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

The Sunday Telegraph - - Letters To The Editor - DANIEL HAN­NAN

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’

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