This CAGE Policy Briefing studies the offshore income and capital gains of the UK's ‘non-doms’ – individuals who are resident in the UK but who claim on their tax return that their permanent home (‘domicile’) is abroad. We use de-identified confidential data accessed via HMRC to analyse all individuals who have claimed non-dom status between 1997 and 2018. We show non-doms at least £10.9 billion in offshore income and gains. Most of these unreported income and gains (55%) belong to non-doms who arrived in the UK in the past five years. Looking at previous reforms that restricted access to the non-dom regime, we see these led to very little emigration. Those who did leave were paying hardly any tax. Consequently, abolishing the non-dom regime would raise at least £3.2 billion even after accounting for migration and other tax planning, and the loss of existing revenue from the remittance basis charge.

This CAGE Policy Briefing studies the UK's ‘non-doms’ – individuals who are resident in the UK but who claim on their tax return that their permanent home (‘domicile’) is abroad. We use de-identified confidential data accessed via HMRC to analyse all individuals who have claimed non-dom status between 1997 and 2018. We show non-doms are globally connected and economically elite: almost all were either born abroad or have lived abroad for substantial periods, and their incomes are very high. Non-doms are highly likely to work in finance and other ‘City’ jobs. They tend to come from Western Europe, India and the US. Within the UK they largely reside in and around London, although there are sizeable shares in Oxford and Cambridge, working in research and education, and in Aberdeen, working in oil.

In this paper we show the importance of international ties amongst the UK’s global economic elite, by exploiting administrative data derived from tax records. We show how this data can be used to shed light on the kind of transnational dynamics which have long been hypothesised to be of major significance in the UK, but which have previously proved intractable to systematic study. Our work reveals the enduring and distinctive influence of long-term imperial forces, especially to the former ‘white settler’ ex-dominions which have been called the ‘anglosphere’. These are allied to more recent currents associated with European integration and the rise of Asian economic power. Here there are especially strong ties to the ‘old EU-6’ nations of France, Germany, Netherlands, Belgium, Luxembourg, and Italy. The incredible detail and universal coverage of our data means that we can study those at the very top with a level of granularity that would be impossible using traditional survey sources. We find compelling support for the public perception that non-doms are disproportionately highly affluent individuals who can be viewed as a part of a global elite. However, whilst there is some evidence for the stereotype of the global wealthy parking themselves in the UK, this underplays the significance of the working rich. Our analysis also reveals the remarkable concentration of non-doms in central areas of London.

In this paper we discuss first the measurement of financial inequalities, focusing on top income and wealth shares. We then consider the scope for policy reforms to tackle some of the issues raised.

Capital gains are particularly complex to tax given their infrequency, the different ways in which they are generated, and worries about harming productivity. There are theoretical arguments in support of everything from zero rates to high rates of tax on capital. In this paper, I first discuss the impact of capital gains on inequality, which often motivates discussions about how gains should be taxed. I then set out the principles that determine how gains should be taxed, in particular how the tax rate should relate to income tax rates. I propose that capital gains tax rates be equalized with income tax rates, subject to provisions to allow gains to be ‘smoothed’ over time and to remove inflation from the tax base. I highlight key transitional issues in moving to such a tax structure. Finally, I discuss the specific lessons for Canada.

This CAGE Policy Briefing studies alternatives to the government’s new Health and Social Care Levy. Using publicly accessible tax data from HMRC, we find that removing the current National Insurance exemptions for investment income and people of pension age would raise £12 billion. This is the same amount of revenue as the Government is targeting from its new Levy. Equalising National Insurance on higher earnings with the rates already paid by lower earners could raise an additional £20 billion. This would be enough to fund a cut in the main rate of NICs by 1.25p, instead of raising these rates, as the government is planning. Under this alternative package of reforms, more of the revenue would come from London and the South East, and from older, wealthier individuals.

This paper introduces a special issue on a Wealth Tax, which draws together the latest thinking on wealth taxes with the aim of filling this gap. It draws heavily on international experience and evidence, applying these insights to the UK context. The papers build on work undertaken for the Wealth Tax Commission, which delivered its final report in December 2020. The contributors to this special issue include tax practitioners and academic lawyers as well as economists, reflecting our view that this range of expertise is essential to evaluating the practice, as well as principles, of a wealth tax. In this paper we touch upon some common themes arising across the papers. We also highlight some important remaining gaps in the evidence base on wealth taxes, particularly on the measurement of wealth and behavioural responses at the very top of the wealth distribution.

In this paper we model the revenue that could be raised from an annual and a one-off wealth tax of the design recommended by Advani, Chamberlain and Summers (2020). We examine the distributional effects of the tax, both in terms of wealth and other characteristics. We also estimate the share of taxpayers who would face liquidity constraints in meeting their tax liability. We find that an annual wealth tax charging 0.18% on wealth above £500,000 could generate £10 billion in revenue, before admin costs. Alternatively, a one-off tax charging 4.8% (effectively 0.96% per year, paid over a 5-year period) on wealth above the same threshold, would generate £250 billion in revenue. To put our revenue estimates into context, we present revenue estimates and costings for some commonly-proposed reforms to the existing set of taxes on capital.

In this paper, we review the existing empirical evidence on how individuals respond to the incentives created by a net wealth tax. Variation in the overall magnitude of behavioural responses is substantial: estimates of the elasticity of taxable wealth vary by a factor of 800. We explore three key reasons for this variation: tax design, context, and methodology. We then discuss what is known about the importance of individual margins of response and how these interact with policy choices. Finally, we use our analysis to systematically narrow down and reconcile the range of elasticity estimates. We argue that a well-designed wealth tax would reduce the tax base (of reported wealth) by 7-17% if levied at a tax rate of 1%.

Aggregate taxable capital gains in UK have tripled in past decade. Using confidential administrative data on the universe of UK taxpayers, we show that including gains changes the picture of UK inequality over the past two decades. These taxable gains are largely repackaged income, so their exclusion biases the picture of inequality. Including them changes who is at the top of the distribution, adding more buiness owners and older people. The share of income plus gains (both pre- and post-tax) going to the top 1% is 3pp higher than for income only, and this gap has been steadily rising.

We study the effects of audits on long run compliance behaviour, using a random audit program covering more than 53,000 tax returns. We find that audits raise reported tax liabilities for five years after audit, effects are longer lasting for more stable sources of income, and only individuals found to have made errors respond to audit. 60-65% of revenue from audit comes from the change in reporting behaviour. Extending the standard model of rational tax evasion, we show these results are best explained by information revealed by audits constraining future misreporting. Together these imply that more resources should be devoted to audits, audit targeting should account for reporting responses, and audit threat letters miss a key benefit of audit

We use administrative tax data from audits of self-assessment tax returns to understand what types individuals are most likely to be non-compliant. Non-compliance is common, with one-third of taxpayers underpaying by some amount, although half of aggregate under-reporting is done by just 2% of taxpayers. Third party reporting reduces non-compliance, while working in a cash-prevalent industry increases it. However, compliance also varies significantly with individual characteristics: non-compliance is higher for men and younger people. These results matter for measuring inequality, for understanding taxpayer behaviour, and for targeting audit resources.

This IFS Briefing note uses data from HMRC’s random audit programme to show which types of people are more likely to be under-reporting taxes and how their behaviour changes after a tax audit. The results are based on data from audits covering tax returns for the years 1999–2009.

This SMF-CAGE Briefing Paper explains which types of individuals are most likely to be non-compliant on their tax returns, and what can be done to improve compliance and raise tax revenue.

Using administrative data on the globally connected super-rich in the UK, we study the effect of a large tax reform on migration behaviour. Prior to 2017, offshore investment returns for ‘non-doms’ – individuals tax resident in the UK but with connections to other countries – were untaxed. Average offshore investment returns for these individuals exceeded £420,000; even without considering other types of income, this puts them in the top 0.2% of the population. A reform in 2017 brought long-stayers and UK-born non-doms into the standard tax system, reducing their effective net of average tax rate by between 8.8% and 13.0%. We find that migration responses were limited: our central estimate of the migration elasticity is 0.02, and across a range of specifications we can rule out elasticities larger than 0.5. Using reforms for the UK-born super-rich who were living abroad, we find that migration elasticities are limited even for recent arrivals, for whom our central estimate is 0.18. Assuming similar elasticities for all non-doms, abolition of the preferential regime would increase tax revenue collected from non-doms by £3.2bn (84%).

In this paper we study the contribution of migrants to the rise in UK top incomes. Using administrative data on the universe of UK taxpayers we show migrants are over-represented at the top of the income distribution, with migrants twice as prevalent in the top 0.1% as anywhere in the bottom 97% These high incomes are predominantly from labour, rather than capital, and migrants are concentrated in only a handful of industries, predominantly finance. Almost all (85%) of the growth in the UK top 1% income share over the past 20 years can be attributed to migration.

Top incomes have grown rapidly in recent decades and this growth has sparked a debate about rising inequality in Western societies. This column combines data from UK tax records with new information on migrant status to show that that migrants are highly represented at the top of the UK’s income distribution. Indeed, migration can account for the majority of top-income growth in the past two decades and can help explain why the UK has experienced an outsized increase in top incomes.

How does economics compare to other social sciences in its study of issues related to race and ethnicity? We assess this using a corpus of 500,000 academic publications in economics, political science, and sociology. Using an algorithmic approach to classify race-related publications, we document that economics lags far behind the other disciplines in the volume and share of race-related research, despite having higher absolute volumes of research output. Since 1960, there have been 13,000 race-related publications in sociology, 4,000 in political science, and 3,000 in economics. Since around 1970, the share of economics publications that are race-related has hovered just below 2% (although the share is higher in top-5 journals); in political science the share has been around 4% since the mid-1990s, while in sociology it has been above 6% since the 1960s and risen to over 12% in the last decade. Finally, using survey data collected from the Social Science Prediction Platform, we find economists tend to overestimate the amount of race-related research in all disciplines, but especially so in economics.

In the wake of last summer’s Black Lives Matter protests, many have asked themselves what they are doing to tackle racial injustice. For economists, one central question is the extent to which the profession has examined the causes and consequences of racial inequality. This column reports evidence that race-related research in economic journals constitutes a far lower share than in comparable publications in sociology and political science. What’s more, economists over-estimate the extent of race-related research done by the profession. Understanding why economists produce so little race-related research is essential if the discipline is going to be able to reform.

Economists are central to policymaking in the UK, and to providing the research that underpins that policymaking. Despite having this important role in society, economists are not very representative of society, with a well-documented under-representation of women in the profession. In this briefing note, we examine the ethnic diversity of academic economists who provide much of the research that ultimately feeds into policymaking. We use data from the Higher Education Statistics Agency (HESA) to look at which groups are more or less well represented as academic economic researchers. We then examine economics students, to understand both the source of current under-representation and the prospects for change. Finally, we study some of the barriers faced by economics students. We are not able to examine diversity among the large number of economists who work outside academia, due to a lack of data.

The future of UK economics is looking predominantly male and disproportionately privately educated. This column introduces #DiscoverEconomics – a campaign to increase diversity in economics led by the Royal Economic Society and with the support of a wide range of institutions involved in economic research, communication and policymaking, including the Bank of England, the Government Economic Service, the Society of Professional Economists and many leading research institutions. The campaign aims to attract more women, ethnic minority students, and students from state schools and colleges to study the subject at university.

The gender pay gap opens up immediately after graduation, with male graduates earning 5% more than female graduates on average at age 25. Ten years after graduation – before most graduates start having children – the gender pay gap stands at 25%. Most of the initial gap can be explained by university subject choices, with women less likely to study subjects that lead to high-paying jobs: women make up just a third of graduates in economics, the subject with the highest financial returns, and two thirds of graduates in creative arts, the subject with the lowest returns. Subject choice continues contribute to the gender pay gap over time, but its relative importance fades as other factors (like having children and working part-time) come into play.

The economics profession – and the current student population studying economics – is not representative of society, with women, some ethnic minorities, and state school students underrepresented. While more than 7% of private school boys doing an undergraduate degree were studying economics in 2018/19, less than 1% of state school girls were. We highlight that interventions aimed at changing this picture need to consider the choices students make early on in their educational career. A Level Economics is a key gateway to further study in the subject, but access to and take-up of this qualification varies substantially according to a student’s background. As a result, improving representation within the economics profession in the long-term must include steps to ensure young students understand what the subject involves and the opportunities it provides, and have the chance to study it before university.

Carbon pricing will be one of the most talked about policy options at COP26. The idea of carbon pricing is that putting a price on the emission of greenhouse gases (GHGs) to reflect the social costs of climate change should provide producers and consumers with strong incentives to reduce such emissions. In this observation, we consider the opportunities and risks from introducing carbon taxes in developing countries, with reference to Ethiopia and Ghana as case studies.

This CAGE Policy Report chapter describes how policy can do more to protect the environment without having to hurt the least well-off.

Current UK energy use policies, which primarily aim to reduce carbon emissions, provide abatement incentives which vary by user and fuel, creating inefficiency. Distributional concerns are often given as a justification for the lower carbon price faced by households, but there is little rationale for carbon prices associated with the use of gas to be lower than those for electricity. We consider reforms that raise carbon prices faced by households, and reduce the variation in carbon prices across gas and electricity use, improving the efficiency of emissions reduction. We show that the revenue raised from this can be recycled in a way that ameliorates some of the distributional concerns. Whilst such recycling is not able to protect all poorer households, existing policy also makes distributional trade-offs, but does this in an opaque and inefficient way.

The report analyses and assesses: the rationale and objectives of energy policy; the current policy landscape faced by UK energy users; how current and future policy has led to inconsistencies in the implicit carbon prices faced by different users; and potential ways in which to improve policy affecting domestic and business energy users.

Government wants both to reduce carbon emissions and to reduce ‘fuel poverty’. Energy prices have risen in part because of a multitude of policies aimed at reducing emissions. There are also multiple policies aimed at ameliorating these effects. Altogether, this leads to a complex policy landscape, inefficient pricing and opaque distributional effects.
In this report, we show the effects of energy price rises over the recent past, look at what current policies mean for effective carbon prices and their impact on bills, and consider the distributional consequences of a more consistent approach to carbon pricing, alongside possible changes to the tax and benefit system that could mitigate these effects.

An IFS Observation on the current state of carbon prices and environmental policy in the UK.

An IFS Observation on the costs of hypothecating green taxes.

Carbon pricing will be one of the most talked about policy options at COP26. The idea of carbon pricing is that putting a price on the emission of greenhouse gases (GHGs) to reflect the social costs of climate change should provide producers and consumers with strong incentives to reduce such emissions. In this observation, we consider the opportunities and risks from introducing carbon taxes in developing countries, with reference to Ethiopia and Ghana as case studies.

Poor households regularly borrow and lend to smooth consumption, yet we see much less borrowing for investment. This cannot be explained by a lack of investment opportunities, nor by a lack of resources available for investment. This paper provides a novel explanation for this puzzle: informal risk sharing can crowd out investment. I extend the canonical model of limited commitment in risk-sharing networks to allow for lumpy investment. The key insight is that the cost of losing insurance is lower for a household that has invested, since it has an additional stream of income. This limits its ability to credibly promise future transfers, and so limits its ability to borrow from other households. The key prediction of the model is a non-linear relationship between total income and investment at the network level – namely there is a network level poverty trap. I test this prediction using a randomised control trial in Bangladesh, that provided capital transfers to the poorest households. The data covers 27,000 households from 1,400 villages, and contain information on risk-sharing networks, income and investment. I exploit variation in the number of program recipients in a network to identify the threshold level of capital provision needed at the network level for the program to move the network out of a poverty trap and generate further investment. I also verify additional predictions of the model and rule out alternative explanations. My results highlight how capital transfer programs can be made more cost-effective by targeting communities at the threshold of the aggregate poverty trap.