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When inequality bites back

Three things deflected attention – briefly – away from the war in Ukraine in recent days. Non doms, the latest Federal Reserve plans, and the closely fought presidential contest in France which is threatening to topple Emmanuel Macron from power. All three stories share at least one thread in common – that of wealth inequality, although they also each go far beyond this one issue in their own ways. 

First, and closest to home, revelations that the spouse of the second-highest ranking politician in the land, who decides how much tax we all pay and who has upped the amount extracted from ordinary taxpayers from this month, holds the rather special tax status known as non domiciled, and as a result can pay a portion of her tax bill overseas rather than in the UK, were not well received. The anger expressed over what is being interpreted as a textbook example of one rule for them and another for us, alongside evidence that the chancellor himself has a strong allegiance to another country (the US), have almost certainly put paid to Rishi Sunak’s prime ministerial ambitions and increased the chances that we will have a new chancellor of the exchequer sooner rather than later, either through a resignation or a cabinet reshuffle.

And as luck would have it, this week a juicy piece of research by the LSE and Arun Advani at the University of Warwick – The UK’s Non Doms: Who are they, what do they do and where do they live? – fell into the laps of the non dom critics. This paper revealed that around one in five of the UK’s bankers are non doms – not in itself surprising given the global nature of the UK’s banking sector and its workforce – and the status is highly represented in sport and the oil industry. The report’s authors claim that clamping down on such tax treatment would not trigger a flight from the UK by the affected individuals (the vast majority were born abroad). But that’s not supported by evidence on wealth taxes which indicate that people do indeed flee. Indeed, one of Macron’s first acts as President was to abolish France’s more-trouble-than-it-was-worth wealth tax.  

It might not have been an act he wanted to remind voters of in his election battle. Wealth and fairness have been core to winning votes and Macron’s remaining rival, Marine Le Pen, has targeted those groups in society who have been worst affected by rising wealth inequality. She has promised wealth redistribution through more benefits and an array of income tax exemptions. She may fail to beat Macron in the final round of the election on 24 April but her campaign has resonated with an electorate hungry for tangible change in their economic conditions.  

The same themes have regularly bubbled to the surface of discussions around quantitative easing (QE). News that the Federal Reserve has now drawn a thick black line under the era of QE via plans to shrink its $9tn balance sheet by $95bn a month might please critics: those who have disliked how the policy of printing money has enriched some and added to wealth inequality through inflated prices for the property, equity and bond assets of homeowners and investors, while simultaneously being a disaster for savers. That flood of money into markets has also helped to fuel inflation, whose impact is shared across all strata and may be more damaging for lower income families.

To be effective in getting inflation under control, the Fed may need to induce negative growth rates, even to force a recession. As one former Fed policy maker Bill Dudley commented, for this new approach to work one thing is certain: significant losses will need to be inflicted on stock and bond investors.

These 'cures' may impose a price on broader society. Recessions rain down pain and misfortune indiscriminately.

While non dom status may be an additional option for the 'elite' and confer advantages, it is by no means a golden ticket to tax freedom. Holders must still obey the tax rules of the different tax jurisdictions; there are costs to pay for the privilege and there is also a time limit to the status, as Leonora Walters spells out.