Monday, July 23, 2012

Dodging tax: a £13 trillion issue

If avoidance is legal, how can it be wrong?
There is an important legal distinction between tax evasion and tax avoidance. The former means practices that reduce the tax one contributes and which are actually illegal; the latter means practices that reduce the tax one contributes, which are technically legal, but morally dubious, even repulsive. There is an important moral distinction between tax avoidance and proper use of provisions within tax law that attempt to make tax fairer. It is important to keep these distinctions clear.

Some question whether this latter distinction is meaningful. Mitt Romney, for instance, insists that he has paid every cent that he is legally obliged to pay, and not a cent more. This is a common refrain from very rich individuals and massive corporations. Their claims amounts to: I have not broken the law of the land. That may well be a true claim, but it is not the point of the accusation that one has engaged in morally repugnant, even if technically legal, tax avoidance.

Such a legally watertight claim has a certain intuitive ring to it. Why would I not claim deductions for which the law has made provision? Presumably, such provisions were made in order to avoid a potential injustice from which I might otherwise suffer and so my use of them could even be argued to be a moral good, allowing me to dispose of my income to bless others in ways the government could not dream of and for which the government has already planned ahead of time. And put this way, I agree, such moves can indeed be a blessing.

But that there exists legitimate use does not ensure that no abuse is possible. Alcohol has a legitimate use as a good blessing of God, yet there is such a thing as getting drunk. And while the state may legitimately take interest in placing limits of certain forms of drunkenness (such as driving a vehicle while having a blood alcohol limit above a given determinate figure), it will not necessarily legislate against getting drunk and then making a fool of oneself or being rude and obnoxious to one's family while intoxicated. So we can affirm legitimate use while noting illegal extremes and yet still desire to speak of legal - yet morally dubious, even repulsive - drunkenness.

And as with drunkenness, it is not always easy to pick the precise point where a cheery dram with companions becomes drunken offensiveness, and the distinction may not even always be purely a matter of quantity. But when inebriated revellers stagger down the street at three in the morning yelling abuse at each other and waking everyone within earshot (to pick a hypothetical example), then it doesn't take a finely tuned moral compass to determine something is awry.

Likewise, when an individual or corporation is hiding sums larger than most people will make in a lifetime from the taxman's view by pretending to have some business connexion to a microstate whose primary export is being a known tax haven, then speaking of such practices in a very different moral tone to the teacher who claims a deduction for the purchase classroom materials is no great leap of moral imagination.

And when it is revealed that it is likely that at least £13,000,000,000,000 is hidden in such havens (or more than the combined GDP of Japan and the USA), then moral outrage from the teacher who faces worsening conditions due to budget constraints is neither illogical nor untoward.

Someone who said because the law is not interested in the difference between a relaxed pint over dinner and passing out in a pool of one's own vomitus therefore there is no relevant moral distinction to be drawn would be gently reminded that the point of political authority is not to legislate every morally relevant occasion. Neither should we have any qualms about being willing to distinguish between legitimate tax deductions and the egregious abuse of legal loopholes to avoid sharing the burden and privilege of serving the common good through contributing one's fair share.

24 comments:

byron smith said...

And this amounts to "look over there!". Corporate tax avoidance in the UK is estimated to run to something like £80 billion and they're going after plumbers exploiting a cash economy to catch £500 million? Sure, chase the plumbers, but keep things in perspective.

byron smith said...

US company that paid zero tax (in fact -0.2%) over the last four years nonetheless testified to Congress that it faced a competitive disadvantage because taxes are too high.

byron smith said...

Grist: Review of The Queen of Versailles.

byron smith said...

(Slightly off topic, but concerning the recent storm in a tea cup over some remarks by Obama, a business owner decided to controvert his claims. Oops.)

byron smith said...

DSB: The Delaware loophole. "More than 900,000 business entities choose Delaware as a location to incorporate," explained another report. "The number…exceeds Delaware's human population of 850,000."

byron smith said...

Some independent tax analysis of what is known of Romney's accounts, distinguishing the real issues from the red herrings.

byron smith said...

Guardian: Italy's tax hunters target super-rich and their yachts off the Sardinian cost.

""We are in a state of war" against tax evasion, Monti warned on Friday."

byron smith said...

Guardian: Details of Romney's finances published.

byron smith said...

MHS: How long will we humour the church of Apple? Includes mention of Apple's tax-dodging amongst various other issues.

byron smith said...

Joseph Stiglitz: Tax avoidance weakens the bonds of society.

"Democracies rely on a spirit of trust and co-operation in paying taxes. If every individual devoted as much energy and resources as the rich do to avoiding their fair share of taxes, the tax system either would collapse, or would have to be replaced by a far more intrusive and coercive scheme. Both alternatives are unacceptable."

byron smith said...

The Conversation: Debunking the myth of our well regulated banks.

"Our" = Australian.

byron smith said...

While the US income tax is progressive (like that of most mature economies, including the UK and Oz), a study from a few months ago showed that when all other taxes are included, US taxation as a whole becomes basically a flat tax across all income groups, with somewhat lower figures for the very poor. Although not included in this link, the über-rich (top 0.1 or 0.01%) also pay considerably lower rates due to the effect of having the vast majority of their "income" from capital gains.

The reason for this is that while federal income tax is progressive, many other taxes are quite significantly regressive, especially all State taxes (some states are much worse than others).

See also here for many more useful stats about US taxation

byron smith said...

And another link on the same topic, which points out that income tax only accounts for 27% of total government revenue collected in the US.

byron smith said...

Some more stats and graphs from Ezra Klein debunking Romney's idea of a "taker class".

byron smith said...

Monbiot: Romnesia, when the wealthy forget where their wealth actually came from and they buy into a ideology to justify their rent seeking.

byron smith said...

Rolling Stone: Mitt Romney's tax dodge. "A guide to how the multimillionaire twists the law to hide his massive fortune - and avoid paying his fair share in taxes"

byron smith said...

Seamus Milne: A roll call of corporate rogues who are milking the country.

"It's not as if there aren't any number of measures that would plug the loopholes and slash tax avoidance and evasion. They include a general anti-avoidance principle (of the kind the Labour MP Michael Meacher has been pushing in a private member's bill) that would outlaw any transaction whose primary purpose was avoidance rather than economic; minimum tax (backed even by the Conservative Elphicke); and country-by-country financial reporting, and unitary taxation, to expose transfer pricing and limit profit-siphoning.

"The latter would work better with international agreement. But there is already majority support in the European Union, and it is governments in countries such as Britain – where the City is itself a tax haven – that are resisting reform. When you realise how closely the tax avoidance industry is tied up with government and drawing up tax law, that's perhaps not so surprising."

byron smith said...

Guardian: Top companies grilled over tax evasion and here.

"We're not accusing you of being illegal, we are accusing you of being immoral," replied Hodge.

Precisely.

byron smith said...

Polly Toynbee: Forget Bermuda - UK tax havens are closer to home.

byron smith said...

Guardian: Investigation into sham offshore companies.

byron smith said...

Grist: Shell's rig ran aground in Alaska because the company was trying to avoid taxes.

byron smith said...

Guardian: Tax avoidance dwarfs welfare fraud in the UK.

byron smith said...

Guardian: All but two of the largest 100 companies in the UK have subsidiaries in tax havesn.

byron smith said...

Guardian: An amnesty for tax evasion. Not avoidance, evasion.