How a Tax Hike Increased the UK Deficit

Figures out last week confirm yet again that crippling tax hikes are driving people and economic activity away from Britain. Rather than raising extra tax receipts to plug Britain's budget deficit, there is growing evidence that the raids are actually reducing the amount of money collected by the taxman, thus inflicting even greater debt on the rest of the population, says City A.M.

When in April 2008 the Labour Party introduced an annual levy of £30,000 (about $47,650) for those who had claimed non-dom status for seven years, pundits dismissed the tax as too low to make a difference. The number of non-doms living in the United Kingdom collapsed by 16,000 in 2008-2009. Non-doms are people who originated overseas and pay U.K. tax on their U.K. earnings but no tax on their foreign income.

The Treasury says 5,400 non-doms opted to pay the fee. This means that the taxman raised an extra £162 million ($257 million). The Treasury would not or could not give any more information, so City A.M made a few guesstimates to work out the net cost of the tax raid:

  • Being over-generous to the government, it might be that half the missing non-doms are now full taxpayers.

  • Assuming they are paying an extra £15,000 ($24,000) in tax each, that would make another £120 million ($190 million) in tax, taking the total to £282 million ($448 million).

  • Let's then assume that the 8,000 missing non-doms would have paid £50,000 ($79,000) each in U.K. income tax, capital gains tax, value-added tax and stamp duty.

  • The gross loss jumps to £400 million ($635 million), which means that the Treasury is £118 million ($187 million) worse off.

    In years to come, Britain's short-sighted stupidity will be used as a case study in introductory economics courses. In the meantime, the rest of us will have to pay even more tax to plug the deficit, says City A.M.

    Source: Allister Heath, How a Tax Hike Increased the Deficit, City A.M., January 13, 2011.

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    First published by the National Center for Policy Analysis, United States

    FMF Policy Bulletin/ 25 January 2011
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