The USA boosts its tax take by taxing its citizens on their worldwide earnings. Should the UK follow suit?
The British tax system is incredibly, fiendishly complicated. As proof, Tolley's Tax Guide -- the definitive manual for UK taxation -- stretches to a barely believable 11,500 pages.
Our main taxes include income tax, National Insurance, Value Added Tax, fuel duty, Council Tax and Inheritance Tax -- and many more.
Despite this jumble of taxes, the UK government still spends more than it earns. In 2012/13, this spending is expected to exceed tax revenues by more than £91 billion. Ouch!
Critics of this tax bureaucracy, notably The Taxpayers' Alliance, argue that our tax system should be completely overhauled, shortened and simplified. I agree, because I feel that the UK's tax structure has become a complicated, time-consuming labyrinth to navigate, even for low earners.
The American way
That said, I've been mulling over a different approach to UK taxation that is already used across the Atlantic in the good old US of A. In the UK, residents are taxed only on their domestic earnings and gains, whereas, American citizens are taxed on their entire worldwide income.
In the United States, US citizens and resident aliens (foreigners living and/or working in the US) are required by law to declare all foreign earnings and gains and pay US taxes on these. Also, for US citizens living abroad, the rules on declaring income and paying taxes are broadly the same as if they were resident in the US.
Americans can avoid being taxed in the US only by renouncing their citizenship and, in effect, by handing back their passports.
Not declaring foreign income to the Internal Revenue Service (IRS) is a criminal offence on which the IRS harshly cracks down. Likewise, the IRS requires US taxpayers to declare on their tax returns any foreign bank or investment accounts -- or face penalties, interest, fines and even imprisonment.
In short, the IRS takes a very dim view of Americans who seek to hide foreign assets, income and gains, as it wants to collect the taxes due on these.
The UK's huge tax gap
The UK has around 31 million taxpayers, most of whom are permanently resident and work in the United Kingdom. Together, these adults pay the majority of the nearly £592 billion in taxes that the government expects to collect this tax year.
Despite this tax burden (which averages more than £19,000 per taxpayer), the UK's tax revenues fall short of its spending by more than an eighth (13.3%). In other words, merely to balance the books, the coalition would have to increase all taxes by nearly a sixth (15.5%).
Since this can't be done without collapsing Britain's economy, our government desperately needs new sources of taxes. So, how about following in America's footsteps by introducing taxes on worldwide income?
Why not do as the US does?
What would be the main impact of this radical change to our tax system? Quite simply, UK residents with foreign assets, income and capital gains would be forced to pay UK taxes on these foreign earnings.
Thus, people with rental properties overseas, those owning foreign shares and collecting foreign dividends, and anyone with other sources of income from abroad would have to cough up UK taxes as if these foreign assets were based here.
In effect, this would be very similar to how the US tax system currently operates.
Winners and losers
Of course, as with any major change to the tax system, switching to worldwide taxation would create both winners and losers.
The biggest winners would be the vast majority of British adults who don't own any overseas assets and have zero foreign income. For at least nine out of ten taxpayers, their tax bills would be unchanged and life would go on as normal.
Obviously, for the small minority of British residents who do own foreign assets (many of whom are in the top 1% of earners), their tax bills could rise significantly. Then again, thanks to 'double taxation' treaties between the UK and many advanced economies, their overall tax bill (UK plus foreign combined) could hardly change at all.
Nasty for non-doms
Perhaps the biggest group to be hit by this change would be 'non-doms' (non-domiciled individuals). These folk live and/or work in the UK, but dodge the full force of HM Revenue & Customs by claiming domicile abroad, usually in their country of birth.
As things stand today, non-doms pay UK taxes on their UK earnings, but not on foreign income. However, after living in the UK for seven years, non-doms must either pay UK tax on their worldwide income or pay a flat tax of £30,000 a year to keep their foreign income outside of the UK tax net.
This creates the bizarre situation where a non-dom can be permanently resident in the UK, have foreign assets in the billions of pounds, yet contribute just £30,000 to this nation's upkeep. For some non-doms, all of their income is foreign, so a lucky few pay no UK taxes on income whatsoever.
It's estimated that there are up to 200,000 non-doms living in the UK, but this population has declined since boom turned to bust in 2007. Many of these people are super-rich, live in the most expensive parts of London, and enjoy all that England's capital has to offer -- including the legal and physical protection of which Britain is rightly proud.
In summary, while there are many arguments for and against worldwide taxation, it works in the world's biggest economy. Thus, I suspect that it would work equally well over here. Frankly, we have nothing to lose but our foreign oligarchs and insanely high London house prices!
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