The world has become increasingly interconnected, and capital owners have become more mobile than ever before. High tax rates can no longer be imposed without consequences, as residents have the ability to leave for places with lower tax rates. This trend is happening right now in the United States, where red states with low tax rates are attracting residents from blue states with high tax rates.
Economists Arthur Laffer (author of the Laffer Curve) and Stephen Moore recently released a report on the migration of residents and taxable income between states over the past decade. They found that six of the seven most highly taxed blue states have lost nearly five million residents and almost $250 billion of taxable income to other states. California, Illinois, and New York have suffered the most significant losses.
This trend is not limited to the United States. Britain was once a world leader in attracting the super-rich to its shores, but a series of punishing tax changes, political uncertainty, and more difficult migration rules have caused the ultra-wealthy to shun Britain and take their money elsewhere. According to Henley & Partners, the UK has suffered a net outflow of 12,000 wealthy individuals – those with assets and cash of more than $1m (£830,000) – since 2017, with some 1,500 rich individuals leaving in 2022.
The consequences of these migration patterns are not limited to individual households. As the number of wealthy individuals leaving the UK increases, the nation’s tax intake decreases, resulting in higher taxes on ordinary households to fill the gap. This situation threatens to have a significant long-term impact on the UK economy, especially in the tech industry.
Many of the non-doms who are leaving the UK to settle in countries such as Greece, Portugal, and Switzerland were entrepreneurs and investors who came to the UK to set up successful businesses and added to the economy. With them, the UK loses not only cash to invest and UK taxes but also talent and entrepreneurship that would have contributed to the economy.
In a world that is increasingly dominated by the tech industry, this loss of talent and entrepreneurship could be disastrous. The UK is already struggling to keep up with countries such as the United States and China when it comes to developing new technologies such as artificial intelligence. As more wealthy individuals leave the UK, the gap between the UK and other countries is likely to widen, and the UK could miss out on the economic benefits that come with being a leader in emerging technologies.
Many of the non-doms who are leaving the UK to settle in countries such as Greece, Portugal, and Switzerland were entrepreneurs and investors who came to the UK to set up successful businesses and added to the economy. With them, the UK loses not only cash to invest and UK taxes but also talent and entrepreneurship that would have contributed to the economy.
Governments need to be careful when implementing tax policies. Capital is more mobile now than ever before, and capital owners have more options when it comes to choosing where to live and invest their money. High tax rates might seem like a good way to raise revenue, but if those taxes drive away the people who contribute the most to the economy, the long-term effects can be disastrous.
The problem that coule be brewing for the UK (and any other country that goes the same route) is that now is a period where many new tech businesses are seeking a home. This is especially so in the Fintech space where regulators, unfriendly to finance innovation such as blockchain and digital assets, are looking where they can go that has long term stability. The stability that all businesses seek, but especially fintech, is that the massive investment in people technology and R&D is not going to be wasted due to a political change in the wind. The P2P industry, for example, has faced every tightening rules and regulations. That, in and of itself isn’t too much of an issue, but often times there is a ‘re-interpretation’ of existing rules to suit whatever narrative is being pushed this week because of some kind of problem in that market.Whether that be the execution of the mini-bond market or the tightening of the noose on P2P lending, for UK fintech the regulations have, time and time again, been changed amended or re-interpreted. This can cause millions of pounds worth of investment to go down the toilet in a very short space of time. If you now layer that with reducing R&D tax credits, higher taxes on employess and high net worths, why wouldn’t an entrepreneur look elsewhere?
In conclusion, the migration of wealthy individuals from the UK and the United States is a warning sign that governments need to be careful when implementing tax policies. High tax rates might seem like a good idea in the short term, but in the long term, they can drive away the people who contribute the most to the economy. As the world becomes increasingly interconnected, governments need to remember that capital is more mobile now than ever before, and they need to create tax policies that are fair and competitive to prevent an exodus of talent and entrepreneurship. Failure to do so could have dire consequences for the economy and the future of emerging technologies such as artificial intelligence, new fintech and blockchain projects. These are the industries of the future, if their roots are established offshore the UK may find that those kind of businesses never come back.
