2008 November 25 Tuesday
Britain Raising Taxes On Higher Incomes
While the British government abandoned (or at least temporarily shelved) secret plans to raise their VAT sales tax from 17.5% to 18.5% it is going forward with a big tax increase in higher income workers.
The Treasury is expecting to recoup £1.6 billion a year from increasing the top rate of income tax from 40 per cent to 45 per cent for workers earning more than £150,000 and a further £1.6 billion a year from scrapping the tax-free personal allowance for higher earners.
However, the influential Institute for Fiscal Studies (IFS) said that the 45 per cent rate would raise “approximately nothing”. Higher earners could avoid paying the tax by contributing more into their pension plans, giving more to charity or leaving the country.
Those earning more than £150,000 will face an effective tax rate of nearly 60 per cent once national insurance and other taxes such as VAT and fuel duty are taken into consideration, the IFS said, which would prompt those with high incomes to seek ways to avoid paying the tax.
Some of those workers have to work in Britain to make their higher income salaries. But not all of them do. What I'm looking for: the emergence of countries that high income mobile people migrate to in order to escape home country taxes. We see that some already. But will some countries become specialists in attracting these sorts of workers? Some low tax locales are not attractive for other reasons such as weather, lack of infrastructure, remote location for business trips, immigration rules, political instability, political repression, and other downsides.
Not all countries with high marginal tax rates will generate these ex-pats. The US government taxes Americans living abroad almost the same as Americans at home. One has to give up US citizenship to escape from the reach of the US Internal Revenue Service (and even then there's a tax as you depart). But some countries do not impose income taxes on their ex-pats. It is my understanding that Britain is one of the countries that do not tax citizens working abroad. Anyone know if that is correct?
Randall asked: But some countries do not impose income taxes on their ex-pats. It is my understanding that Britain is one of the countries that do not tax citizens working abroad. Anyone know if that is correct?
From the sixties onward plenty of nouveau riche Britains (usually movie stars etc) became full time residents of Spain in order to avoid the income taxes at home (note that they retained British citizenship).
If you are a US citizen living and working abroad (not for the US government) you can exclude up to $80,000 of income from your US taxable income, though you do have to file a return each year. If you're married, your spouse can exclude up to $80,000 as well.
The U.S. is one of maybe five countries that taxes on worldwide income. Of course, there is the $80,000 per year exclusion. I was not aware that there was a tax for people to change to non-U.S. citizenship (I've never heard of anyone doing this as most people are trying to GET U.S. citizenship).
Most of the people making big incomes in the U.K. are in the financial industry. Since this is what is going away, it is likely that there will be very few high-income people left to tax in the U.K.
The premier refuge that covers almost all the bases is Singapore. Jim Rogers has made the move.
Within Europe Estonia seems to have its heart in the right place but it's part of the EU so its room to maneouver is rather constrained. Switzerland could possibly grab some of this market but I don't believe their taxes are all that low.
New Zealand appears to be gaining in popularity but not primarily as a low-tax place, I don't think.
And what about Dubai? I think they would be all over this sort of thing but I wonder how much longer the political/religious/natives-vs-foreigners tension can be sustained without breaking. That place seems completely unsustainable even over the medium term.
Closer to home Bermuda comes to mind but it's too small and isolated to make much of a difference.
Dubai: Extreme weather. Plus, Muslim country.
Singapore: Air quality a problem due to neighboring countries? Also, housing costs?
Bermuda: Living costs? Crime level? It is convenient for business flights into the US northeast. Also, London's reachable.
Agree with above, Singapore - 20% marginal income tax rate, plus the weather is always hot and humid, and the country is not really democratic. Jurong Bird Park is nice, though. Bermuda - no income tax, but a 13% payroll tax. Plus its expensive. Watch out for hurricanes. Switzerland - 11.5% marginal income tax (not bad), plus a 7.5% VAT. It's very difficult to get Swiss citizenship. EU countries - I wonder if any can really be considered low tax, although Estonia and Ireland seem to be trying (good luck to them). Ireland might be the choice. New Zealand - really a delightful country, but the marginal income tax rate is 39% - hardly different from the US.