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Nick Saalfeld founded MoneyWorld (now MoneyExtra), the UK’s first personal finance website; and was Business Editor for AOL for three years. He now runs a media consultancy, Wells Park Communications, and is a director of two further companies. He blogs at www.truebusiness.co.uk
Is tax avoidance legitimate?
As I write, comedian Jimmy Carr is currently issuing grovelling apologies for his “terrible error of judgement” in using a highly effective tax avoidance scheme through which his earnings were funnelled.
I’m not sure what he needs to apologise for.
There is a morsel of hypocrisy in Carr’s situation, because he famously parodied tax avoidance schemes in his hit show, “Ten O’Clock Live”. To my mind though, that’s his only mistake; and he has little else to atone for.
Despite David Cameron’s insistence that tax avoidance is “egregious”, the vast majority of us, from hardened CEOs on the right of the political spectrum to union leaders on the hard left all practice some form of tax efficiency.
Ask any economist and they will tell you: tax avoidance isn’t immoral, it’s just rational.
There is no shortage of options, either. An entire industry, featuring professionals from specialist tax minimisation companies through to the major accountancy players has evolved specifically to discover and exploit loopholes, weaknesses and stress-points in the tax system.
A colleague of mine asked me today why tax avoidance schemes are even possible. Why do we not have a transparent tax system which makes avoidance impossible?
Well, here’s the true hypocrisy – and why I believe tax avoidance is an entirely legitimate pursuit for anyone receiving any sort of income whatsoever. A complex tax regime is the only politically expedient way in which to run a country. Simple tax regimes leave no wiggle-room for governments to make revenue-neutral (or nearly revenue-neutral) tweaks which favour specific communities in the electorate – whether that’s voters, businesses, geographical communities, etc.
From a third runway at Heathrow to all the fanfare of an Olympics and its, ahem, legacy, redistributive processes have winners and losers, and the more the difference between them is obfuscated, the easier it is for citizens to swallow the pill.
Indeed, few countries mooting flat rates of tax ever get round to it; and few which have adopted flat tax rates to any degree (Hungary, Estonia) can resist the urge to make progressively more changes and amendments. Transparency hampers government.
In fact it’s worse than that: transparency can become the wobbly wheel on the social trolley. It’s when the injustices of life are made too overt that we end up with rioting in the streets. It seems to me to be entirely reasonable that ordinary people should, for example, object to austerity measures across Europe when they have just witnessed casino-bankers secure their salaries, livelihoods and bonuses from the taxpayer. I’d be pretty angry too. Thank goodness we’ve got a healthy fog of confusion to muddy the waters most of the time.
And here in the UK, we’re good at opacity. Really good. Since 2009, Tolley’s has proudly noted that we have the world’s longest tax code. Whether you’re an investor in startups or a vicar with a penchant for solar panels, there’s a tweak to the tax code designed just for you.
That opacity is also what allows the government to sit with a boot in two camps simultaneously.
Whether Labour or Conservative, the administration needs to demonstrate its commitment to redistributive policies and social welfare. Just servicing the NHS, schools and housing benefit won’t do, either: redistribution means you have to be seen to tax the rich.
But the rich don’t want to be taxed, and vocal CEOs like the mega-paid (and exceptionally talented) Martin Sorrell of WPP are happy to move their personal and corporate tax domiciles on a sixpence to show they mean business.
Opacity allows governments to carve a middle ground of obfuscation in which they can point to measures which clearly move wealth around society to appease ordinary folks, without scaring off the geese that lay the golden eggs in the first place. It’s an important path; as Stephen Pollard writes in the Daily Express, "It's a mistake to attack the people who use [these tax avoidance schemes]. We need the rich - whether they're comedians, singers or entrepreneurs - if we are ever to climb out of recession".
We should applaud Jimmy Carr for his diligent application of tax efficiency, as it is, after all, just a legally sanctioned game.
What should instead offend our British sense of fairness is that it’s a game to which not everyone is invited. I’m entirely alive to the fact that private banking advice has a price tag attached to it, and therefore it is not economical to give tax avoidance advice to everyone. That’s not my bugbear.
Rather, as someone with ample experience of earning nothing as well as earning quite a bit (us entrepreneurs need to learn to live on fresh air), I do look for some fairness from HMRC. Owners of small businesses would be more supportive of the UK tax regime if they were not subject to draconian parking-ticket style fines and dismal customer service around submission-time.
Reading the letters pages of the papers, it’s clear that the public in general support Jimmy Carr – despite the fact that he’s removing money from the public purse. The level playing field that people want isn’t between rich and poor, it’s between those who can game the system and those who can’t.