Is Talking Tough on Tax Avoidance Obscuring the Bigger Picture?

Is Talking Tough on Tax Avoidance Obscuring the Bigger Picture?

There are few universal truths in modern politics. On everything from future levels of government spending to the speed of devolution the parties are divided. As the gaps between them have grown larger a number of smaller parties – largely unbeholden to history – have emerged, pushing their own agendas and narrow interests.

However, there does seem to be one area where all the parties are in agreement: that tax avoidance, though not illegal, is a moral issue and those individuals and organisations that actively seek to keep their tax bill to a minimum are partaking in actions that are damaging and perhaps even wicked. While Ed Miliband accused David Cameron of being “a dodgy Prime Minister surrounded by dodgy donors” in the wake of the Lord Fink affair, Chancellor George Osborne has himself referred to tax avoidance as “morally repugnant.” Such views are reflected amongst the general public, with almost two-thirds of those polled by YouGov describing avoidance as “unacceptable.” More startling are the results of a ComRes poll, which suggests that 85 percent of British adult believe tax avoidance to be morally wrong.

In part it may be that there is a degree of confusion between legal tax avoidance and illegal tax evasion. As David Bennett, tax adviser at Moore and Smalley notes, “there’s a clear distinction to be made between legitimate tax planning and tax avoidance, something that both major parties seem to ignore.” The crucial distinction between the two has been laid down in British law since at least 1936, due to the court case of IRC v. Duke of Westminster.

In this instance the Duke stopped paying his gardener a weekly wage, instead drawing up a covenant agreeing to pay an equivalent amount. The gardener received the same amount, but the Duke gained a tax benefit thanks to a clause that reduced the liability to surtax on covenants. When the case came before the House of Lords the judge, Lord Tomlin stated:

“Every man is entitled if he can to arrange his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure that result, then, however unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax.”

Much of the fervour behind the clamour for action to tackle tax avoidance seems to come from a popular antipathy towards business itself. Few would take moral issue with the purchase of duty free goods, despite the fact that they are purchased to avoid paying sales tax, yet when companies undertake tax planning the goal posts shift considerably. Reflecting on the paradox between individual action and collective will, Labour MP Tom Harris asks: “Is tax avoidance wrong in principle? Or does it depend on scale?”

Although the arbitrary blurring of lines between morality and legality is concerning, a more immediate issue is the impact tax avoidance is having on wider political and economic discourse. In particular, a myth has developed that the funds ‘lost’ through tax avoidance could be something of an economic silver bullet, reviving growth and supporting service provision. This view has been propagated by a number of bodies that seek to equate tax efficiency with fraud and tacitly suggested that cuts to government spending should be mitigated by recouping taxes saved.

It seems then that the debate has narrowed to how the pie should be divided, rather than seeking to grow it. Britain is experiencing its longest period of pay stagnation since records began in 1855 and wages are approximately 6.9 percent lower than in 2007. As a result not only have overall income tax takings declined, but the top 1 percent of earners now contributing 27.4 percent of all income tax, as opposed to 21.3 percent in 2000.

Poor income tax receipts have also seen the ‘tax gap’ – the difference between estimated and actual rates of collection – balloon, rising to over £34 billion. The burden of income tax has also shifted to an ever smaller minority with the top 1 percent of earners now paying more than 27.4 percent of all income tax revenue, up from 21.3 percent in 2000.

Allied to falling wages is Britain’s weak exporting position. The trade in goods deficit rose to £9.8 billion in January, with exports falling by 4 percent and imports rising by 3.4 percent: boosted by domestic demand for foreign goods. Within the EU this picture is little better, with the value of exports falling by 3.7 percent. It is alarming that Britain’s export gap is at a four year high, yet discussing it seems to be the preserve of manufacturing insiders. Shadow Business, Innovation and Skills minister Chuka Umunna has raised the issue, but the debate has gained little purchase.

Since the recession commentators from all sides have scrambled to point fingers of blame. From politicians to bankers to CEOs, the idea that some individual should be held responsible is a powerful force. This is understandable from the press, but less so from politicians themselves. As the depressing figures above show, Britain is yet to recover from the crash and is being held back by low wages and meagre exports. Solving these problems seems essential to improving living standards and generating the kind of revenues needed to provide world class services. While this is undoubtedly a more difficult task than hammering corporations and wealthy individuals on points of morality, it is also likely to be a far more rewarding one.

This article was originally published last Friday in Whitehall Weekly. You can subscribe to it via the sign up option in the blog sidebar. 

Jack Taylor

Jack Taylor

Consultant at Keene Communications
Jack’s background is in domestic politics, having worked in various research position in both the Commons and the Lords. He has a particular interest in matters pertaining to infrastructure, transport and development.
Jack Taylor

About the Author

Jack’s background is in domestic politics, having worked in various research position in both the Commons and the Lords. He has a particular interest in matters pertaining to infrastructure, transport and development.