TAX EVASION - AN ABUSE OF SOCIETY?
What are the arguments for and against tax avoidance?
Anti-tax
William Hague, erstwhile Conservative leader, once described the then current level of UK taxation as 'immoral'. Indeed, there is vociferous political, business and media anti-tax agitation every time the topic is raised in public. The current issue of tax avoidance by the very rich and by multi-national corporations has cooked up a storm, at the centre of which is the assertion that the national interest will be seriously damaged by tightening the regime for systematic tax avoiders.
Many of the anti-tax assertions derive from neo-liberal free market thinking, which is based on the propositions that humans are essentially self-seeking individualists, best left to seek their own way by competing in the free market - and allowed to keep the proceeds of their enterprise away from the state, which is potentially corrupt and will only waste it. This philosophy extends to a belief that governments and politicians are essentially incompetent and should stay out of economic affairs, apart from ensuring private property rights. The main argument is that society as a whole will benefit most if talented people are able to maximise their wealth, which will trickle into the economy.
This thinking is dominant in free-market societies such as in the United States and Britain and stretches far into our economic and social lives. For example, in business, Agency Theory has it that managers are essentially self-seeking and potentially dishonest; therefore investors, the true owners of companies, need elaborate governance and reward mechanisms to make sure that they behave. In this version of free-market thinking, the proceeds of enterprise should be allowed to flow to investors and managers, so corporate tax avoidance is virtuous.
But the bottom line of such thinking is that the market is best, that a very small state apparatus is essential to freedom, and that low taxes are therefore good. We have seen this thinking put into action in the US and to a lesser extent Britain. The instinctive reaction of the Bush administration to any economic problem has been to cut taxes. In Britain, the very notion of increasing taxation to reduce rampant inequality and further the interests of the poorer members of society causes hysteria, so it is an absolutely out-of-bounds idea.
Other perspectives on taxation
However, there are other perspectives
Here is an argument for fair and universal taxation by a committed Christian tax lawyer, Susan Hammill, from the Virginia Tax Review:
- Judeo-Christian standards of justice express special concern for those with little wealth and power, and require those at higher levels of income and wealth to endure real economic sacrifices beyond their voluntary efforts of beneficence and charity. Belief that beneficence and charity can be a substitute for the revenues raised under a just tax structure assumes human beings have the spiritual capability to overcome the sin of greed by the strength of their voluntary efforts. This assumption cannot be theologically defended because it denies the sin of greed as being part of humanity's fallen condition and our absolute dependence on God to help us fight greed as well as all other human tendencies to sin.
- Further indications that the payment of taxes have a sound religious and philosophical basis come from a speech by Dan R Ebener, Social Action Director for the Diocese of Davenport, Iowa: " From "Me" to "We." The theory of contributive justice could begin with Aristotle, who said that the pursuit of common interests could be one and the same as our pursuit of virtuous happiness. Now John Locke suggested that payment of taxes was sort of a quid pro quo - I pay the quid in taxes and I receive the quo in services. But a theory of contributive justice goes beyond this Aristotelian notion of happiness or Locke's quid pro quo or even the stakeholder theory of taxes. If we look closely at contributive justice, I would suggest it's not only about my happiness, my stake, or my self-interest, but it's about our relationships in a community, our responsibility to be contributing members of a community, to be our brother's keeper, so to speak. A payment of taxes as a moral obligation of contributive justice goes beyond my interest in following the law or making sure that my business has good roads; it's centered on living gospel values, which are essentially communitarian values".
- In the Inquiry into the Nature and Causes of the Wealth of Nations, Adam Smith, much quoted as a hero by free-marketeers, argues that progressive taxation is a vital ingredient in the creation of a fair society: "The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state. The expense of government to the individuals of a great nation is like the expense of management to the joint tenants of a great estate, who are all obliged to contribute in proportion to their respective interests in the estate. In the observation or neglect of this maxim consists what is called the equality or inequality of taxation".
The dynamics of tax avoidance
Here is material drawn from various sources and drawn together by Martin O'Neill of the University of Manchester.
The curious business of taxation
Martin O'Neill
Published 12 November 2007
Wages have stagnated, corporations contribute less to Treasury coffers as their profits grow ever vaster. What has gone wrong with taxation?
Something very odd has happened to the world economy in the past decade or so. With the march of globalisation, real wages have more-or-less stagnated in the developed world, yet returns to capital have shot up.
Moreover, as the benefits of growth have started to accrue more to capital-holders than to workers, the share of government revenue from corporate taxation has fallen.
Across the world, governments have found it more and more difficult to tax corporations, and so the tax burden has instead fallen squarely and heavily onto the shoulders of individuals.
Making sense of how and why this has happened is fairly straightforward. With the emergence of industrial capitalism in the late 19th and early 20th Centuries, governments in the developed world realized a balance had to be struck between the demands of the market and the demands of the broader society in which markets were located.
This realization came sooner in some places - as with Bismarck's development of the welfare state in Germany in the 1880s.
In Britain, the process of taming the market started perhaps a little later, beginning with Lloyd George's radical reforms as Chancellor in the early years of the last century, and reaching its zenith in the post-war settlement created by the Attlee Government of 1945-51.
What marked out this earlier stage of the relationship between markets and societies was that it all happened under the roof of one particular state.
A balance could be struck, therefore, between the demands of economic growth and of social protection, because the nation state was in a powerful position to impose whatever regulation it saw as necessary on corporations.
Now globalisation has shattered that balance.
Capital can move jurisdiction at will. The mechanisms of taxation and regulation that can be used by the state have grown useless and atrophied.
States cannot set the terms of operation for corporations that are free to relocate to more benign host countries.
The balance of power has slipped from democratic governments to globally mobile corporations, with states reduced to adopting beggar-my-neighbour policies of tax competition.
It is unsurprising, given this reallocation of political power, that the benefits of the world economy accrue increasingly to the owners of capital rather than to the providers of labour, and that the tax burden in countries like the UK falls disproportionately on individuals rather than corporations.
These problems were illustrated starkly last week, in the Guardian's investigation into the economics of the world banana industry.
Del Monte, Chiquita and Dole sold over £400 million worth of bananas in Britain last year. Yet these three corporations between them paid only £128,000 tax in the UK.
To put things into perspective, the annual income to the UK Exchequer from taxation of banana companies is less than the income tax paid in a three month period by the Liverpool footballer John Arne Riise (if the copy of his wage slip that has been circulating on the internet is to be believed).
How do these companies manage to pay so little tax? Well, primarily, through the operation of complex webs of financial transactions known as 'transfer pricing', whereby semi-imaginary deals between different subsidiaries of the same company are used to move profits from one jurisdiction to another.
As the Guardian article illustrated, the tax avoiding behaviour of UK banana sellers are so Byzantine and complicated that, on its way from Latin America to our supermarket shelves, a bunch of bananas will have passed through virtual balance sheets in the Isle of Man, Ireland, Bermuda, Jersey and the Cayman Islands.
The combination of tax havens and transfer pricing allows large multinational corporations to set their tax rates more or less at will.
As things stand, of course, none of this is actually illegal. Traditionally, the distinction has been drawn between tax evasion, which is the illegal activity of evading one's full tax liabilities, and tax avoidance, which is the legal activity of arranging an individual's or corporation's affairs, within the letter of the law, so as to minimise one's tax exposure.
Unsurprisingly, it is hard to hold a clear line between the two, and many schemes of tax avoidance shade over towards the borders of tax evasion. Indeed, some writers on tax have coined the term 'avoision' to refer to those schemes which fall somewhere in the disputed borderlands.
Large corporations are concerned to avoid downright illegality, and so tend not to practice tax evasion.
But, as the banana example shows, large corporations have no need to get into straightforward illegality when their interests can be served so fully by avoidance strategies using transfer pricing and tax havens.
Tax avoidance is a despicable practice, for a number of reasons. Firstly, it is deeply anti-democratic. It frustrates the legislative intentions embodied in tax legislation, in favour of allowing the distribution of ownership in the economy to be determined by the machinations of tax avoiders themselves.
Secondly, tax avoidance ignores basic standards of fairness. Corporations can make money because they have access to our markets, and make use of our workforce, legal system and transport system. Basic fairness surely dictates that corporations therefore have responsibilities to society, and the very minimum of meeting those responsibilities should be meeting the full expectation of a corporation's tax contribution?
Tax avoidance enables corporate tax avoiders to fail to live up to their side of the 'social contract'.
As Richard Murphy, Director of Tax Research LLC, succinctly puts it: "Tax is not a cost to a company. It is a distribution out of profits. That puts tax in the same category as a dividend - it is a return to the stakeholders in the enterprise.
"This reflects the fact that companies do not make profit merely by using investors' capital. They also use the societies in which they operate, whether that is the physical infrastructure provided by the state, the people the state has educated, or the legal infrastructure that allows companies to protect their property rights. Tax is the return due on this investment by society from which companies benefit." ('Havens and have-nots', The Guardian 7.11.2007)
Corporations earn their "social license to operate" insofar as they contribute to the general good of the societies in which they exist.
They can only do this when they contribute both towards the economic health of that society and to the democratic aims of that country's government, through providing revenue to the state that can be used to pursue valuable social policies.
A corporation which shirks its minimal commitment to uphold the basic rules of society, including its taxation rules, fails to earn its justification for existing, and is in need of urgent reform.
I've said that the explanation of why corporations contribute so little to society is straightforward.
What is much more difficult is to understand how this situation can be changed. Once markets are global, the individual state has little room for manoeuvre in its efforts to grab social value from internationally mobile capital.
Indeed, it would seem that tax avoidance is the inevitable result of a co-ordination problem among competing firms. If your competitor is avoiding tax, then you will have to do so as well, if you are not to suffer a sizeable commercial disadvantage by comparison. Moreover, tax avoidance is incredibly wasteful: it consumes the efforts of thousands of high-energy, talented, imaginative people; and it does so for a destructive social end.
If tax avoidance could be structurally outlawed, then the enormous energy and imagination that goes into pursuing it could be redeployed to more genuinely productive occupations, and directed towards technical and managerial innovation, instead of just 'cooking the books'.
There is, so to speak, something of a Prisoner's Dilemma in operation. We would all be better off if this practice of tax avoidance could be eliminated, but it is individually rational for each corporation to engage in such practices. The questions to be faced, therefore, are why it might be that such practices are currently legally permissible, and how we might bring it about that such practices could be stopped.
This, it seems to me, is one of the most pressing political issues of our day. How can we re-empower our collective institutions, given their powerlessness in the face of globally mobile capital?
From the problems of tax avoidance to the problems of the 'sub-prime' mortgage market, what we see everywhere is a failure of regulatory power by states when facing rampant corporate and financial interests that value quick profits over social progress or even long-run economic stability.
When society and the market are no longer "under one roof" these sorts of problems emerge. There are two ways in which they could be brought back under the same roof. One is a retrograde policy of closed-borders and protectionism, which would attempt to re-localize markets. This approach is likely to throw away the material gains of globalization along with its problems of capital mobility.
The forward-looking approach is instead to look for transnational regulatory mechanisms, operating at an EU level (in the first instance) or eventually perhaps even at a global level. Through this approach, we might hope to keep the material benefits of globalization, whilst rebalancing the relationship between corporate power and the power of democratic governments and our collective institutions.
Politicians of all parties should be addressing this agenda with much more energy than we have seen.
Moreover, shifting the tax burden away from individual income from work, and towards the owners of capital, is a policy that could be highly popular, and surprisingly easy to sell.
People could be brought around to an agenda of clamping down on corporate tax avoidance if they were told that it meant that they could pay less personal tax if only corporate scroungers and tax-cheats paid their fair share.
In the long run, we need a better global financial architecture. In the shorter term, a raft of specific policies could be pursued, hopefully in co-operation with other nations. Firstly, we need better public information.
Companies should be required by law to publish in full their tax payments in every jurisdiction in which they operate, so that individual citizens and voters can see whether those companies are good corporate citizens or scrounging cheats.
Secondly, we need to clamp down on tax havens, especially those in our own back yard, like Jersey and the Isle of Man. If need be, consideration should be given to refusing legal recognition to corporate entities based in tax havens.
Thirdly, we need to move towards international accounting practices that rule out the most shameless examples of financial hocus-pocus such as 'transfer pricing'.
Moreover, we need to clamp down very hard indeed on accounting firms that market the more exotic forms of tax avoidance schemes, by subjecting them to much tougher regulatory legislation. (If a softer approach does not work, then perhaps we should consider legislative measures that could lead to a few senior accounting partners being banged-up for a few years, pour encourager les autres.)
Most of all, democratic states need to take the power back before it's too late.
What this will involve is the reorientation of tax laws so that they take more account of where real economic activity takes place, rather than being too bamboozled by the formal paper structures of imaginary subsidiaries and bogus holding companies.
More aggressive regulation, pursued at a European level, could provide more government income whilst reducing individual tax burdens.
Best of all, perhaps, all those clever and ingenious corporate accountants who spend their working days devising ever more complex ways of defrauding their fellow citizens could instead expend all that ingenuity and intelligence on doing something more productive instead."
Tax evasion by individuals - what's going on?
There is also a debate in the UK about the behaviour of the very rich, many of whom assume 'non-domiciled' status to avoid paying tax. The Conservative party, mindful of the fact that the population is beginning to become a little fractious about the thought of the fabulously rich paying virtually no tax, has recently suggested that foreign 'non-doms' should pay £30,000 towards the running of the country. This suggestion has been espoused by the government, but has caused a heated debate.
The UK position
Here is an explanation of non-domiciled status and its advantages by Wendy Walton, tax partner of accountants BDO Stoy Hayward:
"Many people have come across the concept of domicile when applied in the context of UK tax. The concept is not unusual, indeed, with the recent EU enlargement and the increasingly diverse nature of the UK population, there is a growing number of individuals who could theoretically claim to be non-domiciled for UK tax purposes.
In the majority of circumstances domicile of origin can only be altered via the attainment of a domicile of choice in an alternative jurisdiction. To attain such a domicile of choice, it is necessary to illustrate both actual physical residence in the new jurisdiction plus the intention to remain residing there indefinitely.
Any person resident, but non-domiciled in the UK, has a number of tax advantages. For both income tax and capital gains tax, the remittance basis of assessment is available ensuring that non-UK source income and capital gains can only be liable to UK tax in the event that the funds representing that income or those gains are remitted to the UK. Significant UK tax advantages can be obtained by a UK resident non-domiciliary should they hold funds in a tax-neutral jurisdiction such as Jersey. (Belize, Brecqhou, the Cayman Islands, Luxembourg, Lichtenstein, Bermuda etc etc).
It is necessary for the individual to organise his affairs in a suitable manner to take advantage of the favourable tax treatment. For example, it is often necessary to hold a number of differing bank accounts; an account holding capital derived from, say, an inheritance, capital derived from asset sales at a gain and an income account to receive overseas income (including the interest from the two capital accounts). This ensures that it is clear from which source funds are remitted to the UK.
So it is possible for rich individuals to choose where they are deemed to be domiciled. This may entail a certain amount of inconvenience, because such individuals will need to plan their visits to the UK if their residence is there, but, with good advice, this is little trouble. For example, here is a snippet concerning Lord Ashcroft, significant funder of the Conservative party, worth an estimated £800m. It comes from 'The Guardian' of November 9, 2007:
"After Lord Ashcroft's nomination for a peerage was rejected in 1999 - in part because of his status as a tax exile - Mr Hague wrote to Downing Street demanding a change of heart on the grounds that the businessman intended to become resident in Britain "in order properly to fulfill his responsibilities in the House of Lords".
However in 2004, five years after the assurances were given, Lord Ashcroft's main residence was declared in the House of Lords expenses register to be the central American tax haven of Belize, thousands of miles beyond the reach of HM Revenue and Customs.
A spokesman for Lord Ashcroft, who is estimated to have a personal fortune of around £800m, said he had been registered as residing in Belize because he did not have a main residence in the UK at the time. He denied any suggestion that the peer had reneged on the assurances given before he received his peerage. Lord Ashcroft has repeatedly declined to say where he does reside, however, and it is unclear whether he currently pays a penny in UK income tax."
Other countries practices
United States
US citizens and Lawful Permanent Residents (usually Green Card Holders) are subject to US tax on worldwide income no matter where they reside, so even after leaving the US, a US citizen or Lawful Permanent Resident will be required to continue filing US tax returns. This can lead to the potential for double taxation so US tax law allows certain exclusions and foreign tax credits to help the US taxpayer avoid double taxation. If a US taxpayer resides in a country where there is no tax or low tax, US tax could still be due. In short, if you haven't paid tax in the host location, the US could tax you on the income.
Germany
Avoidance of Taxation in Germany of Offshore Profits
According to the "Welteinkommensprinzip" (principle of income-source neutrality), all income of a German taxpayer is liable to German income tax. For this reason, an offshore company only makes sense if foreign income is either reinvested in the foreign country so that it does not flow to Germany or is exempt from German taxation under a double taxation treaty. This is rarely the case with pure tax havens, as Germany does not normally enter into double taxation treaties with tax havens.
To bring the news more up-to-date, the German government has just cracked down on tax-avoiders with secret accounts in the Principality of Lichtenstein, where Crown Prince Alois is "Lichtenstein's ultimate law enforcer and runs its most powerful bank". Here is an excerpt from 'The Observer' of 02.03.08: " In 2002, a data archivist working for LGT, a vastly profitable private bank with 77,000 account holders and controlled by the Crown Prince of Lichtenstein, stole from under the noses of his bosses a CD-Rom containing the names of more than 1250 super-rich customers.
In 2006, he (the thief Heinrich Kieber) touted the data to the UK Inland Revenue. Strangely, it refused to buy the information. (our italics).
But last June, the German Secret Service paid 4.2m Euros for the discs. The information was shared with US authorities. Seven months later, German investigators made their first move with the arrest of one of the country's most prominent businessmen. There will be many more". "......As investigators trawl through 1,250 names with a collective fortune in the tens of billions, London bankers fear being drawn into criminal proceedings, not surprisingly given the regularity with which English accents are heard on the streets of Vaduz. Among the 100 alleged British tax evaders are those with 'sensitive political connections', say sources close to senior figures connected to the investigation".
OECD view
Angel Gurria, secretary-general of the OECD, said last week (end of February 2008): "Jurisdictions characterised by strict bank secrecy and a policy or practice of non-co-operation with law enforcement in other countries prosper by attracting brass plate banks , anonymous financial companies and asset protection trusts. But they do so to the detriment of the integrity of the world financial system and such behaviour is no longer acceptable".
What are the economic and competitive issues for the UK?
It would appear that the UK position is more lax than that of two other major economies. Supporters of this position argue that the UK economy will suffer great damage if rich non-doms and foreign nationals are not allowed tax beneficial or tax-free status. Here is a piece from the Observer, readers will notice that Lord Digby Jones has added his voice to those of the City and CBI which are horrified at the idea of foreign nationals and non-doms paying tax.
"It took Conservative shadow Chancellor George Osborne's out-maneuvering of Brown to force Labour's hand. For six years, the Treasury claimed it was reviewing the tax, but no conclusions were ever published. And then as Brown dithered about whether to hold an election last autumn, Osborne announced that the Tories, if elected, would force non-doms to pay a £25,000 registration fee. This would enable him to pay for the lifting of inheritance tax thresholds. It was a political masterstroke and Labour had only one answer: steal the idea.
Six days later, Darling did just that. In so doing, he has unleashed the biggest mobilisation of the business lobby in 10 years. Over the past month, the Treasury has firmed up its proposals. As the financial community grasped the full implications, the CBI, the Corporation of London, London First - the capital's inward investment agency - senior bankers, the British Venture Capital Association and even the government's own trade minister, Lord Digby Jones of Birmingham, united to condemn the government's proposals. They argued that they would lead to an exodus of highly skilled City workers. At stake, they claim, is the future of the City, which contributes billions of pounds to Britain's economy".
(The estimated losses to the UK Exchequer from corporate and individual tax avoidance are somewhere between £25 and £45 billion per annum).
The average citizen might feel that there is a certain amount of special pleading here. For them, and for those of a more skeptical nature, here is another view, again from Richard Murphy of Tax Research UK, concerning the threat that there will be a substantial outflow of talent and capital from the UK if foreign nationals are taxed:
"So, the question of whether some will leave is not the right one. What we need to ask is whether those who are leaving are doing so for this reason, and if just 4.5% of all non doms plan to go soon because of this I'd suggest that given that this is just 1 in 22 of them; that's probably less than the normal attrition rate and so no cause for alarm.
Then there's the obverse question. Will the non-doms stop coming? Some will. Absolutely certainly. But let's be clear, have we ever wanted to attract business to the UK that is so marginal it needs a tax subsidy to lure it to our shores? Because that is what this really means. Some people who would come here with a tax subsidy (and the effect of not paying full rate tax is exactly the same as getting a tax subsidy) won't come because of the change. And quite probably that's a good thing, I reckon. I don't want people here whose only reason for choosing is to secure a tax benefit. I want them to come to add value, not detract from it.
More than that though, tax subsidies are wholly misplaced when there is no need to subsidise the activity at which they are directed. Financial services and the South East of England are making the biggest fuss about the loss of this subsidy from the domicile rule. But in practice financial services are growing rapidly and ate highly profitable: it appears to have no need for a subsidy at all. The South East of England has an over-heated economy. It likewise appears to have no need for a subsidy. Losing some new entrants into both of these overheated sectors may be of benefit to our economy".
So, what might we conclude about the UK position?
It seems to us that there are several issues that shed pretty unfavourable light on the integrity and ethical standards of senior UK politicians, business and the prevailing culture of materialistic individualism that has infected large parts of our society:
- Political parties have become beholden to the very rich for their incomes. Some of the people that support them have been proven to have very dubious histories of tax avoidance and even legal malpractice.
- London has become a haven for the very rich. This has skewed the economic and social life of the capital, making life very difficult for ordinary citizens to live there, and pulled resources and vitality from the rest of the country.
- Senior business, political and financial figures obviously believe that it is right for the very rich to avoid paying tax - this speaks ill of their moral compasses and gives strong message to the rest of society. One of the most vociferous voices against taxing the very rich is Lord Digby Jones, well known for his previous role as the shop steward for business, who appears to be extending his advocacy on behalf of the rich and powerful from the position of a government minister.
- Given this, why should not ordinary citizens also do their best to be tax-evaders? Why should they bother about making a legitimate contribution towards the maintenance of a healthy society if the rich are not willing to?
- The UK is now one of the most unequal developed nations. This inequality of wealth and opportunity is acknowledged by researchers and government to be a terrible cancer in the bowels of society, destroying cohesion and social capital. Many other countries have better, more balanced economies and far healthier societies with superior education, health and employment opportunities - in short, they are better societies for the bulk of their citizens. And these citizens pay more tax to support this state of affairs. The fact that a significant portion of the wealthy do not contribute adequately towards a healthy society incurs far more cost in terms of lost skills, bad health, education and high crime than their contributions to the economy.1
Last, and by no means least, if the UK economy has become so dependent on industries that employ very large numbers of non-dom workers, what has happened to the country? And the fact is that Britain is now felt to be in thrall to the London financial markets, owned by non-domiciled companies and staffed by many foreign specialists. Bit by bit, the UK economy has been taken over by foreign competitors, to the point that there are few British high knowledge, high technology large companies left. This is not a xenophobic point; it simply reflects an inherent weakness in indigenous enterprise, the sad decline of UK industry and the misbegotten policies of successive governments.
The fact is, if the UK had a balanced economy, with sensible support for technology, manufacturing, creative design, media, services and retailing industries, we could simply ignore the blatant bullying of a minority of financial speculators whose activities have probably caused more harm than good to the rest of the economy. Some day we will have to bite the bullet and take action to properly regulate and harness the investment banking industries, it would seem that now is a good time, at the point that public awareness of the evils caused by these industries is at a relatively high pitch. A government with sense and 'bottle' would start a campaign of public education about economic common sense now.
Our Last Word - tax avoidance is immoral
It is quite clear to us that tax avoidance is immoral. It is avoidance of proper dues to society. It places greater burdens on the less well-off, and denies our polity funds that could be a contribution towards creating a healthier community. Internationally, it drains resources that could be better spent on helping the poor. This view is supported by a phalanx of philosophers and most major religions. The fact that people in positions of responsibility feel able to argue against the rich paying tax is to us a pretty fair indication of how badly they have mislaid their moral compasses.
1. See Markets, men and morals and The importance of Social Capital
