The Return of the Tax Exiles: The UK’s Biggest Export Has Been its Wealthy Citizens by Gregory Hilton

PHOTO: The Right Honorable Lady Victoria Hervey, 33, is the elder daughter of the 6th Marquess of Bristol. Her social life is a staple of the British photo-tabloids. To avoid UK taxes, she was brought up in Monaco and has no intention of ever being a full time UK resident.

The most popular activity of the British photo tabloids is making fun of the aristocracy, and Lady Victoria Hervey is an easy target. Last winter the socialite told the Daily Telegraph she had been contemplating the homeless problem.
Lady Victoria’s recommendation was for poor people to follow her example, “It’s so bad being homeless in the cold weather. They should go somewhere warm like the Caribbean where they can eat fresh fish all day.”
The bad news for the tabloids is that the aristocracy has been declining for decades. It is far more than the weather that has sent Lady Hervey and her family to Monaco and Los Angeles. Her story is an excellent example of the decline of the British empire, as well as the fiscal danger now impacting U.S. states such as California, New York, New Jersey and Illinois.
Wealthy Residents Have Fled New Jersey and Other High Tax States
Similar to the UK, these states thought taxing wealthy residents was the answer to their fiscal woes. They have since learned the wealthy have other options. Gov. Chris Christie (R-NJ) has repeatedly emphasized that as taxes have gone up in his state, the wealthy have relocated. The state had a $98 billion surplus from 1999 to 2003.
Then New Jersey significantly raised taxes on the wealthy, and between 2004 and 2008 they ended up losing $70 billion. The Garden State has America’s heaviest tax burden. Now Gov. Christie is trying to make massive cuts in the state budget because all the revenue projections were wrong.
The UK’s Upper Class Exodus
The New Jersey lawmakers should not have been surprised because taxing the wealthy an inordinate amount has rarely worked. Denis Healey, who was the UK’s Chancellor of the Exchequer from 1974 to 1979, was correct when he predicted “howls of anguish” from the rich. He was referring to the tax increases made by the Labour governments in the 1960s and ’70s.
The result was a huge decline in Britain’s income when the upper class fled. The UK’s biggest export turned out to be its wealthy residents. The first to leave were the rock musicians, and Dave Clark immediately followed through on his promise to abandon the UK.
The Rolling Stones had no desire to leave but they could not cope with the tax bill and were forced to relocate to France. George Harrison of The Beatles wrote the song Taxman when he learned his rate would be 98%.
Michael Caine, Tom Jones and Rod Stewart moved to Los Angeles, while Roger Moore and Ringo Starr went to Monaco. Phil Collins and David Bowie escaped to Switzerland. John Lennon and Freddy Mercury wound up in NYC. Sting went to Ireland and Sean Connery to Spain.
Other popular destinations were Hong Kong, Dubai and Singapore. About six million UK citizens now live abroad. They all have to prove they spend less than 91 days a year in Britain. Mick Jagger has been doing that for 25 years. The threshold in the U.S. is four months and it is six months in other European nations.
Margaret Thatcher Stopped The Brain Drain
Many members of the upper class including Lady Hervey’s family returned in the 1980’s. The so-called brain drain of the late seventies was reversed by the 1979 election of Prime Minister Margaret Thatcher. The 80% and 90% tax rates were abandoned, and the tax paid on income and investment earnings was capped at 40 per cent.
However, they also have to cope with a 20% VAT (Value Added Tax) and gas costs $6.50/gallon. After eight years in exile, Michael Caine returned and blasted the Labour Party for ruining the UK’s movie industry.
The UK was not alone. Belgium has long been a haven for rich of France. President Nicolas Sarkozy is now trying to cut taxes to get them back. Berlin is pursuing wealthy Germans who hold Swiss bank accounts that shield hundreds of billions of euros.
Lady Hervey and the Tax Exiles
It is easy to make fun of Lady Hervey and her frequent appearances in the London social scene. The tabloids call her Lady V, and she has been romantically linked to Prince Andrew and Lord Frederick Windsor of Kent. Her modeling photos for Dior and Elite are always displayed prominently, and she received no sympathy when her trust fund was cut off.
Lady V is a celebrity in London, but is ignored in Los Angeles. Nevertheless, LA will remain her home and she has no intention of ever being a full time UK resident. She believes National Health Insurance ruined the country, and the UK’s fiscal outlook remains dismal.
The UK has a new government, but it inherited one of the largest budget deficits in the world and they are coping with a larger structural deficit than they thought. Similar to the 1970s, a popular solution could be tax exiles.
In April of this year the tax rate went back up to 50% for individuals earning more than $235,740 annually. Now even members of the House of Lords are once again about to abandon Britain. Many of them also want to avoid inheritance taxes.
The new tax hike will not impact Lady Hervey’s family, but similar to the past, the UK’s standard of living will continue to decline.