Those Really Big Tax Havens

Often in my public speaking I will define a "tax haven" as a country that welcomes foreign capital and imposes low or no taxes on the foreigners who do business there. I will than ask the audience if they know what are the leading tax havens in the world -- at least in total volume of foreign cash and assets under local control. Often people will respond with the Channel Islands, Monaco, Andorra or Liechtenstein. (Switzerland is not a tax haven per se, since for the most part they levy the same taxes on foreigners as on others).

No -- the world's two largest tax havens are the United States and the United Kingdom -- two nations whose governments have been highly critical of the many small jurisdictions who are also tax havens, and proud of it.

The U.S. gives virtually tax free treatment to many thousands of foreigners who invest millions in American stocks, bonds, real estate and especially U.S. Treasury bonds -- deficit spending Washington politicians desperately need the foreign cash float these tax free investors so generously provide.

But the United Kingdom is also a major tax haven for wealthy foreigners who choose to live there. Under an obscure piece of British tax law, anyone who lives in Britain but was not born there, can choose what is known as "non-domiciled" tax status. That means billionaires like Lakshmi Mittal, the steel magnate born in India, or Hans Rausing, born in Sweden and now one of the world's wealthiest men, need pay tax only on the relatively small amount of money they bring into the country every year, and pay no UK taxes on their much larger worldwide earnings.

In effect, that has made London a tax haven for everyone from Russian oil tycoons to international investment bankers. The country now has 68 billionaires, three times as many as four years ago. Only three of its 10 richest people were born in Britain.

Now that special tax law is under increasing attack and presents a political problem for Prime Minister Gordon Brown. The left-leaning Guardian newspaper accuses Brown of having  a "love affair with the super-rich." The British trade unions are gunning for ending the loophole. So are politicians from the Labour Party and even some columnists for conservative newspapers.

For ten years as Chancellor of the Exchequer, Brown has produced annual promises of reform on the "non-dom" tax issue, but has done nothing -- which is fine with us; we've never met a tax we liked.

"The UK tax system is well beyond the point at which complexity itself imposes costs and disincentives", says a new report from the Adam Smith Institute (ASI). At 9,973 pages, the UK's tax code is now said to be the longest in the world and, according to KPMG, its administrative burden costs the people of the UK £5.1 billion a year (US$11.3 billion). No doubt UK taxes, like those in the U.S., does need tax reform.

We disagree but the International Herald Tribune thinks the non-dom tax exemption opponents have a point. They say it makes little sense for a highly taxed country, the top income tax rate is 40 percent, to exempt a small group of wealthy people. But we agree with them also as they conclude "...it is too late to change it. London and, by extension, the rest of the British economy have become dependent on the megarich. It would make as much sense for Saudi Arabia to shut down its oil industry or for Seattle to attack the software business as it would for Britain to abolish the 'non-dom' rule."

There is no denying the impact the rule has had, or the growing debate about it. According to figures compiled by the British Treasury, there were about 112,000 people claiming non-domiciled status in  2005. Although they reported a total of £9.8 billion, or $19.9 billion, in earnings, their wealth from overseas income would be much more.

Based on past performance and the politics involved, we predict the non-dom tax loophole will survive under left wing Labour as it did under the Conservatve Party. If we're wrong, there will be a lot rich foreigners who can afford to live anywhere they like fleeing London for other, more secure tax havens.