‘A non-dom Budget would show Labour can tax without hitting most workers’

Expectation management is starting to ramp up ahead of next week’s budget and the messages coming out of the Treasury are that economic forecasts haven’t delivered a windfall to the Chancellor, putting plans for tax cuts on ice. More intriguingly, it seems Jeremy Hunt has been looking to more progressive places for ideas, with rumours he is considering scrapping the non-dom tax rules.

This is a policy that IPPR has long supported and that Labour is also committed to, but the Chancellor himself previously criticised the idea saying he would rather the rich stayed “and spent their money here”. So, what’s going on? Is the government trying to eat Labour’s lunch?

Is the government planning to eat Labour’s lunch on non-doms?

Before jumping into the politics, it’s worth stepping back and looking at what an unfair and antiquated tax rule this is. Non-domiciled status, allowing wealthy people who live in the UK to claim tax residency in another jurisdiction, stands as a relic of the past. Jonathan Reynolds MP, the shadow business secretary, recently called this a “colonial-era” policy. Far from promoting economic growth, this regressive tax policy opens avenues for tax avoidance by the rich. As rightly pointed out by tax justice campaigners, it enables wealthy elites to shield their income from taxation. Thus, it is imperative that the non-domiciled loophole be closed regardless of who’s doing it.

Scrapping the non-dom loophole would show the lie at the heart of the tax-cuts-doom-loop narrative that has trapped both government and opposition. Whilst levels of tax in the UK economy are historically high for this country, among international competitors they’re unremarkable. In fact, there are plenty of ways of raising more tax revenue that wouldn’t hit working people at all. Closing the non-dom loophole is one of these. As is equalising capital gains tax on the income from wealth with income tax paid on income from work. These would raise revenues and nudge the overall level of tax a bit higher, but it wouldn’t hit the median voter. Instead, it would fall on the wealthiest who are most able to bear the burden.

The non-dom funding plans Labour has set out would be hard to ditch

If Jeremy Hunt is brave enough to face up to those in his party and closes the non-dom loophole next week, this does raise two questions.

First, how would Labour respond? The party has allocated the revenue it would raise from closing the loophole to two areas: an increase in spending on the NHS, and breakfast clubs for schools. Both are the sorts of public services that all the polling shows voters are crying out for, rather than tax cuts they don’t want. These are popular economic and social policies that distinguish Labour from the government – neither would be easy for Labour to ditch. If the government does close the loophole and uses the additional revenue elsewhere, the party will have to look for other ways to raise it.

Second, and most importantly, what would the government use the non-dom revenue for? Further tax cuts are neither in the national interest nor what polling indicates voters want. The Fairness Foundation has shown that even Conservative voters want to see higher taxes on the wealthy, and YouGov polling for the Times found that to be especially true if the spending goes to support public services, as the Labour party has promised.

Using non-dom cut to fund tax cuts is not in the national interest

If, as expected, Jeremy Hunt uses this revenue to cut income tax or national insurance, that would go against the economic interests of the country and the desire of voters to see crumbling public services improved. Countries that have higher levels of tax than the UK also tend to have higher levels of household income.

This shouldn’t be a surprise, by raising more revenue they are able to invest in robust social safety nets, public services, and infrastructure. The lack of these are what is holding back UK growth.

Merely floating the idea that he could close the non-dom loophole, the Chancellor has shown that there is an alternative. The government can increase taxes from the wealthy, without hitting working people, and it can spend that on public services and driving investment and green growth. The question is, will he be brave enough to close the loophole and will he invest the proceeds wisely?