THE BRITISH ONCE tried to separate Americans from their money by taxing tea. It didn’t work. Now, they’re trying again, this time using obscure treaties to raid the U.S. Treasury to the tune of what might be hundreds of millions of dollars–and I am told by sources here in London that our representatives are preparing to sit still for the pilferage.
This is really against my own interest, since the raid would benefit me personally. Here is how it will work. We have a treaty with Britain that allows Americans resident in the U.K. to credit any taxes they pay in Britain against the taxes due in the United States. So far, so fair–the idea is to avoid taxing us twice on any income we earn in Britain.
Income earned anywhere outside of the U.K. is not taxed by Her Majesty’s tax collectors. This is pursuant to a special arrangement that treats those of us resident in Britain but planning eventually to return to America–not domiciled in the U.K., in the technical jargon–as so-called “non-doms.”
It’s a nice benefit–and one our taxing authorities do not confer on Brits resident in the U.S. They pay U.S. tax on their worldwide income; we in London pay U.K. tax only on what we earn in Britain. It’s one of the reasons that so many high-flying financial types have set up shop in Britain–a benefit rather like those conferred on foreign companies by southern states competing for new factories and jobs.
Now the Brits want to change that. In part because an increasingly left-wing government is resentful of the wealth and, in some cases, of the high-living antics of American hedge fund managers and investment bankers, in part because the British welfare state is gobbling up money at a horrendous clip, the government has decided to give non-doms a choice: Pay tax on all of your worldwide income, as Brits do in America, or pay a fee of about $60,000 per person per year for the continued privilege of avoiding such a tax.
This is a fee, not a tax. It is not related to income earned. It is more like a parking fee, which bears no relationship to the value of the vehicle being parked. Park yourself in Britain, and we want a fee of $60,000 is the message.
The problem for Americans is that their tax advisers are telling them that under the treaty fees cannot be credited against their U.S. income tax. We in Britain pay a 17.5 percent value added tax (VAT) on just about everything we buy, but can’t deduct that from our U.S. income tax. Which puts the British taxmen in a spot.
They have been hoping that Americans would pay the new non-dom fee, and deduct it from the money owned the U.S. Treasury. That would half its impact on the Yanks who live here, since most are in something like the 50 percent bracket when you factor in federal, state, and local income taxes. Which would ease the burden, and make it less likely that the Americans would pack their bags and head for home–or move their financial headquarters to Monaco, or Geneva, or Dublin. The British government is guessing that about 4,000 of us will do that, and figures it can tolerate that loss–but based that estimate on the guess that American legislators and Treasury bureaucrats would roll over and allow the fee to be treated as a tax, eligible for all the privileges of the treaty–that is, be deducted from U.S. income tax due.
The word here is that somehow the Brits have persuaded the Americans to cave, and treat the fee as a tax. Whether it was Chuck Schumer working on behalf of the Wall Street banks that employ so many non-doms in the U.K., and might have to raise their salaries to cover the fee; or the smooth operators in the British embassy over on Massachusetts Avenue; or the pleas of America’s ambassador to the U.K., under pressure from the expatriate community, I have been unable to find out. But someone got to our Treasury, and the Senate’s interpreters of the treaty. If the Brits pull this off, the result will be a transfer from the U.S. Treasury to Her Majesty’s coffers of hundreds of millions of dollars, at a time when a slowing economy will anyhow cut into taxable profits and incomes in America, and raise the cost of maintaining our social safety net.
There is still time: Sources here in the U.K. are gloating over their triumph. But the Treasury has so far only nodded its approval, not formalized it. That is supposed to happen before the new British tax year begins on April 5. Time for a bunch of us to get out our Indian costumes and visit Hank Paulson. After all, if the Brits want to charge Americans so much to stay in London that thousands decide to come home, open offices, hire staff, and add to America’s edge over Britain in the competition for high-paying jobs, why should our Treasury stand in their way?
Irwin M. Stelzer is a contributing editor to THE WEEKLY STANDARD, director of economic policy studies at the Hudson Institute, and a columnist for the Sunday Times (London).
