Ten years ago, in 1997, James Davidson and I published “The Sovereign Individual” in which we tried to assess the impact of the Information Age on the relationship between individuals and the state. We discussed at some length the prospect that globalisation would erode the taxing power of nation states. We wrote:
“Information technology facilitates dramatically increased competition between jurisdictions. When technology is mobile, and transactions occur in cyberspace, as they increasingly will do, governments will no longer be able to charge more for their services than they are worth to the people who pay for them. Anyone with a portable computer and a satellite link will be able to conduct almost any information business anywhere, and that includes almost the whole of the world’s multi-trillion dollar financial transactions. This means that you will no longer be obliged to live in a high tax jurisdiction in order to earn high income.”
We were influenced by the example of those Swiss cantons which already allowed wealthy foreigners to live tax-free in return for a negotiated fee, which at that time amounted to US$45,000 or thereabouts. Britain at present allows non-domiciled visitors to avoid tax on earnings outside the United Kingdom without any payment. This has been an extremely successful policy in developing the international competitiveness of the City of London. Now, however, there is a growing feeling that the non-domiciled group should make some payment for their freedom from tax on overseas earnings.
The new Prime Minister, Gordon Brown, has threatened to bring them into the tax network. The Shadow Chancellor has committed the Conservative Party to the Swiss policy, and named the fee at £25,000 – about the same amount as Swiss cantons were successfully charging in the 1990s. The proceeds of this proposal would allow the Conservatives to raise the starting point of Inheritance Tax from £300,000 to £1,000,000.
That would take the great majority of families which are at present liable to Inheritance Tax out of the tax altogether. George Osborne’s announcement of the new policy was made at the Conservative Party Conference on October 1st. As it could save an individual a 40 per cent tax on £700,000, it has had a considerable impact. About a third of all taxpayers have current or expected capital assets of more than £300,000. In many marginal seats, with high values for housing, the proportion of the population potentially affected might be closer to 50 per cent.
This is a shrewd electoral appeal. Many non-domiciled taxpayers can well afford to pay a £25,000 fee for the tax privileges they enjoy in the United Kingdom. Large numbers of ordinary people are anxious about Inheritance Tax problems. London house prices make £300,000 the price of the cheapest flats in attractive districts.
The immediate importance of George Osborne’s announcement is political. About half the voting population of England is over fifty, and well aware of the level of house prices. But the greater long-term importance of George Osborne’s offer is that it recognises the need to negotiate an acceptable fee for non-domiciled taxpayers.
The essential nature of the transaction is that the British Government offers certain benefits, including all the usual national services, in return for payment of UK taxes, for earnings arising in the UK In addition the UK Government offers freedom from tax on overseas earnings in return for a fixed fee. The UK is offering the services of a tax haven.
Yet there is, of course, a group who would not benefit. They are the high earning domiciled. There may come a point when they will expect similar terms. So far as I know that has not yet happened in Switzerland, but it seems inevitable.
Taxation used to be a farm. The cows grazed in the national fields and gave milk in the evening. The cows could not live outside their protected environment. But in the global society of the Information Age, the cows have wings. If taxes are too high, they can move to other properties, in other countries, where the grass is just as good, and their milk is just as valuable. George Osborne is recognising the reality that for the citizen of the global economy, taxation becomes voluntary, and reflects the market value of the services of the national government.
for The Daily Reckoning Australia