Friday, 22 June 2012

The great tax dodge

David Cameron's comments on Jimmy Carr are problematic for two reasons, over and above the charge of hypocrisy. First, they focus the issue of tax avoidance on individuals, and specifically rich celebrities. Second, they suggest that tax avoidance is a moral issue. Both are misleading.

We haven't yet got to the point where the use of a tax avoidance scheme is seen as a must-have celebrity accoutrement, but we're not far off it. Having sat in on a pitch a few years ago by someone flogging the latest in a long line of UK film investment schemes (my presence was an oversight), I can vouch that the high-net-worth-individuals who are the target for this tax dodge get a hard-on simply at the thought that they could be "playas".

The humdrum reality is that the most egregious tax dodging (i.e. avoidance and evasion as a percentage of the potential take) is undertaken by big business. This reflects the fact that they have a lot of opportunity, dedicated corporate tax lawyers, and leverage with governments. The significance of the "deals" done by HMRC with the likes of Vodafone and Goldman Sachs was not the suggestion of corruption or leniency but the fact that big business considers its tax payments to be a matter for negotiation. HMRC colludes with this, partly because it lacks the resources to vigorously pursue maximum tax receipts, and is consequently happy to settle for half a loaf. Compare and contrast its diligence in respect of VAT fiddles.

The super-rich are certainly no slouches when it comes to tax dodging, as Philip Green and others have shown, however their unwillingness to pay tax is nothing new. What is relatively new is the wider collapse in tax morale over the last 30 years. Avoidance has spread from an elite to a large swath of the professional middle class, driven in part by privatisation and the growth in self-employment. Outsourcing and casualisation have depressed incomes for the working class. For the middle class, they have allowed incomes to be maintained (and even grown) by translating the reduction in employer costs into reduced tax revenue. Even those nice doctors are at it.

A number of right-wing commentators have already chided Cameron for introducing morality into the discussion. This is partly an ideological distaste for government commenting on private behaviour, but it is also a desire to advance the merits of a flat-tax, which would supposedly reduce the incentive for avoidance. In practice, a flat-tax is a form of avoidance in that it shifts the burden from the wealthy to the poor. It's worth remembering what "avoidance" means. If one group in society avoids tax, rates are simply increased elsewhere to make up the difference. The government still needs to achieve a set level of revenue to pay its bills. If you dodge the bullet, someone else ends up getting shot. This inevitably biases collection towards those taxes that are harder to avoid, such as VAT and excise, which means the tax burden disproportionately falls on the poorest, i.e. those with the least ability to avoid tax or to negotiate rebates with government.

The real reason why morality is not the issue is because tax avoidance is primarily the consequence of the policies of the state, not the behaviour of the individual. Evasion is an issue of public morality because you are breaking a law that encodes society's view on what is good and bad. Avoidance breaks no laws, rather it takes advantage of the system for private benefit. Tax avoidance is therefore a form of privilege. Jimmy Carr cannot have been unaware of that.

The history of tax is obviously political. The choices of what to tax reflect class interests. Up until the 17th century tax was applied arbitrarily and collected haphazardly. Its control by the Crown, and the frequent abuses occasioned by tax-farming (the privatisation of tax collection in return for an up-front fee), were factors in the buildup to the Civil War. The formation of the Inland Revenue in 1665 and the institution of a proper land tax in 1692 were key victories for the Parliamentary/Whig cause.

The increasing use of customs and excise to raise revenue thereafter, as well as more imaginative schemes such as the window tax, marked a reaction by the landed interest to push the tax burden onto the bourgeoisie. The prevalence of smuggling in the 18th century reflected the growth of these revenue streams, while the romantic celebration of smugglers reflected the unpopularity of what was seen as a drag on trade. It also led to that unfortunate business in Boston harbour.

The introduction of income tax during the Napoleonic Wars was essentially an uneasy truce between Whig and Tory. Neither liked it, but the alternative was an increase in tax on either trade or land. In the modern era, the free-trade influence of the EEC/EU and the WTO has led to further reductions in tariffs, while land tax disappeared altogether in 1963. We now predominantly rely on consumption taxes (i.e. VAT and various excise duties) and income tax (including national insurance). The former is regressive and hard to avoid. The latter is usually progressive but relatively easy to avoid, to a degree

Probably the biggest change in our policies on tax however has been development of the offshore tax industry since the 1970s. Though this operates through tax havens such as the Channel Isles and Bermuda, the heart of the operation is London. Successive UK governments have supported and privileged it as part of the Faustian pact with The City. The real hypocrisy of Cameron is not that he isn't criticising Tory-voting Gary Barlow, or even that his own father exploited offshore tax havens, but that he is the Prime Minister of a tax haven himself.

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