The Morality of Tax Avoidance

Tax

There’s an interesting scuffle about tax going on in the British media at the moment – and it seems that the Government is in danger of being responsible for companies contravening the Companies Act which was rewritten in 2006.

This scuffle started a few months ago with the ‘outing’ of various individuals who were apparently using legal tax avoidance schemes to reduce their tax burden. The newspapers – always looking for some dirt to dig up – leapt on this with joy and the resulting public furore caused a number of wealthy people to apologise publicly for avoiding tax, even though the schemes were legal, and in many cases volunteer to pay more tax.

Secure in the knowledge that a significant part of the British public supported this crackdown on the dastardly villains that were exercising their rights to legally reduce their tax bill, the next step was to take on corporations – and the multinationals were an obvious target: nasty foreign companies taking advantage of making huge profits through the sweat of the (implied: underpaid) British worker, but not paying tax on the proceeds. It’s easy for the press to whip up public support for calls that they pay more tax and for the politicians, ever ready to back a cause that would seem to be a vote-catcher, joined in. In essence, these multinationals were being blamed for cuts in welfare and other government services, completely ignoring the fact of profligate government over-spending for years, if not decades.

What has been completely overlooked in all of this self-righteous posturing (and let’s ignore the ongoing issues with MPs and their expenses) are a few important points:

  • First and foremost, every company’s directors have a fiduciary duty – as laid down in the Companies Act – to “promote the success of the company.” By volunteering to pay more tax than is legally required these boards would act in contravention of the Companies Act and, in fact, directors could therefore be disbarred from serving on boards. Even by the admission of the government, these companies are not engaged in tax evasion (that’s illegal) but are structuring their affairs to minimise tax paid, an activity that is not only legal but necessary in terms of the Companies Act. So the government is encouraging directors to act in contravention of its own laws.
  • E.U. legislation requires there be a single legal head-office for companies operating throughout the region, and companies will obviously look to put this in the country/city that makes the most financial sense overall – tax, employment, etc. So, countries that are competitive in these areas will derive most benefit, while those with higher operating/tax costs will not. That’s called free-market enterprise.
  • The UK tax system is now arguably the most complex of any, having more than doubled in size under Labour from under 5000 pages in 1997, to over 11500 pages in 2009. Such complexity will always result in loopholes being found – a simpler code means more tax, more fairly applied. What about simply imposing a flat tax system – this generally means more tax collected at a fraction of the cost?
  • Figures published early this year showed that some 52% of the working populace in the UK are employed by the State. This means that less than half the workforce is not only supporting those not working, but this massive and grossly inefficient (it must be at this ratio!) government machine, too. The issue, therefore, should not be more tax income, but less expenditure.

But, of course, common sense flies out of the window when it comes to politics.

Our revered “public servants” in the current government recognise that the wealthy, and the captains of industry are unlikely to switch their vote to Labour and by appealing to an increasingly vociferous “mob” they might garner enough votes to remain in power after the 2015 elections. Even if this means abandoning previously-held principles and, in fact, common sense, as by taking this tack they risk chasing even more companies and wealthy individuals to more favourable business climes.

Bear in mind that the top 1% of British earners pay almost 30% of all income tax (more than twice their proportion of earnings), and the top 10% pay almost 60% of all income tax. As these are typically the business owners / leaders – and therefore the employers – encouraging them to move will not only reduce the tax receipts from these critical contributors, but put overall employment at risk, too, threatening the health of the country as a whole.

It’s time for that most uncommon of things – common sense – to start playing a part in the UK; for people to realise that the government doesn’t have money and everyone needs to play their part in the economy and life of the country; for politicians to  stop trying to buy votes with short-term moves that will cost the country dearly in the longer term; and for the media to present a more balanced approach to matters and to actively seek to lift the country out of its current mess by encouraging everyone to work together for the good of all.

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2 responses to “The Morality of Tax Avoidance

  1. It’s an irony that Britain embraced austerity instead of following the advice of its own economic giants, John Maynard Keynes, John Hicks, and others.

    Britain was just starting to recover from the global financial crisis when its new leaders forced it back into recession with enormous cuts to the public sector.

    Neither this post nor the articles you mention in the press would have been written if they hadn’t gone against Keynes and put Britain back in recession.

    • Thanks Catarina. Not sure I agree in this case, though – Keynes’ theories work well for general ebb and flow in economies. What happened here has been a perfect storm: massive overspending by government over many years, coupled with massive private debt and a housing bubble. Then along came the global economic collapse.

      The government simply has to cut its spending dramatically (more than half the workforce was employed by the state – unsustainable!), and people had to reduce their debt, too. Private sector debt reduction was also unavoidable due to years of cheap, excessive bank credit and needed to be brought down before interest rates could rise.

      There has been a level of government spend on infrastructure (“Quantitative Easing”) but this has to be balanced with overall expenditure so that the country does not find itself in a debt-default position, as Greece has, which would have been the most likely outcome from a strict following of Keynes’ principles, given the level of public debt that already existed by 2010.

      Had the UK downturn happened in isolation, the current policies would have yielded much quicker and more positive results, but the fact that the economic crisis has been global in nature, compounded by Eurozone countries like Greece, Ireland, Spain and Italy having unsustainable levels of debt and requiring significant write-downs (read: losses) has made the situation far worse.

      I believe that the policy of reducing Government expenditure is really the only way out for the British Government: it simply cannot afford to raise its debt levels further as to do so would risk it moving into a “Greek” scenario and the world could not support that.

      Sometimes the bad-tasting medicine is the best cure.

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