As the UK braces for a potential Labour government and higher taxes, wealthy residents are contemplating leaving the country to avoid hefty tax burdens. Factors such as rising inheritance taxes and increased VAT on private school fees are driving this exodus. Amid growing dissatisfaction with public services and low tax morale, many question the value they receive for their contributions. Merryn Somerset Webb explores the implications of declining trust in government and its impact on tax compliance.
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By Merryn Somerset Webb
The rich are threatening to flee the UK before Labour can roll out its regime of higher taxes targeting them. ___STEADY_PAYWALL___ Private equity partners don’t fancy paying higher rates on their carried interest income. Non-doms — UK residents who aren’t officially domiciled — aren’t prepared to subject themselves to the draconian inheritance taxes for 10 years after leaving the country as they would be under proposed rule changes.
Others aren’t keen to hang around for Chancellor of the Exchequer Rachel Reeves’ “tough choices” budget – and the capital-gains, pension and council tax increases they expect – or indeed to pay the 20% VAT that is just about to be charged on their private-school fees. The latest Saltus Wealth Index report suggests that 10% of high net worth parents are considering moving abroad to cut their education bills.
To some this is a mystery. Why won’t these people pay their fair share? And don’t they see that the services they get in return for the taxes they pay are worth the candle? The answer to that might be that no, they don’t. Tax morale – the measure of the extent to which people are happy to pay taxes – is a fragile beast. It is partly rational: You pay tax because the expected costs (court time, fines, prison sentences) of not paying are higher than the tax hit. It is partly transactional: You pay because you believe the services you receive in return offer value. And it is partly cultural: Taxpayers need to feel that, as the World Bank puts it, the system is “fair, equitable, reciprocal and accountable” – and that their contributions are valued.
It is hard to imagine the well-off in the UK feel valued any more. Why not? Here’s a tweet from one of the UK’s best-known columnists promoting his views on the matter in the Times. “Oh no! All the super rich Farageist scumbag corporate f*ckheads are going to leave Britain and go and live in Dubai because they don’t want to bay a bit more tax. How very terrible. Whatever will we do without them?” That’s a standard response. You get the idea. They might also feel they get very little value: The courts and transport systems are a mess; policing doesn’t seem to work as well as it used it; and they don’t use the National Health Service or the education system. So is it rational to stay and pay – or, if the global networks of international schools and the property agents of Milan are all keen to help, to go?
But in the relentless good riddancing of the rich, one important point is being missed. Tax morale matters for the rest of us. And all the evidence suggests that it is falling. Look to the latest British Social Attitudes survey, released just before the election. Tax morale is highest in high-trust societies – and those with the lowest levels of perceived corruption. Today in the UK, a record high of 49% of the nation “almost never” trust the government to put their nation’s interest first (34% in 2019); 58% would “almost never” trust politicians to tell the truth when they are in a tight corner – that’s too close to the uncomfortable 60% recorded in 2009 in the wake of the MP’s expenses scandal.
High morale is mostly related to high trust. So much for that. Now look to the transactional bits. Dissatisfaction with the health service has more than doubled since 2019 – to 52% from 25%; a mere 24% are very or quite satisfied. The same unhappinessgoes for social care – up to 57% from 37% . The survey didn’t ask about dentists, trains, potholes, driving-test delays or the odds of the police turning up to check out a burglary. But anyone living in the UK would be able to take a good guess at satisfaction levels on all of these things (for those who don’t live in the UK, the answer is “quite low.”) Then there is immigration – in 2019, 47% of people felt it was generally good for the UK’s economy. The latest survey has it at 39% – and that’s before the latest Office for Budget Responsibility analysis showing the true (and very high) cost to the taxpayer of low-wage immigration.
There is a worrying gap opening up in the UK between “prudent normative expectations about how tax and spending ought to be organized, and — on the other hand — the actual lived experiences of engaging with the uses and abuses of taxpayers’ money,” Liam Stanley, a lecturer at the University of Sheffield, concluded a few years ago,
The new Labour government has so far done nothing to help change any of this. The absurd freebies scandal hints at another round of minor corruption. And the announcement that the winter fuel allowance is to be means tested is a miserable morale misstep. Most pensioners viewed this as part and parcel of the state pension, which is not means tested. If your 35 years of tax payments don’t buy you a few hundred quid a winter to pay some of the highest fuel costs in the world, what do they buy you? And if that supposedly universal payback can be removed, what else can be? Is means testing of the NHS and education ahead (note the mutterings about a more “progressive” system of charging for university tuition in the UK). None of this is good for tax morale. In 2019, 53% of people told the BSA survey that “the government should increase tax and spending.” The latest survey has that number down to 46%.
At first glance, you might say that the tax morale of those who are not globally mobile doesn’t matter. Most people can’t avoid tax, and compliance in the UK is very high: The tax gap, or the amount not paid, is under 5% of gross domestic product. But there are ways to avoid without evading. You can avoid capital gains by not taking gains or using wrappers; you can avoid stamp duty by not moving house and you can avoid income tax, or in the case of the UK’s doctors, pension taxes, simply by working less.
Possibly of more immediate worry to the new government is that tax morale is an important driver of voting preferences. Falling levels of trust and tax morale helped get Labour elected. If they keep falling, they could easily help make it a one-term wonder.
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