It is perfectly legitimate to avoid paying tax
If we want the rich to contribute more to the Treasury, we should simply reform the system
Here are some ways in which you might legally reduce your tax bill. Tell me which of them you regard as acceptable: buying premium bonds; investing in an ISA; setting up a company to offset your earnings more efficiently against costs; giving some assets to your children while you’re still alive; setting up a trust for your children; setting up an offshore trust for your children; retiring early; moving to a place with lower taxes, such as Guernsey; moving your company to Guernsey; putting some of your savings in Guernsey; instructing your accountant to reduce your tax bill in any way the law allows.
My guess is that, as you read through that list, you were subliminally inclined to validate your own behaviour. That is what all human beings do: psychologists call it “self-serving bias”. If, for example, you invest in ISAs, but can’t imagine yourself relocating to Guernsey, you’ll have seen the former as legitimate tax planning, but the latter as aggressive tax avoidance.
For what it’s worth, I think they’re all pretty much in the same category: all of them involve minimising your liability within the rules. You might, of course, want to pay more tax than required: that option exists, and the government gladly accepts donations. Frankly, though, if you have extra money to give away, it is more sensible to donate it to charity than to a necessarily inefficient and lumbering state machine.
Oddly, the people who demand that you should volunteer more – or, as they prefer to put it, that you should not engage in tax avoidance – rarely fork over anything extra themselves. Actually, it’s not odd. It is just another example of self-serving bias.
Over the past week, politicians and commentators have been deliberately conflating legal and illegal behaviour. Count how many times you hear the phrase “cracking down on tax evasion and avoidance”, as though the two things were the same. They are not. The first is a criminal offence: it involves cheating the entire country by dishonestly ducking your responsibilities. The second is what you do when you buy premium bonds.
Ah, you say, but there is a difference between premium bonds, which anyone can buy, and the sorts of ingenious schemes favoured by rock stars and multinational companies. Actually, the only difference is one of scale.
If you don’t like these ingenious schemes, blame the successive chancellors who have complicated and distorted the tax system for no higher purpose than to generate one day’s headlines. Politicians love to tweak the system so as to boast that they have (say) boosted the British film industry. But every time they do so, they create a little pocket for the super-rich, who can pay lower rates by (say) investing in films that don’t get made.
The answer, of course, is to do away with all such distortions, making what ministers call “aggressive tax avoidance” impossible. And here’s a bonus: squashing these holes would generate additional revenue, allowing the Chancellor to lower tax rates. Think of the tax system as a massive Swiss cheese: each cavity represents an exemption that can be exploited by plutocrats (whose accountants are a lot better paid than HMRC accountants). As the cavities are collapsed, the overall height of the cheese falls. Taxes become lower, flatter and simpler, and – this is the best bit – the rich end up paying more, in both relative and absolute terms.
That’s all very well, you might object, but it doesn’t deal with the issue of tax havens. Even if Britain rationalised its tax system, the super-rich would still be able to stash their wealth away in hidden offshore accounts.
Not really. At least, not without breaking the law. It’s true, of course, that some people under-declare their income, whether or not overseas accounts are involved, and some of them are caught and fined. But new rules on disclosure make offshore accounts far less useful for this purpose and, in any case, that is not what the Paradise Papers row is about. Most of the leaks, so far at any rate, involve money that was being held offshore legally.
Our whole vocabulary is loaded. We talk of “secrecy” as if it implies criminality. Actually, most bank accounts are secret, in the sense that they are not open to public view. Commentators assume that people putting money offshore are crooks looking to hide their ill-gotten gains, but they might just as easily be honest people seeking to preserve their savings from rotten dictatorships, as German Jews did when they opened Swiss bank accounts in the Thirties, and as the remnants of Venezuela’s middle class did under Hugo Chávez.
We likewise talk of “tax havens” when what we really mean is “jurisdictions with lower taxes than our own”. The Channel Islands are in this category. They are subject to the same disclosure rules as the UK, and cannot be used to hide money illegally from the authorities. They do, though, offer lower tax rates, and good for them. Instead of moaning about it, we should reduce taxes here so as to narrow the gap.
To make the same point the other way around, imagine how much higher taxes would be if countries didn’t need to worry about international competition.
If we are truly bothered by the Paradise Papers, we have the solution in our hands. Cut taxes. Rates will fall, revenues will rise, and avoidance will become purposeless.
‘Those putting money offshore might just as easily be honest people seeking to protect their savings’