Tuesday, 10 April 2012

Taxes, and the impoverishment of the Left

Today George Osborne has expressed his incredulity that some of the richest people in our society pay the least tax. This once again brings to the fore the idea of avoidance and evasion, a difference which even the excellent Richard Murphy was not entirely clear about on the Moral Maze last month.

Let’s get a few of the more dogmatic points out of the way first. Taxation is not theft, it is a charge levied for services rendered. Some of these services are tangible, like schools, hospitals and police. Some are more abstract, like the benefit from living in a peaceful and relatively harmonious society. While the poorest might well be more dependent upon the more obvious state services, interestingly the richer you are the more you benefit from the abstract ideas. After all, property rights give the greatest benefit to those with the most property. Being able to run your business without having to bribe petty officials, sending your kids to school without armed bodyguards, knowing that contracts will be honoured, all these benefit the businessman as much as the benefit claimant. Further, there is no Iron Curtain around Britain. The government has only just started keeping a register of those emigrating. If you no longer wish to avail yourself of these services, you can leave. If you stay, you’ve agreed to the social contract, and dodging it is free-riding.

Which brings us to the age old question, what counts as dodging? We’ve all spent the last few weeks bombarded with adverts not to miss the ‘ISA deadline’ of May 5th, a move whose sole objective is to avoid tax on savings. Anyone with a spare £5,340 to hand can have a bit of extra help courtesy of the exchequer (as someone operating in a permanent overdraft I don’t have to deal with such annoyances). From tax relief on pensions, to capital gains to running your money through Guernsey there are a plethora of ways to lower what you pay to HMRC. And they are perfectly legitimate. Indeed, the problem isn’t that this isn’t done too much, it’s that it’s not done enough.

Before they come to take me away for counter-revolutionary activity let me explain. Few ordinary people are aware of the allowances, benefits and reliefs they are entitled to by law. Indeed, £16 billion goes unclaimed each year just in means tested benefits. By comparison benefit fraud is estimated at less than £1 billion per year. Most of the advantages of our complicated tax code are taken by those with the time and financial acumen to find them or, more often, the money to pay someone else to find them. Indeed, the government’s accounts seem predicated on the notion that most of us will not take full advantage of the amount we are entitled to. Working some of the longest hours in Europe, most of us lack the time to scour DirectGov and fill in the forms for the chance of a couple of extra quid. This mixture of ignorance and inertia, which the government is entirely complicit in, is effectively providing a subsidy to the rich and financially literate, who know how to game the system. Notice how those adverts reminding you to claim your tax credits have disappeared? Thank you Mr Maude. Legal tax avoidance is estimated to cost the UK economy over £25 billion a year. The additional cost of thousands of clever and talented people spending their efforts on elaborate Easter-egg hunts as opposed to making things remain uncalculated. The scandal isn’t that clever people dodge, it is that the law allows them to do so.

The usual response has been an appeal to morality, the ‘spirit’ of the law. “We have a lower capital gains rate to encourage investment, please don’t funnel your income through your company and pay it as a dividend,” or, “We don’t want to bankrupt family farms but please don’t graze a few sheep in your garden to dodge inheritance tax.” This is a total abdication of responsibility. After all, the whole reason we have taxation in the first place is because people by and large don’t cough up if they don’t have to. By making payments voluntary, you are in effect taxing duty. Those who follow the spirit of the law will pay more than those that follow the letter. The good will pay more than the bad. That would appear to be a flaw in the system. As I’ve said before, charity is bunkum because it allows bad people to get the benefits of society without the costs.

If everyone claimed everything they were entitled to budgetary pressure would compel the government to change this situation. Transparency is good, as is simplicity. If reliefs, grants and exemptions are necessary let them be in the spotlight, not buried where only the potholers of KPMG can find them. Long term moves towards simplification of the tax code are welcome. It is the same argument for energy tariffs, mortgages and all the other expenses and financial instruments that dominate our wallets while boggling our minds. In the meantime, there are a couple of things which could be done.

First, ensure everyone you know, particularly those in vulnerable positions, claim what they’re entitled to. It’s their money, they earnt it. Older people in particular in my experience often forgo assistance because they view it as charity, or too intimidating to claim. Fill in the forms for them, Big Society and all that. The big Trade Unions already do this for their members. This will force the government to sharpen the dividing line between avoision and evasion.

Second, the point is often made that no matter how clever the government and HMRC are, the big consultancies and tax law firms find ways around them. The current game is rigged, we need to change the odds. The answer is not to fight the vast financial and legal industry of Britain, but to get it to fight itself. I would propose that any person or company which submitted evidence leading to a successful prosecution for tax evasion be entitled to a percentage of the capital recovered. The bigger the scheme, the bigger the incentive will be for someone to just turn you in. When I mentioned my idea to a friend at Price Waterhouse Coopers she replied, “The partners would turn over the accounts and retire tomorrow”. Will Barclays trust the Deloitte junior exec on 30k to read through a murky £100 million scheme knowing he can send the files to HMRC and pocket a fortune?

It is not hypocritical for a socialist to use the tools of a capitalist society. Similarly, the sack-cloth and ashes routine is unnecessary. Erstwhile left-wingers are not ideologically compelled to be ‘better’ people. Robert Tressell answered this point over a century ago, pointing out it was not that employers, companies or wealthy individuals were bad, but that the system encouraged, and often obligated, them to do bad things. The point is to change the system. The notion that it is an individual’s duty to be a light in the darkness, to follow a fixed code of absolute goodness regardless of the social setting does not come from the Left, it comes from the carpenter whose death just gave you a long weekend. But even he didn’t tell you to give more to Caesar than required.

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