What are the arguments for and against tax avoidance?


William Hague, erstwhile Conservative leader, and beneficiary of the banking and finance industries, 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 banks, the very rich and 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 down to the poorer elements of society.

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 the role of the state should be very limited and a very small state is essential to freedom. Therefore low taxes are good.

We have seen this thinking put into action in the US and more recently in Britain. The instinctive reaction of the Bush administration to any economic problem was to cut taxes, especially those of the rich. In Britain, the very notion of increasing taxation to reduce rampant inequality and further the interests of the poorer sections of society causes hysteria in the powerful right wing press, 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:

Free-marketeers' hero Adam Smith favoured progressive taxation

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.
How do 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.
The combination of tax havens and transfer pricing allows large multinational corporations to set their tax rates more or less at will.

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.

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?

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.

Take the case of 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."

OECD view

Angel Gurria, secretary-general of the OECD, said at the 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".

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, banks, big companies and the prevailing culture of materialistic individualism that has infected large parts of our society:

Last word - Britain is wasted by non contributing wealth

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 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 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.

How free market economies got it wrong - and what to do about it
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