Tuesday, 23 October 2012

The taxing problem of tax avoidance #1: the moral question.

It seems that hardly a week goes by these days without the issue of tax avoidance hitting the headlines. First it was companies like GlaxoSmithKline (GSK) that were in the firing line then it was poor old Jimmy Carr.  Now, in recent weeks we have had both the BBC and Starbucks under the spotlight.

Of course central to this debate is the issue of what constitutes a fair tax system. To most that is one where those that have the most pay the most. The reason why tax avoidance is seen to be so invidious by many is that it distorts this principle. A millionaire can end up paying a smaller fraction of his income in tax than his secretary or his cleaner. Indeed in many cases he can end up paying no tax at all. It is not just that he can end up paying less tax that is the problem. It is the fact that he seems to be able to pick and choose which tax he would prefer to pay, and when he would prefer to pay it. In short, it is because there are opportunities open to him that are not open to the general population. Thus the playing field is not flat and it is not fair.

It is probably to be expected that in times of austerity for  many (although not the few) there will be a sense of moral outrage directed at those perceived to be not paying their fair share, but it should be remembered that the political issue of tax avoidance has been with us for many years. It was a particular cause célèbre in the boom years, and every year the public's expressions of outrage against it appeared to grow louder. So too did the protestations of certain venerable politicians that "Something must be done". Yet nothing ever was done, or so it seemed. Instead what we got were a plethora of appeals to the moral conscience of the perpetrators. Yet what many fail to realize is that morality doesn't come into it, or even worse, that tax avoidance in many cases may actually be the most moral action available.

If you are a tax accountant it is your moral (and legal) duty to do the best by your client. That means finding the lowest tax rate for the client. If you are a company finance director your moral and legal duty is to maximize the return to your shareholders. That inevitably means minimizing the funds paid to everyone else including employees and the taxman. So, when it comes to paying tax, morals are for individuals. When you are handling the tax affairs of others, morality doesn't come into it. It is about applying the letter of the law. So if politicians want to eradicate tax avoidance, then surely the onus is upon them to legislate to that effect? Yet nothing ever seems to change. Now why is that? Is it because it is really so difficult to legislate against tax avoidance? I think not.

You see if you look at all the various schemes on offer for the average man or woman with more disposable income than social conscience, they all boil down to a handful of basic mechanisms. These schemes often involve off-shore companies, but they also tend to exploit the use of loans, rebates, rents, "gifts" or arbitrage to minimize the tax liability of the company or individual. As I will outline in later posts, most of these schemes could be closed down with the right legislation and a modicum of political will.