More Cheerful Evidence of Tax Competition

Gordon Brown’s greed for more tax revenue is probably going to backfire. Britain’s “non-doms” bring considerable prosperity to London, but the Financial Times reports that there already is evidence that they are moving to Switzerland - and taking the UK’s hedge-fund industry with them - because of the Labour government’s compulsive desire for bigger government:

Scores of London-based hedge fund managers are moving part of their operations to Switzerland in readiness for a proposed UK tax crackdown on non-domiciled residents, according to Kinetic Partners, an investment management consultancy. London has become a popular base for the industry, with the city’s 950 or so hedge fund firms managing about 80 per cent of European hedge fund assets. But according to David Butler, founding member of Kinetic, at least 40 per cent of the founders of the consultancy’s 300-plus hedge fund clients are non-domiciles and they are reportedly getting increasingly jittery about the likelihood of a harsher tax regime. … From next April, non-doms who have lived in the UK for more than seven years will face a £30,000 a year levy if they choose to keep their offshore income and gains out of the tax net. However, a greater threat to the hedge fund industry comes from proposals to crack down on offshore trusts that also allow non-doms to escape tax on their investments. “Remove this [exemption] and the general view that is starting to prevail is that £30,000 is the thin end of the wedge,” said Mr Butler. … “There will come a time when people are using the UK just for their finance and back office operations. The key value operations will move offshore.”

This is why tax competition is so important. Politicians (at least some of them) are learning that the geese with the golden eggs can fly across the border. This means that there is growing pressure to lower tax rates and reduce the tax bias against saving and investment. So long as international bureaucracies such as the OECD and European Commission do not succeed in their efforts to cripple tax competition, more and more governments will implement better tax policy. Not because they want to, but because a competitive global economy is forcing them to do the right thing.