Tuesday, October 2, 2007

The Thin Edge of the Flat-Tax Wedge in Britain

Speaking at the Conservative party conference in Blackpool on October 2, 2007, George Osborne, the opposition "shadow" chancellor of the exchequer, proposed several changes in British taxation. To fund reductions in property tax, increase the exemption for inheritance taxes, increase tax breaks of married couples, and abolish the 1 percent stamp tax for first-time home buyers, he proposed a change in the treatment of non-domiciled British residents.

Britain has created a tax haven for so-called non-domiciled residents. These are wealthy individuals who keep their money offshore, live and/or work in London, and only pay local council property tax and tax on earnings received in Britain, but not on offshore earnings. Osborne proposes that non-domiciled residents choose between paying normal British tax on offshore investment income or, in lieu of that, pay a flat rate of £25,000 (a bit over $50,000). Osborne estimates that there about 150,000 non-domiciled business men and women living in the United Kingdom who are not registered to pay tax, and that his proposal would collected about $7 billion in additional revenue. He further believes that multi-millionaires will not change their residents over an annual tax of $50,000.

The proposed flat tax amounts to a poll tax on a class of foreign residents. Nonetheless, it would be assessed at a flat rate, rather than a progressive rate, regardless of the amount of offshore investment income.

Aesop’s Lost Fable

The price of oil is always on the minds of politicians, investors, and economists. Although the U.S. economy uses less oil per unit of economic output and consumers spend a smaller portion of their income at the gas pump than in 1980, further increases in oil prices may begin to stoke fears of inflation and the "R" word, recession.

If oil reaches $100 a barrel, alarm bells will grow louder. During the first oil crisis in the 1970s, petro-dollars were recycled into the U.S. economy. Many people will recall double-digit inflation during President Carter’s term and the subsequent savings and loan debacle in the early 1980s.

Low-cost Chinese manufactured goods, which were not available in the earlier oil crises, have helped to cushion the shock of higher oil prices. But a stronger yuan (the Chinese currency) and rising labor costs are gradually raising the cost of Chinese goods. In the era of globalization, analysts and investors believe that if Russia, Middle Eastern, and other oil-producing countries recycle their dollars in the United States, the economy may survive $100 a barrel oil without a significant downturn. As mentioned in previous postings, there is concern that continued accumulation of U.S. assets by potentially unfriendly oil-producing nations may pose a security risk.

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