Envy is alive and well in today’s Labour Party – non-doms are its victims

As we prepared for the Budget earlier this year, Jeremy Hunt had two clear aims: to cut taxes again for working people and to ensure that borrowing went down.

In the end, he achieved both. But when the headroom to do so started to come down due to judgments made by the Office for Budget Responsibility (OBR), we started looking at targeted tax rises that could help achieve these aims. Reforming the way non-doms were taxed became a necessary source of revenue.

Crucially, any new system had to raise money, preserve our international competitiveness and ensure we continued to attract highly mobile investors. This meant there had to be a replacement scheme rather than outright abolition. And to ensure people didn’t immediately leave, a series of transitional arrangements were designed including a rebasing for capital gains and a 50pc transition year.

Contrary to what people said afterwards, it was always assumed that some people would leave as a result of this system. In the end, the OBR stated that between 10pc and 20pc of those affected would do so.

Even then, they decided this system would raise around £3bn a year. A helpful third of the cost of the further 2p cut in National Insurance contributions (NICs) that became the Budget’s centrepiece.

During this process, though, it became abundantly clear that the treatment of inheritance tax (IHT) was a major driving force behind the behaviour of the non-dom population. So much so that we were advised that extending reforms to this particular tax would be unlikely to raise much, if anything.

As such, we didn’t include it.

It does not surprise me that Treasury officials are now worried that Labour’s plans, specifically its proposal on trusts and IHT, will not raise any money. Everyone knows this non-dom raid will be a disaster, but Labour just can’t admit it.

To press ahead with these changes would show three things.

First, the Chancellor is happy to make the apparent “black hole” in the public finances even worse by introducing a tax rise that costs money. Second, contrary to what she and the Prime Minister say, growth and wealth creation are not the driving motivation of the Government. And third, that pure and simple envy is alive and well in today’s Labour Party.

I am sure they will dress up their motivations in a cloak of “fairness”. But there’s nothing fair about others having to pay more tax so that the Government can implement a virtue-signalling, ideological attack on rich people.

The same would be true if they abolished so-called carried interest when the opposition costing published before the election shows that doing so could cost the Treasury up to £900m a year. Envy, not economics, would be driving the Budget.

But if there is a rethink going on, what could that involve?

They could just drop their plans regarding IHT and keep the transitional arrangements. If they are determined to include IHT in some form, they could reduce the time period in which a non-dom who has left the country is still liable for it, from 10 years to less than five. This might keep people here until they thought they were a bit closer to passing on at least.

They could keep the system as set in March but extend the length of time someone benefits from the new residence regime, up from four to six, or even eight, years. They could change the date that capital gains are rebased from.

At the moment, the plan is for them to be rebased from 2019. Adjusting that by a few years might raise more money. Finally, they could do what Italy does and charge a higher flat-rate fee to keep foreign assets free from tax.

What this really illustrates, though, is a broader problem the Government keeps having: that the reality of government is very different from campaigning in opposition. Once you’re in charge, rhetoric isn’t enough. It is easy politics to pledge to further tax non-doms and private equity bosses. But there really is a limit to how much you can do both without driving them away.

Come Budget day, it won’t be enough to simply state that growth is the primary mission of the Government. Tax policy, however politically uncomfortable for Labour, will have to back that up.

Adam Smith is former chief of staff to Jeremy Hunt and author of theinvisiblehanduk on Substack