Tax-dodging: the left's problem

Lefties love talking about tax dodging, perhaps because it's an easy way of claiming moral superiority. But in fact, it raises an embarrassing question for them, namely: why do legal tax loopholes persist?

There's nothing new about such schemes. Back in 1996, Peter Mandelson wrote:

The present tax system...permits a proliferation of tax shelters and avoidance loopholes that are not in practice available to the hard-working majority. Tax reform is about guaranteeing a fair deal for all types of saver and doing away with the vast array of fiscal privileges that in practice are accessible only to a minority. (The Blair Revolution p23, 108)

Mandelson is not renowned for his left extremism, and yet the last Labour government failed to meet even his demands for the closing of legal fiddles.

There are two possible reasons why it didn't.

One is a lack of expertise. The state just lacks the ability to draft legislation that permanently closes such wheezes. As Roy Lyness, the manager of Jimmy Carr's tax dodge said:

It's a game of cat and mouse...The Revenue closes one scheme, we find another way round it...That's all we do with tax avoidance. The revenue puts a block in, we just go round the block.

The other possibility is a lack of desire. The lobbying power of the rich is so great that the loopholes stay open; the demand that the government encourage the film industry is a favourite cover for such special pleading.

Now, whichever of these explanations is correct, there's a depressing message for the left. It's that the state lacks either the will or the ability to achieve even basic principles of justice. Marx was, to a large extent, right; the state is the instrument for advancing the interests of the rich, not the cause of justice. This in turn implies that merely having a large parliamentary majority is nothing like sufficient for achieving leftist ideals.

So, what are the alternatives?

The Marxian answer is that the left must control not only parliament but the means of production as well, which would put the rich under the control of the majority.

Another possiblity, suggested by David Aaronovitch in the Times, is to create a stronger social norm in favour of paying taxes - to increase tax morale.

The latter might (just, and arguably) be more desireable than the former - but I'm not at all sure whether it's much more feasible.

Comments

[Account Deleted]

Another possibility is that tax-dodging has spread beyond the traditional rich to the professional classes, making it a sensitive issue for politicians. There are a lot of articulate voters who would be hit by a clampdown.

The Jimmy Carr story (like the earlier focus on Philip Green) perpetuates the idea that tax-dodgers are only to be found among the top 1%. In reality, most tax-dodgers are middle class, i.e. the sort of people who will no doubt be tutting as they read The Times. Aaronvitch's appeal to conscience is just hand-wringing.

Tax morale has collapsed since the 80s in part because of the spread of self-employment through personal services companies. Outsourcing and casualisation has depressed incomes for the working class. For the middle class, it has allowed incomes to be maintained (and even grown) by translating the reduction in employer costs into reduced tax revenue.

It is estimated that there are 1.5 million freelancers among the 12.4 million higher-level occuptaion workers in the UK (i.e. professional, managerial and technical roles). In other words, 12% of the working middle class are dodging some tax.

It's worth remembering that the significance of Ken Livingstone's use of a PSC was his assumption that what he was doing was normal.

See http://fromarsetoelbow.blogspot.co.uk/2012/03/is-that-whip-tax-deductible.html for more.

[Andrew]

@Chris - Nice post, thanks.

"The Marxian answer is that the left must control not only parliament but the means of production as well, which would put the rich under the control of the majority."

Total Fail from Marx here, at least as presented. If the state is not under the control of the majority in the case of tax reform, then why would it be as the custodian of the means of production?

This merely converts a state captured by plutocrats into a plutocratic state.

The dynamic balance of power between social groups mediated by the state is complex and multi-factorial, I'm sure you agree.

[Eric]

A flat tax with no exceptions and a flat rebate would be difficult to get around.

[Stuart]

Why is squeezing a little bit more money out of the rich better (even if just, and arguably) than putting the means of producing wealth under democratic control?

[Andrew]

@Stuart - It is already under democratic control. Are you talking about micromanaging this "means"? Why do you think a democratic state would be effective at that?

[Stuart]

@Andrew I just noticed that the blog says that the Marxian answer is for the left to control the means of production (presumably through its control of the state). It would be more accurate to call this the Leninist answer. The Marxian answer is for the working class to control the means of production, thereby nullifying the need for a state. I suppose the tax twiddles therefore appear (just and arguably) a better answer for being closer to achievability in the near term.

[Paolo]

Ability to clampdown is tricky to establish. I guess that, as for Treasury, HMRC has a large staff turnover due to low pay compared to the private sector, which incidentally in the case of HMRC is the other side of the fence.... Also, clear high-level principles that avoiding taxes is illegal might help winning court battles hinging on conflicting technical interpretations. So in the end, ability (or lack thereof) may in turn depend on political will. I remember the issue of paying one's fair share of taxes was on the agenda during the last general elections, so I would expect that either side of the political spectrum shall be able to capitalise on this issue next time around, depending on whether the clampdown has materialised or not.....

[Will Davies]

Didn't Ed Balls once say (something to the effect that) "it would be possible to have a society in which close to 100% of taxes were collected, but you wouldn't want to live there". I.e. the state is also constrained by liberal norms around privacy and limits on surveillance.

Whether one is a critic or supporter of liberalism (in the European sense of the term), it is clear that it creates problems for the tax-collecting powers of the state. As Foucauldians have explored, liberalism is implicitly dependent on certain technicians, experts and professions for creating spaces of 'freedom' - in the case of economic freedom, this means accountants. Accountants sit at the interface of the free economic agent and the state, mediating between the two. But it's quite clear who they're working *for*, namely their client. Even people who want to pay their taxes may find themselves in the strange position of being advised not to. Yet, the only alternative is for states to conduct all the necessary auditing themselves, which is both technically and morally unthinkable.

[Luke]

Not sure if this really helps, but in the days of seriously high taxes, there was a combination of acceptance and (legitimate) avoidance. For example, senior members of barristers' chambers would agree to pay a huge amount of the expenses as they were paying 90% tax. So they accepted high taxes (not much choice), while mitigating the effects.

[Account Deleted]

@Will Davies, re Ed Ball's contention that you wouldn't want to live in a country where close to 100% of taxes were collected. That menacing scenario assumes predominantly taxation of income, dividends, capital gains etc, and therefore a "public" invasion of the "private" sphere.

Imagine a society in which the bulk of tax was taken via VAT (I'm not advocating this, just running a thought experiment), i.e. a form of tax that is calculated in the public sphere. Would close to 100% observance be that problematic? How often do you avoid VAT today? Mr Balls lacks imagination.

As you rightly note, our (liberal) cultural norm is to consider tax a matter of negotiation. In clientelistic states you negotiate with a political fixer, in a mafia state you negotiate with the mafia, in liberal democracies you negotiate with accountants.

Accountants are privileged mediators with the state in the same way that solicitors are mediators with the state as law, in the same way that tax farmers were in earlier centuries, i.e. they are para-state agents. They are not disinterested occupants of some neutral territory. The fact that they encourage tax avoidance is not necessarily contrary to the interests of the state.

We're poor at gathering income tax, but efficient at gathering VAT. This is a consequence of political factors not technical ones.

[Tim Almond]

But many people do not feel guilty about the level of tax they pay.

I give money to a local hospice, because I see what they do with my money, and I see that it is good. They operate on very limited costs and do an excellent job.

When I look at the government, I really have no idea how much is actually being well spent. Despite being in a recession and knee-high in debt, the government has announced that we're going to host World Athletics. HS2 is going ahead, despite limited benefits.

If we can afford those luxuries, why should I hand over more taxes? Is the money going to go on more schools and hospitals, or more playthings?

[Tim Almond]

Fromarsetoelbow,

"How often do you avoid VAT today?"

If you buy fresh potatoes rather than buying chips, you're avoiding VAT. If you change you're own oil rather than taking it to KwikFit, you're avoiding VAT. If you bake your own cake, you're avoiding VAT.

The problem with VAT is that it's a tax on specialisation. It makes us poorer.

If you want to stop tax avoidance, bring in Land Value Taxes. Property and Land Taxes have an almost 100% collection rate, cost little to collect, and have little deadweight costs on productive wealth.

[Andy_Formby]

Enoch Powell once said that he rejoiced in paying his taxes as it was like buying a ticket to a civilized society. In other words it is part of the contract between the citizen and the state. People avoid paying taxes because they distrust the state to fulfill its obligations.

[Keith]

If tax avoidance has become more socially acceptable among the middle class then is that not deliberate? The plutocrats and aristocracy have always been intimidated by the articulate middle and allowing them to share in tax avoidance is money well spent. The super rich gain far more then the middle class by discouraging redistribution and so the middle class have been bought cheaply. If it stops the readers of the Times and Guardian marching on their houses and burning them down all to the good. Just as selling Council Houses was a social disaster but if creating Ghettos and impoverishing millions by raising housing costs gets the c2s to vote tory so be it. Over crowding, homelessness, and exorbitant private rents are a price well worth paying for winning Basildon a few times. Divide and rule.

[Ralph Musgrave]

The reason Labour governments do not close down one particular set of tax dodges (those carried out in Bermuda, Isle of Man, Channel Isles, etc) is that these islands are a haven for international hot money or dodgy money, which is then recycled via the City of London. This brings in megabucks for UK PLC.

I’m sure all incoming Labour governments are quietly told by City elders that any clampdown on those islands would necessitate a significant tax increase for a given level of public sector spending, and that makes incoming Labour governments “see sense” or soil their pants (take your pick).

It’s Queen Elizabeth I, Sir Frances Drake and Spanish galleons all over again.

[Charlie B]

I think this debate highlights our failure to understand what we want from our tax system as a society. Is our tax system designed to maximise revenue (in which case we mnight say that 1% of a lot is better than 40% of nothing - notwithstanding the debate about the marginal sensitivity of labour to tax rate). Or is it in fact a moral element to our society in which we think everyione should pay in according to their means (in which case a sharply progressive tax system is desirable even if it reduces the overall tax take)?

The conflict between equality and efficieny stalks the debate - and it is the friction between these two where these controversies happen.

[ortega]

But, is the end of the left to collect taxes or to distribute wealth? As you well know, the taxes in the States are much more 'progresive' than in Sweden, but with quite different results. And with no need to control the so called means of production.
Maybe less Marx (and Keynes) and more Myrdal is what is called for.

[Luis Enrique]

maybe what we're seeing with all this furore over tax avoidance - even if some of it is misdirected - is raising tax morale.

I think another problem of sorts is that condemnation of tax avoidance has a scale problem. Tax avoidance by the rich might be the greater problem quantitatively, but in terms of the morality, there's a point where tax avoidance is harder to condemn and it's not clear where that point is - "the people" whom the left purports to champion also like to reduce their taxes where possible, for the same reason we mostly like to buy things cheaply: we want more money. Undeclared cash-in-hand transactions are commonplace, but also in industries where free-lancing is the norm (IT, various creative industries) people of modest means routinely set themselves up as companies so they can reduce their tax bill by doing thing like claiming expenses for their laptop which to be honest they would have bought anyway but can now claim as a business expense. Maybe this lack of consistency isn't a problem, but I think it's a bit awkward.

[Account Deleted]

@Tim Almond, you're not avoiding VAT by buying potatoes. VAT is levied on a value-added product, chips, that includes a non-VATable raw material, potatoes. They're different things.

This is not the same as the recategorisation of activity to avoid higher tax rates, such as claiming personal income as corporate profit, or domestic profit as foreign. Jimmy Carr's activity and consequent income did not materially change. The chip did not regress to a potato.

I totally agree with you re land value tax. This would be easy to collect and diffcult to avoid, which is probably one of the reasons we don't already have it.

[dBonar]

I'm not in the UK, but it seems like the US answer to the question includes the fact that many politicians on the Left personally benefit from tax dodges. Their rhetoric is of the 99%, but they are firmly of the 1%.

[Trevor Brown]

but how is anyone supposed to get rich if they have to pay tax at 45%?

the queen didn't where she is today by paying tax like the lumpenistas

..and a few days ago didn't 'everybody' join in wishing her the very best for her anniversary....

the uk......bless...

[Sean]

Lets have a subtle public tax auction.

Make all income tax info publicly available and for the loss of privacy you get to pay what you want, which also would be a matter of public record.

[Account Deleted]

@Luis, you don't need to set yourself up as a company to get a cheap laptop. You can claim "allowable business expenses" through a 3rd-party umbrella company, which manages PAYE for freelancers.

The reason IT contractors and others go the extra step and set up companies is to reclassify income as corporate profit and secure a lower rate of tax.

The employee's official income is usually no more than the tax-free allowance, on which they pay minimal NI. They then pay themselves 6-monthly dividends. The net effect is to reduce their tax bill by 25% on average.

Regulation IR35 was meant to end this dodge, but it hasn't. Contractors, agencies and clients write contracts to circumvent it. HMRC seems happy to let them do so.

[TheBoilingFrog]

Fromarsetoelbow "If you bake your own cake, you're avoiding VAT."

Not really, cakes are not VATable anyway, thus the Pringles court case http://news.bbc.co.uk/1/hi/8060204.stm

[xdhfjgkyuhl]

"Now, whichever of these explanations is correct, there's a depressing message for the left. It's that the state lacks either the will or the ability to achieve even basic principles of justice"

No, it's NEW LABOUR lacked the will to tackle tax avoidance. I find it hard t believe that an actual left-wing party would lack the desire to clamp down on tax avoidance.

As usual Chris, you confuse the behaviour of recent governments with the behaviour of "the State". The State is not a constant.

[Laban Tall]

dBonar - the Milibands had their father's will rewritten after his death to avoid some of the death duty.

http://ukcommentators.blogspot.co.uk/2004/09/estate-in-capitalist-society.html

It wouldn't have occurred to me that you could legally change someones will after their death, but apparently you can.

[james higham]

Mandelson is not renowned for his left extremism

What an unbelievable statement. Why do you think he was known as the Dark Lord, Chris? He's a fully paid up member of them - the global socialists.

[Anonymous]

@James Higham

Are you mad?

[Angela]

the estate pays the taxes, there shulod have been assets enough to take care of the tax obligationyou probably disbursed assets before the estate return was closed whereby, if you were the administrator are having a hard time taking care of what was your responsibility regarding the estateit will go away when it is paid

[Lexi]

Ur right lankan soul' they are the world 2nd bieggst population but stil they can't produce best cricketers, example of best cricketers from small sri lanka= murali(1st project mystery off spinner,highst wicket taker in da world,introduced the Doosra),mahela(best logical captain,and asia cup 2008 best captain award winner),TM dilshan(the world best batsman alive,t20 2009most runs nd best player award winner and introduced new batting style DILSCOOP'),finaly ajantha mendis(2nd project mystery off spinner,asia cup2008 man of da trnmt inroduced the carram ball). (0)

[Sajan]

Its really funny about iniands.After 96 world cup it is a habit that Sri Lankan team throw them out of multi nation tournements.In Asian cup also iniands last match is against Sri Lanka.I really feel soory for them. Best thing for india is playing their own country.the pitches are made for them.out of their country indian team is nothing.I hope atleast they will win 2 t20 matches against zimbabwe.After that they can think about making a good fight against Sri Lanka. (0)

[Saijan]

lankan soul come on my dear iiadnn friends try to understand the reality u guys r not talented like srilankans ..india always wins a match with one man performance , with umpires help or with crowd support not as a cricketing team .no team spirit with you guys ..only anger and jealous.that's y u guys always have fights inside the team.. (0)

[Christian]

Sri Lankan never ever under estimate the team of ZIMBABWEANS. Bcoz we know they are very taltneed team who even beated great team like Aussies, Indians so on. Sri Lankan selection committee has rested the senior players for the upcoming Big series of Asia cup in subcontinent which ll held on June 12th onwards. (0)

[Raul]

Well I am in favor of this tax. So much of spam sms keep coming daily that we tend to miss the real imnartopt ones. Plus if a facility is given to someone it shouldn't mean that one starts misuing it. Loads of Loads of dirty jokes are passed each day. They spread like wildfire. I came to a point that I said enough is enough. They started becoming a pain in the ./ . People don't understand the difference between others rights and their moral obligations. They mix them together and make it their rightful moral obligation to send those tonnes of dirty stuff to every contact in their phones daily thus making others either to just delete them without reading or just cursing them. The govt. took the right step although I know they didnot have a slightest clue of the problem people had started to face. They just imposed it because they found this commodity up and running so they decided this is lucrative business. Impose tax! Such pity!!!