Staking out the high ground.

Photographer: Dan Kitwood/Getty Images

The Truth About Britain's 'Non-Doms'

Marc Champion writes editorials on international affairs. He was previously Istanbul bureau chief for the Wall Street Journal. He was also an editor at the Financial Times, the editor-in-chief of the Moscow Times and a correspondent for the Independent in Washington, the Balkans and Moscow. He is based in London.
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In the heat of the campaign for the U.K. elections on May 7, Labour Party leader Ed Miliband has made a transparently desperate but politically astute pledge to end the tax regime for "non-doms." 

Non-domicile is a uniquely British category of taxpayers: people who reside in the U.K. but declare that their true tax home is somewhere else. The roughly 116,000 people in this position pay tax only on the money they bring into the country, and not on their worldwide incomes. 

As with so many things in Britain, the tax rule has its origins in a peculiarity of history: It was designed for merchants bringing goods from the colonies of the British Empire. 

Along with those who come to work in Britain temporarily, non-doms include Americans who (also uniquely) have to pay taxes on their worldwide income back home anyhow. Global banks factor in the non-dom tax break among the reasons for setting up their headquarters in London. But the archetypal non-dom is a rich Russian, Scandinavian or other foreigner who, by making London home, avoids paying tax anywhere on most of his income. 

This arrangement seems, as Miliband says, inherently unjust. That's why the last Labour government introduced an annual 30,000-pound levy on people who want to take advantage of their non-domicile status, and it's why the current Conservative-led coalition has raised that levy to as much as 90,000 pounds for those who stay in the U.K. for a very long time.  

What's less apparent from Miliband's argument is exactly who suffers the injustice. It's not, as Miliband implies, ordinary Britons. On the contrary, Brits benefit in the same way that the citizens of other off-shore tax havens (such as Switzerland or Luxembourg) do. Because non-doms tend to be wealthy, they bring in quite a bit of money to fund their lifestyles. The Russian billionaire Roman Abramovich, for example, bought himself a 90 million-pound house in Kensington, and spends a lot to run it. 

As a result, non-doms paid more than 6 billion pounds in income tax in the 2012-2013 fiscal year, according to one estimate. That averages out at around 52,000 pounds a head, compared with the per capita national average of just over 7,000 pounds. This is why successive governments have bemoaned the unfairness of the non-dom rule, but kept it anyway. 

What would Abramovich do if he had to pay tax at Labour's promised top rate of 50 percent on his worldwide income? Most likely he would just make sure he spends fewer than 182 days of the year in London, and set up his tax home somewhere with a much lower tax rate. He would no longer have to pay the 30,000-pound fee, or any tax to the U.K. at all (unless he should start making a profit from his Chelsea soccer club). 

Some banks might also recalculate whether London is the best place to be based. Other negatives to factor in include new European Union rules that cap bonuses and the U.K.'s special profits tax. So it's possible, though not certain, that getting rid of the non-dom tax break would cost some ordinary Britons their jobs. 

If Miliband wants to take the moral high ground, he should be honest about it. He should tell Britons they need to get rid of the non-domicile regime -- even though it will cost them -- because, as global citizens, it's the right thing to do. He should tell them that they need to stop robbing other nations of large sums in order to secure smaller ones for themselves. 

That's what Miliband should say, but of course he won't. It's much more effective to win votes by claiming that the rich have been benefiting at the expense of ordinary voters. 

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Marc Champion at mchampion7@bloomberg.net

To contact the editor on this story:
Mary Duenwald at mduenwald@bloomberg.net