Sunday, July 08, 2007

The Clueless Chancellor

Incoming UK Chancellor of the Exchequer Alistair Darling is renowned within civil service circles for being cautious and indecisive. Some just call him timid. He showed this quality in early July when, faced with mounting disquiet within Parliament and the serious press about tax subsidies for private equity firms and super-rich people and top-end City workers claiming non-domiciled status, he warned against "knee-jerk" reactions that might harm London's attractiveness.

Which planet does he live on? London is the pre-eminent global financial centre. In terms of scale and diversity, it has no competitor. It enjoys a significant geographic advantage through being mid-way between the Far East and the America's, straddling time zones to cover all the main global markets. It also has English as its first language and enjoys a Cool Factor which places it in a different league from rival centres like Luxembourg, Zurich and Frankfurt. Far from needing to sell itself cheap to attract global talent, it is in a position where no-one with serious career intentions in international finance can afford to not spend at least a few years working in the City. So why the need for subsidies?

For several years, TJN has enjoined the UK Treasury to justify the retention of the anachronistic non-dom policy. Proponents talk about vague but unquantified financial benefits, but the flip-side is the house price inflation across South-East England, and, of course, the wholly unnecessary harm to social equity. On the private equity issue, it has become clear in recent weeks, that fiscal distortions play a significant part in shaping this market, to the extent that buy-outs are being driven by short-term opportunities for financial engineering (read tax avoidance) rather than long-term prospects for genuinely building economic value. Another instance of City short-termism and welfare for the rich and powerful.

So our message to Mr Darling is as follows. Wake up: the knee jerk reaction was yours and yours alone. Britain's non-dom policy has been under review for decades, and whilst the current review -- initiated in 2003 -- grinds on, the numbers claiming non-dom status are sky-rocketing. In 2003/04, 65,000 people claimed to be non-dom. By2004/05 the figure had almost doubled to 112,000. We understand that the rate of increase of those claiming non-dom is accelerating, so expect somewhere in the region of 200,000 for 2006/07. Why should the already rich, and the ultra-high income earners benefit from these tax subsidies? And what does it say about the Government's commitment to equity and social inclusion when it remains too timid to take on vested interests, even when powerful voices within the City have already conceded that it is hard to justify tax treatments which leave them paying less tax than their office cleaners.

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