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.
With revelations today about HSBC's part in helping the rich avoid (and possibly evade) tax, the blogosphere has become clogged with high-minded moralising over the wrongness and immorality of tax avoidance more generally. In recent times, companies like Starbucks and Amazon have been vilified for 'aggressive' tax avoidance, despite avoiding tax being perfectly legal and within the bounds of the law. The distinction between tax avoidance and tax evasion is important. Recently, the line between the two has become blurred as people have condemned both, often without realising the difference.
Tax evasion is illegal and clearly wrong. There is not any disagreement about this. Companies or individuals found to be breaking laws with regard to their tax liabilities should be made to pay the entire amount originally required (as well as any compensation that may be warranted), and the full extent of the law should be pursued.
Tax avoidance, however, is perfectly legal, and it is here where The Economic View has concerns over the aforementioned recent 'high-minded moralising'. It is also too easy to criticise and condemn companies for avoiding tax, complaining of the wrongness morally of doing so. But, if a company is complying with all laws, then what is the right amount of tax to pay, if not the current amount? What is the moral amount of tax to pay? Much of the discussion around these issues is very generalised and vague about the wrongs of Amazon or Starbucks or whoever paying a certain amount of tax deemed 'too low'. But, if it is within the bounds of the law, then what is wrong? What amount should they pay instead?
As any tax accountant will tell you, there are a million different ways for individuals or companies to manage their tax affairs. Tax liabilities can be structured in an infinite number of different ways, varying in efficiency and the amount of tax paid. Who is to say which of these infinite number of different tax structures is more moral, or 'better' than any other, if they are all legal?
Lastly, while it is easy to condemn companies for tax avoidance, who among us does not avoid tax? The Economic View certainly does not know anybody who voluntarily pays any more tax than is legally required, yet this is not seen as wrong. Many people will buy things in duty free while going on holiday each year, avoiding VAT, yet this is seen as permissible.
While it is all too easy to moralise about the wrongs of tax avoidance and evasion vaguely and generally, specificity is needed as to whether the activity in question is legal or illegal. Clearly, illegal tax evasion is wrong, but what about legal tax avoidance? It is unfair to expect companies, or individuals, to pay anything more than the minimum amount required by law. If we want rich individuals and large multi-national companies to pay more tax, we need to change the laws to force them to do so.
