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%?

Should we tax fat?

BBC's 'Panorama' programme this week raised the prospect of a "fat tax" being applied to junk foods that contribute to obesity in the UK. This is a fascinating debate which brings forth arguments about the justification for and effectiveness of government intervention on this issue as well as the fairness of a particular tax.

The economic justification for government intervention in this instance is that obesity has 'social costs'. This means that the cost of obesity is greater to society than the 'private cost' to the person who carries the weight. The difference between the two is the 'external cost'. Those external costs might be the extra burden on the NHS from treating obesity but also possibly sick days through related illnesses down to something as simple as the difficulties someone who is overweight may have playing a constructive role in many of society's activities.

2007: Plenty of fat to tax!

A 'fat tax' would suggest that the government feel that fatty foods are overconsumed and this is causing obesity. If the government can find a way to reduce the amount consumed then that would be better for society. If they can raise revenue from a tax to cover those external costs of overconsumption then that makes sense too.

So far, so economically rational. But does a tax on fatty foods actually solve the problem? And is there a chance it will create other problems?

I must declare an interest here because two years ago I would have been a 'target' for this tax. I am 6 foot tall and used to weigh 17 stones (107 kilogrames). I am now 14 stone (88 kilogrammes). How did I do it? By eating less calories and doing more exercise. Why did I do it? Because I was fed up of looking at a fat bloke in the mirror, because my daughter was starting to run around and I couldn't keep up with her, and because there's only so many times you can put up with being drawn as a

2009: calories in < calories out

big blob by a four year old child when on holiday with your friends' families.

Did eating less cost me less? No it didn't. It is a sad fact that eating healthily in this country is more expensive. Also, I spent a lot of money on getting the right clothes and shoes and equipment for exercise as well as gym membership.

Furthermore, I read a lot of magazines and websites about how to get fit and eat properly and I kept a daily diary of everything I ate and did exercise wise.

Put all that together and it worked. Took me 9 months to lose 3 stone and I ran a half-marathon comfortably at the end of those 9 months having not run for 18 years.

The point of this story? For people to lose weight and get fit, they need to have money, and they need to have the right information. A 'fat tax' would give them neither.

If you put a tax on fatty foods you will make them more expensive which should mean that people will swap to more healthy foods. But the difference in cost is large enough that it would have to be a large tax.  That would leave BOTH cheap fatty foods and healthier foods more expensive. Food is a need, so by making all types of food more expensive you are lowering living standards.

And this is where we get to 'fairness'. I hate to generalise, but obesity is more of a problem in this country for people on low incomes than those on high incomes. So a 'fat tax' will hit the poor harder, and is therefore regressive. The consequences of that could be uncomfortable for a government attempting to present themselves as fair and progressive.

What's more, many fatty foods are rather addictive, and quite frankly rather nice. Translated into economic terms - the quantity demanded of them would not go down anywhere near as much as the tax would take their price up. In other words, demand for fatty foods is 'inelastic'. The way tax works in this country, firms collect tax for the government - which means that taxes affect the supply of a good first, UNLESS they can pass on the entire tax to consumers - which in the case of fatty foods, they can, as demand won't fall by as much as the tax applied. So the quantity of fatty food eaten won't drop much.  What will happen is that government will get a lot of tax revenue.

Therefore, government intervention to solve the problem of obesity solely by way of a tax on fatty foods would not be effective and could result in further problems.

However, many say that the tax would be like a 'nudge' in a particular direction. Well, why not give consumers a nudge away from fatty foods and a further nudge towards healthy ones. The government could subsidise healthy foods, based upon the argument that they will gain that back through less cost to the NHS and less sick days from employees.

Also, as I said, it was information that really helped me. Government could make sure that everyone who wants to lose weight has access to the right information presented in accessible ways to help them. Much of this is already out there. But there is a lot about healthy eating, but is there really enough about the benefits of what really made a difference for me, exercise. So they can provide a lot of information about that too.

So, they could also subsidise gym membership, although the problem with that would be that people would still have to go to the gym once they are members - which has always been a problem. They could subsidise running clothes and shoes, although again the key is getting people out running.

Point is, it all goes back to each and every individual. Every time I bring up a solution I seem to be bringing up an argument against it. This is why we have ended up back at the 'fat tax', because if we can't get people to lose weight, let's at least try and raise the money from them to pay for the problems their weight causes, right?

The proof, on this issue, will be in the (gluten and sugar-free) pudding (yuk!)