You can't avoid tax avoidance

UK Uncut occupying Top Shop on Oxford Street

There's more than one way to skin a cat, and more than one way to correct a budget deficit. Given it's when tax revenue is dwarfed by government spending you can therefore manage both. The coalition argue that cuts in spending should bear the bulk of the deficit-cutting burden, others argue that there should be more tax rises instead. Both of these methods will, in the short-term, reduce aggregate demand and thus economic growth. But
A new pressure group - UK Uncut, has been bringing attention to a third way to do it. Don't raise tax, just stop people avoiding paying it.

UK Uncut are a rather loose coalition of left-wing groups, and their main aim is to fight the cuts in government spending announced over the past 6 months by the current UK government. The difference between them and many others is that they are combining a call to stop the cuts whilst offering an actual way to cut the deficit (take note Labour Party) by finding a solution to what they say is £25 billion of tax being avoided each year by, say UK Uncut, rich and wealthy individuals and companies. If this got paid, they argue, there would be less need for the cuts, which are mainly affecting the poor. Makes sense doesn't it?

They give the example of Philip Green, who owns Arcadia, the shopping group. Actually he doesn't own it. He runs it. His wife, who has never worked for it and lives tax free in Monaco, actually owns Arcadia. This allowed Green to channel a £1.2 billion dividend to her in 2005, avoiding paying around £300million in income tax - enough to pay the salaries of 20,000 NHS nurses or the £9,000 tuition fees of almost 32,000 students.

They also give the example of Vodafone managing to avoid £6 billion in tax recently, that they needed to pay after their purchase of Mannesmann in 2000. They lost a court case to the HMRC, but were eventually let off with a bill of £1.2billion instead. That's £4.8billion not paid. A lot of nurses, and a lot of students.

Some interesting points can be made here:

1) Everybody avoids tax, both consciously and unconsciously. The other day I was going to buy a new kettle and some food. On the way to the shop I realised I only had enough money to buy the kettle OR the food. I chose the food and avoided paying VAT. Will UK Uncut come and occupy my home in protest? Unlikely, because as you can imagine, this is a rather unavoidable avoidance!

2) There are a lot of people working hard to avoid inheritance tax. Inheritance tax is also called "death duties" and is an example of "triple taxation" in that someone is taxed on their income, taxed on interest on their savings or capital gains and then taxed again on any left over over a certain threshold when they die. There are, however, many ways to avoid inheritance tax, and it is so common that even famous Labour politicians have done it. Many argue that inheritance tax is fair as it one of the ultimate examples of a tax on unearned income. Others say it is a tax on success and everyone should have the right to pass on their wealth to their children, especially since much of that wealth has been taxed already.This is why none of the main political parties are comfortable properly attacking it.

3) Philip Green, on the many occasions he has been asked about his actions, argues that his success with Arcadia has rescued some major companies and created many thousands of jobs, which have taken many out of unemployment and generated tax revenue in themselves. However, is it really acceptable that the price of job creation is to let the creator off paying tax? What was certainly inadvisable was the government appointing Green to oversee the search for efficiency in public service as they did last August. There are plenty of other experienced corporate operators like Terry Leahy who could have done that without having everyone carp that it would help if he paid tax properly before advising us how to cut spending.

4) Vodafone's main obligations are to their shareholders. They say themselves,  in answer to questions on the HMRC case, that "the maximisation of shareholder value will generally involve the minimisation of taxation." The point is that it isn't the company who pays the tax, it is the shareholders. These include pension funds and small shareholders who hold a few shares or an ISA - and are likely therefore to have a tiny stake in Vodafone.

5) Ultimately, the main point which ties together the above points is that this is tax "avoidance" and is legal. It is not tax "evasion" which is illegal. Philip Green and Vodafone didn't make it legal, and they are unlikely to push for these methods to become illegal. The only organisation that can do that is the Government. So however many times UK Uncut occupy one of Philip Green's or Vodafone's shops they are actually aiming at the wrong target. Tax avoidance is allowed by the government.

So, why don't the government crack down on it? Why do so many loopholes exist? I imagine the main issue here is the need to balance the need to make sure that tax revenue is maximised without reducing the incentives to entrepreneurship and whilst also being that most normative of things..."fair".

If you raise tax on certain activities people may just stop those activities, or reduces the amount of those activities. Which means tax revenues fall. Which defeats the point.

This isn't an argument not to close some of more ridiculous loopholes. This goes to show that raising tax revenue isn't as simple as that. It's a little but like one of those games where you bash an object down and another one pops up. If the government do close one loophole, there are highly paid and trained tax accountants who will find their clients another one.

So what's the answer to the deficit then? It's hard to raise tax revenue by raising tax rates, and cutting government spending could actually increase the deficit in the future if it pushes the UK into depression.

The answer is found in an unlikely place. Tony Crosland - a former Labour Government Minister who literally wrote the book on the future of socialism - argued that economic growth is a necessary precursor to wealth redistribution. So that is where the UK Uncut should be targetting their campaign. We won't need cuts if we can grow because tax revenues should rise with that growth.

How do we get that growth? Here's an interesting thought...

Why, amongst all the protests against the cuts in Ireland, are they not complaining about the country's corporation tax rate being 12%?