Leona Helmsley remains alive in Britain

By Martin Wolf

“We don’t pay taxes. Only the little people pay taxes.” Thus spoke the late Leona Helmsley, the billionaire New York hotel owner known as the “Queen of Mean”, en route to federal prison for tax evasion. Silly her. If she had resided as a non-domiciled person in the UK, she need not have paid tax at all, at least in the UK, though as a US citizen she would still have been pursued by the land of the far from fiscally free.

How different things are in the mother country. And what a huge lobbying effort there has been to keep it so. The view that only little people pay taxes has been advanced with passion. Does the private equity business pay tax on its income at 10 per cent? Quite right too. Do entrepreneurs turn their income into capital gains, also taxed at 10 per cent? Right, again. Do 130,000 people live in the UK, many for decades, without paying tax on their foreign income. Absolutely right. Change these arrangements and the sky will fall in, we are told, or at least it will be the end of the City of London, the art market and the business of luxury.

Am I the only person to be surprised not by the complaints, which are predictable, but by their lack of ambition? After all, non-doms are not the only people who will be chased away from the UK if high taxes are imposed. So will British citizens. Indeed, we know they are: millions of British citizens live abroad. So, if non-dom status is so good for the economy, extending it to everybody, domiciled and non-domiciled, would surely be better.

Similarly, some non-doms have asked: what has the British government ever done for us? We do not use its lousy state-run schools or hospitals. We do not expect a British state pension and certainly do not want one. We do not expect to receive any of the benefits showered on the UK underclass. So why should we pay taxes? You should be grateful for our brilliant presence.

Yet this argument, too, cannot be limited to non-doms. The same argument can be made by wealthy British people. The upper 10th of UK income earners surely provide the largest lifetime net contribution to taxation, because they pay the highest taxes and make least use of state benefits. So why should they pay tax? Maybe nobody should pay tax on incomes above, say, £100,000 a year.

Non-doms, we are told, make a gigantic contribution to the economy. If they are taxed too heavily, they will depart and the economy will suffer. Again, why not pursue this argument a little further? Should the UK not subsidise the inflow of human capital, just as many countries subsidise inflow of foreign direct investment? What about a negative tax (a subsidy) on all UK income earned by non-doms above, say, £100,000 a year?

Yet this, too, ought to be extended to highly paid citizens who, presumably, also provide big benefits to the economy. Why should the country wish to subsidise people to employ foreigners instead of citizens. So why not give everybody who earns about £100,000 a year a negative tax rate or at least a nice juicy lump sum? Moreover, if having non-dom billionaires resident in London is good, why not subsidise them too? So why not compete for billionaires the way countries compete for investments by Intel and the like?

It is Helmsley’s wisdom, then, that is animating the intense lobbying, ever since George Osborne, shadow chancellor of the exchequer, proposed the lump sum tax on non-doms and Alistair Darling, the chancellor, reacted with his own proposals, as well as suggested changes in capital gains tax, in his pre-Budget report last October. She pronounced the principle that has been behind the screaming: only the little people pay taxes.

What, after all, was the fuss about? It was about the crime of raising capital gains tax by 80 per cent, all the way from 10 per cent to 18 per cent, and about suggesting that someone who has lived in a country for seven out of the last nine years should pay a lump sum of £30,000 or pay tax on their worldwide income. Rich and successful people are too important, too valuable and, not least, too mobile to be expected to do so.

From long experience, I am deeply sceptical of special interest “the sky is falling” pleading. More fundamentally, I am opposed to this particular pleading because it is subversive of any enduring political compact among citizens. If we take the principle that successful people are too important and too mobile to pay tax to its logical conclusion, political community will collapse.

The way these proposals were introduced was surely appalling. The details still seem to be a mess. Certainly, the plans should have been better thought through. This is just a special example of a broader failure, to which I hope to return: the UK is being depressingly badly governed.

Yet the experience also shows that the case for a simple, neutral and stable fiscal system, which taxes the worldwide incomes of all long-stay residents on the basis of ability to pay, is overwhelming. As soon as one departs from that principle one enters in a maze of special pleading or invidious distinctions, in which failed ideas of industrial policy – subsidising winners through the tax system – return to the fore. If the application of that great principle means some rich people leave the country, so be it.