Tuesday, 10 April 2012

Some Common Sense On Tax

People who read this blog will remember that, last year, I suggested a number of times that reducing benefits was not the only or even the best solution to the budget deficit – increasing taxes on the rich was another.
Since then, of course, Chancellor Osborne has reduced the tax on rich people, but increased it on pensioners … which I suppose serves me right.
But what is the truth about tax?


Taxing the Rich
It is an uncomfortable fact – as I was recently challenged about by two young men on twitter – that the rich pay much more tax than the rest of us. A BBC editorial suggests that the top 10% of earners provide almost a half of the tax yield. Moreover, according to another BBC article, the burden individually on the very rich is rising – whereas in 2005-6 people earning more than £10m a year paid £6.1m each on average, in 2009-10 (i.e. before the 50% rate) that average had increased to £7.6m each – an rise of 24% in just four years.
There is no wonder the rich are squealing.

By contrast, those of us at the bottom of society provide comparatively little, the lower 50% of earners providing barely an eighth of the tax yield. And it has been estimated that almost three-quarters of us get more out of the state than we pay … only the top earners pay more in tax than they receive in benefits and services.

Before you run off proposing further tax cuts for the wealthy, however, there are a number of factors you need to take into account:
1. Apparently, the picture is much more balanced when you take the whole range of taxes (including VAT, excise etc.) and not just income tax, into account.
2. Income tax is rightly based upon the notion of ‘progressive taxation’ – that the more you earn, the greater proportion of your income should go in tax – and indeed this is fair because, as I suggested in an earlier Rant, what matters is not your absolute income, but how much you have spare after you have paid for the necessities of life.
3. Many people (and not just socialists) would accept that – in a world where wealth flows naturally from the poor to the rich – taxes on the rich are essential to redress the imbalance in the terms of trade. If such a mechanism did not exist, we would literally move steadily towards a society where the poor starved.
4. Above all, it might just as validly be argued that it makes no sense to cut the tax of the very people who supply most of the tax yield; surely, if anything, this is an element of the tax share that we need to maintain!

Nevertheless, you can see why the government is so scared that we might, by an over-punitive tax regime, drive away the rich. If we were to make Britain a place where the top 1% of earners did NOT want to live, we would see the tax take fall by a quarter … and just see what cuts in benefits and services would follow upon such a reduction!
It is in this context that we need to judge Francis Maude’s recent controversial statement that he wants to make Britain a ‘tax haven’ for the rich. I suppose the argument is that the richest 1% of earners provide the lion’s share of our tax revenue so, even if the cost of keeping them here is letting them off billions of pounds-worth of tax, it is well worth it to get the £614bn a year we DO get from them.

On the other hand, London IS the favourite residence of the world’s super-rich, so it might be argued that we have a way to go yet before we start driving away the hand that feeds us.

'Tax evasion' and 'tax avoidance'
A proper debate about how much the rich should pay, and (perhaps more to the point) how much we dare charge them before they decamp elsewhere, has not even begun to take place, however, before it has been muddied by talk about 'tax avoidance'.

Talking about stopping tax avoidance is judged to be much ‘safer’ for Mr Osborne than talking bluntly about taxing the rich. And so he declared in his budget speech that ‘aggressive tax avoidance’ was ‘morally repugnant’, and today he has declared himself shocked at the degree of tax avoidance that takes place. The government is currently considering a General Anti-Avoidance Rule (GAAR) – although the general opinion is that it is conveniently toothless.

You need to be careful here, too, however.

Most people, when they hear that rich people are ‘aggressively avoiding’ their taxes, will come away with the impression that they are somehow CHEATING on their taxes.
They would be wrong.
Cheating on your taxes is illegal. When you break the law (e.g. by claiming allowances you do not deserve) it is not called ‘tax avoidance’ … it is called ‘tax evasion’, and you will be fined or sent to prison for it. My father, who was an accountant, terrified me by telling me that, if they find you evading tax, the Inland Revenue can set a putative amount that you should have paid, and then charge you in addition up to seven times that amount in penalties. (I don’t know how true it is today, but it is a strong argument to keep your tax return straight!)
What most people fail to realise about 'tax avoidance' is that it is completely legal.

Moreover, tax avoidance is something we ALL do.
When you put your money into an ISA so you don’t pay tax on it, you are avoiding tax. When you take advantage of any of the many legal ways openly advertised on the Which? website in order to reduce your tax bill, you are avoiding tax.

Tax experts DO draw a distinction between ‘foreseen’ avoidance (i.e. tax claims explicitly allowed by HMRC) and ‘loopholes’, but it is hard to see how anybody can do anything about something which is absolutely legal.

Until recently, for example, rich people could avoid stamp duty by putting their house in the name of a company, and then selling the company (and the house with it) rather than just the house. Last month’s Budget tried to close the loophole but, apparently, accountants have already found a way round the new rules.

Similarly, the Budget sought to limit how much people might reduce their tax bills by donating to charity, by setting a cap on tax relief of 25% of total income on claims over £50,000.
It remains to be seen how effective this measure will be. Unlike the USA, whose citizens pay tax to the US government on every penny they earn anywhere in the world, Britain only charges people on money they earn in the UK. Consequently, rich people, by artificially moving their money around, are able to minimise the amount they appear to have earned in the UK and thereby – absolutely legally – to reduce the tax they pay. That’s why so many rich people have financial interests in the Cayman Islands, and Jersey, and the Isle of Man.
So there seems little point in setting a cap linked to income if rich people have limitless absolutely legal ways to artificially reduce their declared income.

Ultimately, it all boils down to how clever your tax accountant is, and ‘morality’ and ‘duty’ play no part in a tax return. How many of us, for example, if we were made aware of a perfectly legal way to avoid tax, would not take advantage of it?
Here’s one example; if you pay a higher rate of tax than your wife, it makes sense to put your savings in her name – if she pays no tax, for example, you may be able to claim back the tax she paid on her Building Society accounts. It is a way to avoid tax.
Will you do so now? Or, when I described it, did you say to yourself – no, I enjoy paying tax and will continue to pay tax on my Building Society savings, even thought there is no need whatsoever to do so.
Maybe you did – there are people in the world who do indeed think like that – but let me guess that you are not rich.
We cannot expect people to pass up opportunities to avoid tax when they can legally do so. EVEYBODY hates paying tax.

So what is the solution?
Polly Toynbee in today’s Guardian argues that tax transparency is the solution. Once people could see at the click of a mouse how much you earned and how much tax you paid, she suggests, the court of public opinion would exert its influence:
“[In Norway] the boss of Nokia, pop stars and politicians face annual embarrassment as the press explores their returns. Transparency underpins a culture of social justice and civic duty.”
Personally, I think it is a nonsense. Are we really suggesting that we base our tax system on trying to embarrass people into paying more?
And in the meantime, I am not so sure that I would be happy in a world where my next-door neighbour, my political colleagues (and enemies) – and you! – can know what I earn, can scrutinise my tax return, and can try to suggest that some absolutely legal allowance I have claimed is, in the court of public opinion, ‘morally repugnant’.
Apart from the fact that I regard my income and my tax as a private transaction between me and the taxman and none of your business, I am unhappy about a system which threatens to turn tax from a mathematical calculation into a moral opinion.

The answer to the 'tax avoidance' problem is much simpler – it is simply a legal matter of closing the loopholes that we don’t like, or which we find are being misused. The answer to aggressive tax avoidance is aggressive loophole-closing.
Don’t get me wrong. There IS an ethical debate to be had about the amount of tax we ought to be paying related to our income.
And it is linked to the practical problem of how much we can ask rich people to pay without driving them abroad.
It may well be that – as we close the loopholes which allow the rich to avoid tax we need also end up reducing the rate of income tax which we require them to hand over.

But a system which nominally charges them a high percentage of their income as tax, on the understanding that they will be able wriggle out of much of it by finding tax loopholes, is clearly ridiculous.

And at the end of the day, there is this abiding imperative; as a state we are spending more than we are taking, and we need to find some way to close the gap.
And I am still of the opinion that – until, as ‘wealth-creators’, they have got the economy booming again – the people with money have to understand that it is inevitable that people are going to ask them to stump up more … one way or another.

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