Clamp down on tax, not taxpayers

Wednesday January 11, 2012

Tax avoidance is simply a product of high and complex taxes, says Eamonn Butler

There is a lot of talk – even David Cameron is at it – complaining about tax avoidance and saying that we need to give HMRC more sweeping powers to deal with it. The beef is that people (or, as they are more usually described, ‘the rich’) are using loopholes in the tax system – perfectly legally – to avoid paying their full whack of tax, just at a time when the country needs all the money it can get.

Tax evaders – folk who take cash and don’t pay VAT or income tax on it, or who falsely under-declare their income, say – should rightly be punished. But I wouldn’t castigate people who avoid tax simply by using the loopholes that Parliament has left littered about in the tax code. Indeed, company directors have a duty to save their shareholders from paying more tax than they need – that is just good management. And it has long been a principle in UK and US law that free people have a perfect right to organise their affairs in any legitimate way in order to minimise the tax they have to pay.

Of course, while Parliament intended there to be some tax loopholes – tax breaks on pension contributions, which are designed to promote pension savings – it didn’t intend others. It did not intend that spouses could save tax and national insurance by setting up jointly owned companies, shifting each spouse’s income within it, and taking income as dividends rather than as salary. But people are going to do that just as long as the law is daft enough to encourage it. When you have progressive taxes, when national insurance is separately calculated, and when the tax on salary is much higher than the tax on dividends, dodges like that are bound to occur and people are bound to use them.

Don’t blame taxpayers for there being so much tax avoidance. Blame taxes that are too high and too complicated. And tax rules that are vague and ill thought out. Likewise, don’t try to end avoidance by trying to close one loophole after another, when you are adding new complexities by the day. That will be an endless cat and mouse game that governments will lose, and sophisticated lawyers and accountants will win (and earn a lot of money from). The UK tax code is already the longest in the world. Tolley’s Tax Handbook needs five volumes to explain it, and is seven inches thick.

And definitely do not give more discretionary power to tax officials. Already, the relationship between the public and the tax-collectors is an unequal one. The latter can threaten you with fines and jail just to prove a point, and don’t care much about the time, effort or (other people’s) money they spend on it. Most ordinary taxpayers simply cannot afford the cost and the worry of of standing up to them. A legislative ‘presumption’ against avoidance would be the greatest tyranny, allowing them to challenge almost any aspect of a taxpayer’s affairs with complete immunity.

No, the solution is taxes that are simpler and lower – so low that people would see no point in avoiding them, and so simple that there would be no loopholes to exploit. This is why so many countries have turned to the Flat Tax. With low rates and few, if any, exemptions it’s clear what individuals and companies have to pay, and there is no point in setting up complicated schemes to avoid it. Internationally, too: instead of high-tax countries seeking to preserve their high-tax monopolies by closing down tax havens, we should be praising low-tax countries for the competition they force on the high-tax (and, most likely, high-waste) countries. Anything that puts pressures on governments to reduce waste and keep taxes as low as necessary deserves praise in my book. Let’s not castigate people who legitimately avoid taxes that are too high, too arcane and too wasteful.

Eamonn Butler is Director of the Adam Smith Institute