The so-called Paradise Papers published this week have spurned predictable outrage at the apparent extend of tax avoidance by the ‘rich and powerful’. Several high-profile people and companies were named in the documents as having utilized off-shore jurisdictions to lower their tax bill, though there are no suggestion so far that anyone has acted illegally. This contrasts with the Panama Papers, published earlier this year, which has led to multiple criminal investigations in more than 70 countries.
The outrage is unsurprising. With public services under pressure and the government running persistent deficits, the idea that some can avail themselves of tax loopholes unavailable to the common man grates. Gone are the heady days of the Blair years, when billionaires flocked to British shores to take advantage of the UK tradition of not taxing global income for non-domiciled residents – all with the blessing of the ‘intensely relaxed’ government, who were happy to be able to tax whatever income the rich brought on-shore to splash on champagne, Porches and Chelsea properties. These days, in the wake of the financial crisis, ‘fairness’ is at the forefront of the political agenda.
But is tax avoidance necessarily morally wrong?
Companies have an obligation to their shareholders to optimize their tax structure. Of course, that does not necessarily imply minimizing their tax liabilities. Earlier in 2017, companies like Starbucks, Google and Amazon suffered reputational damage when the size of their UK tax bill was perceived to be unjustifiably small compared to the scope of their UK operations. Google eventually caved to pressure and agreed to cover a decade of perceived underpayment. Apple, named in the Paradis Papers, may decide that the possible damage to their brand justifies a similar gesture. But shareholders will expect a company to make a conscious choice.
For private citizens, the calculation is more straightforward. The only hinderance to the legal utilization of loop-holes is one’s own morals. The popularity of ISAs (tax free savings accounts) indicate that most would indeed avail themselves of any additional opportunities to reduce their tax bill.
As libertarians, we not only acknowledge the individual’s right to attempt to avoid paying tax, we endorse it wholeheartedly.
Firstly, and most importantly, we view taxation as a transgression against property rights. There is therefore a strong moral argument in favour of individuals seeking to minimize their tax liabilities. We do not accept the ‘fairness’ argument that all should contribute and be subject to the same rules. As taxation is a form of theft, the fact that your neighbour is being burgled does not oblige you to hand over your property to the thief as well.
Second, we favour competition between tax jurisdictions. The ability of tax-payers to shift income between tax jurisdictions is one of the few forces that exerts downward pressure on tax rates, as can be seen in the global trend to reduce corporate tax rates.
Third, the existence of loopholes in tax legislation owes itself largely to the complexity of the tax legislation. Britain has a tax code of more than 17,000 pages and it has exploded in size in the last two decades. It is hardly surprising that a skilled lawyer will be able to identify loopholes in such a byzantine body of legislation. Compliance wastes resources and the complexity prevents most from calculating their own tax liabilities. Tax avoidance may encourage simplification.
Fourth, tax avoidance is a method to ‘Starve the Beast’ – the strategy of depriving government of revenue to force a reduction in spending. Unfortunately, in the current era of negligible fiscal discipline, this strategy may be relatively ineffective.
Despite our position on the morality of tax evasion, political reality makes it imperative for Theresa May to act. This is not a question of revenues or morality, but perception. The Paradise Papers may not have exposed criminal behaviour, but in the court of public opinion the verdict is already in. In an age of increasing demonization of wealth, the perception of an elite operating to different rules to the rest means few care to distinguish between legal tax avoidance and illegal tax evasion. The real danger is not a few lost tax-dollars, but that the Paradise Papers play right into the hands of a resurgent political left. Jeremy Corbyn and Bernie Sanders have been quick to denounce the ‘international oligarchy’ and the ‘super-rich elite’ who ‘hold the rest of us in contempt’. Indeed, tax loopholes does seem to work for the few, not the many. John McDonnel was quick to launch sales pitch in the Guardian: ‘ if this government is not prepared to take the action needed to end the scourge of tax avoidance, it must step aside for a Labour government that will’. That would spell serious trouble, not only for the tax-avoiding elite, but for the whole of the British economy.