else in the world. So the idea that if we tax non-doms more we will lose all their investment here is the biggest myth of all. This cohort simply do not invest meaningfully in the UK, as we have designed a tax regime that strongly discourages that.
vii) Overall, it is true that some people did shift their tax affairs to avoid reporting in the UK following this change. but nowhere near as many as you might have expected from the media narrative. Arun's study found, taking account of leavers (going to zero tax) and the extra for those that stayed and lived with it, there was an average increase of £105k in annual tax income across the entire cohort.
vii) Arun finds an increase in overall tax take of £311m from the change to non-dom rules in 2020.

I hope people with in interest in this kind of thing find the paper an enjoyable read. And I hope, just maybe, it might encourage us all to actually read and think, rather than just believing the s**t we are often fed. Before the talk I did have a fairly strong believe that many millionaires are leaving the UK, and that this is making us worse off, and that efforts to tax them more would be not just futile, but harmful. Turns out very little of my prior belief set is supported by actual fact.

(for people that dont give a s**t about this - sorry! too many words I know.)

Posted By: Under soil heating, Jun 28, 12:06:21