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Saturday 21 February 2015

How To Stop 'Aggressive' Tax Avoidance? A Simpler, Flatter Tax System

More than a week after revelations about HSBC's part in aggressive tax avoidance - and outright evasion - the issue has continued to dominate the news headlines.  Ed Miliband, leader of the Labour party, has promised a comprehensive review of HMRC practices, and a crackdown on tax evasion and aggressive avoidance if he becomes Britain's next Prime Minister.  I won't delve again into the difference between evasion and avoidance, and the wrongs and rights of tax avoidance, which The Economic View has already covered (http://theeconomicview.blogspot.co.uk/2015/02/tax-avoidance-is-not-wrong-its-legal.html), but the case does need to be made for a simpler, flatter tax system.  If politicians really want to stop the possibility of 'aggressive' tax avoidance, then this is the only way to go.


The reason that 'aggressive' tax avoidance is possible in the first place is because of the complexity of the British tax code.  It runs at over 17,000 pages and contains a multiplicity of loopholes, exemptions and incentives that, collectively, mean clever accountants can always find innovative ways of minimising - within the law - the tax liabilities of wealthy individuals and multi-national corporations.  Complications to the tax code originally designed to incentivise investment in the British film industry, for example, have often been featured in the news for, contrary to their original purpose, allowing wealthy celebrities to avoid tax.  In a tax system so complicated and elaborate, companies and individuals - and their well-paid accountants - will always find smart ways to reclassify and shift income around to avoid tax.  


A simpler, flatter system of taxation is the answer.  With a simpler system of flatter taxes, the opportunity to cleverly avoid tax almost completely disappears.  Deferring or reclassifying income would no longer be worth it.  Shifting income, taking advantage of loopholes and exemptions; none of this would be possible.  Realistically, a move to a simpler tax regime is the only way to ensure that companies and individuals pay the amount of tax intended by government, as such a system does not give rise to the opportunity of doing otherwise.  The only alternative to this is for politicians to retain the current system, but continue to preach the moral necessity for big corporations to pay their 'fair share'.  But hoping that companies will voluntarily pay anymore than the minimum amount of tax they are legally required to pay is unreasonable and futile.  The only way that we can get these aggressive avoiders to pay more tax is to reform the system, and thus change the incentives. 

Crucially, Labour and the left must realise that they cannot have both a redistributive, very progressive, complicated tax system that is also efficient.  As in all of economics, there is a trade-off between the two.  But, if politicians are really serious about 'cracking down' on aggressive avoidance and making sure that large companies and rich individuals pay more tax, then they must change the laws and reform the system.  We can't expect people to pay more tax than they have to - almost nobody voluntarily sends more money to HMRC than required - so instead the incentives must be changed, and we must move to a simpler, flatter tax system.

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