Tax – What is it good for?

No Taxation
Rock & Roll!!!

Since the credit crunch there has been a lot of talk of tax avoidance and recently it was “revealed” that paid no corporation tax on profits from UK sales of more than £3bn. People are outraged and questions are raised in the House. But hang on, we all avoid tax. I do, I avoid it any chance I get. I try to put my savings into an ISA each year, I have given up smoking and I am deterred from driving because the bloody fuel is so expensive and that’s because of tax.

On BBC Radio 4’s New Quiz today, comedian Andrew Maxwell said that, in an effort to avoid tax, Rock and Roll cliches U2 are now all classed as Dutchman and their guitarist (“The Edge” as he ludicrously calls himself) was quoted as saying “Who wouldn’t want to be more tax efficient?” – As Mr. Maxwell commented: “Yeh!! Rock and Roll!!!” – Everybody’s at it. Bankers, corporations, rock stars, me and you. So what is the problem?

There is a problem because if too much tax is avoided then the chancellor wont be able to finance all the spending. Somebody has to pay for the roads, hospitals and the Queen’s corgis.

One aspect of tax avoidance that annoys most of us is when large corporations, which have extensive business in the UK, fail to pay significant tax and I have blogged before about how this is enabled by tax havens such as the Caymen Islands.

But you can’t blame Johnny Foreigner for this sort of thing. The British are not averse to maintaining tax havens in Guernsey and The Isle of Man. In addition a recent article in The Economist made the point that the UK is one of the few countries which still allows “bearer bonds” which differ from normal investments bonds in that they are unregistered and untraceable. This is the toffs equivalent of paying the plumber in cash, only on a massively bigger scale.

Window Tax
Tax Avoidance?

Tax systems vary across the world. Some developing countries do not have a civil service reliable enough to collect tax from individuals and so most tax is derived from large international corporations but this is a practical decision not a moral one. Kings and governments have always based tax policy on what will generate income and on what they think they can get away with. In the 18th and 19th centuries England, France and Scotland taxed the number of windows in a house and in order to avoid this tax some owners bricked-up their windows. This was tax avoidance. Should the government have insisted that individuals maintain a minimum number of windows in their buildings?

Tax law evolves over time. There was no moral reason why a tax should be paid on windows and there is no moral reason why a tax should be paid by corporations. In a democratic country the tax system is a settlement broadly agreed by the people with recourse to their government and electoral system.

The trouble is that the wealthy have the ability to employ lots of clever bastards to avoid the machinations of government. Further, political parties who receive funds from the wealthy will always turn a blind eye to loop holes which allow the rich to avoid tax.

But the apathy and bias of government are not the only reasons why companies like Amazon can perform the corporate gymnastics allowing them to avoid so much tax.

Two other factors are now making tax avoidance a hot topic: Globalisation and technology. Globalisation started centuries ago, perhaps with the silk road, but it began to gain traction in the 19th century enabled by European empires.

Over the past 20 years technology, and specifically computers and The Internet, have turbo charged globalisation. Our governments are constantly banging on about how we, in The West, should do the design and development work and leave the manufacturing to others and this is happening now on a massive scale. Outsourcing is the order of the day. A recent article in The Economist stated that, despite Apple manufacturing iPads in China, 30% of the value was still created in the United States. Apple’s developers sit at their computers in the U.S. and squirt designs and instructions across the world in split seconds. The situation is similar with the British chip maker ARM who make most of the processors in smartphones. The designers sit in the UK but the chips are manufactured abroad. From telephone banking based in Mumbai to British stag weeks in Thailand we can see that the world is integrating.

Yet when Amazon adjust their business model to avoid UK tax we squeal like little piggies.

So what’s to be done?

The solution is not to force corporations to stick to a 20th century tax structure any more than they should be forced to have more windows. Governments have changed the rules on commerce so it is logical that the rules on taxation be adjusted accordingly. This may mean designing rules which ensure that corporations pay more tax but not necessarily.

We should understand that only one group of people in society ever pay tax and that is the general public. You and me. The “consumer”. Joe Blogs. The Man on the Clapham Omnibus.

There IS nobody else.

In theory the super rich pay tax but since they derive their incomes from employing a lot of us and, since they largely set their own salaries, any increase in tax for them will just be compensated by an increase in salary and who pays their salary? We do. Similarly corporations don’t really pay tax as they pass all their costs on to the consumer and their profits to share holders.

The starting point of any taxation system should be: What is the fairest and most efficient way of distributing taxation. To determine this we should ask what are the reasons for taxation. The most obvious reason is to raise funds, but a second reason is to deter the activity which is taxed.

The purpose of income tax might be purely to provide funds to the government but the tax on cigarettes is meant as a deterrent (although one suspects that it is now just cash cow).

If we believe that taxing cigarettes deters smoking then we should also believe that taxing income deters work – and we do. Consider the Tories reducing the top rate of tax from 50% to 45% to encourage “global talent” to come to the UK and consider people who collect “benefits” but would lose this money if they took paid employment.

Given this, it is astonishing that 48% of taxation in the UK (according got the 2008 budget) was derived from the taxation of work in the form of income tax and National Insurance.


If we want people to work then why the hell are we taxing it?

Our tax system seems antiquated and not fit for purpose. Large parts of it deter desirable activities and other parts, such as corporation tax, are so dysfunctional that corporations are running rings around the HM Revenue & Customs.

The solution is a radical design of the tax system. We need a system which is simple, practical and deters only activities which society deems undesirable.

Ah….but there’s the rub. What does society deem undesirable? Cigarettes? Alcohol? Marijuana? I suggest that the activity which is most undesirable, yet prevalent, is the emission of gases which cause climate change Therefore, our tax system should be adjusted to place the majority burden of taxation on activities which emit CO2.

Commuters will scream: “but I need my car to get to work. How will I manage if my fuel bill is a thousand pounds a month?” – My repost would be: If income tax and National Insurance were abolished then you could afford to pay a thousand pounds for fuel……but you would have huge incentive to DO SOMETHING about climate change rather than talking about it.

Star House
Star House

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