For a long time tax avoidance has been seen as a ‘left’ issue, however many are now realising that this is a fundamental ‘free market’ issue as well. Currently, small and medium sized businesses are at a serious disadvantage when compared to large multinationals as they are subject to taxes that the large multinationals are able to chose not to pay.
The simple fact of the matter is that a market is kept ‘free’ the same way that people and societies are kept ‘free’ – with firm rules that bound what can be done. Taxation is a key element to this – a free market needs fair taxes.
Taxation levels are a fundamental part of the economics of any business. Taxes need to be explicit and universally applicable so that a company can plan for the future and to know that its competitors are subject to exactly the same rules as itself. The size of the company must not matter. Large companies should not be able to pay less tax just because they are large and have the resources to avoid them and governments should not treat them differently. No government should, for example, do ‘sweet heart’ deals with a company just because it is huge and the tax man is grateful to get anything at all (a couple of years ago Vodafone managed to ‘persuade’ the tax office to reduce its tax bill from £6 billion to £1.2 billion, something no small business would ever be able to do).
You should view companies as being subject to a biological style life cycle of birth, growth and death so that the small start up company of today should be looked on as something with the potential to grow into the multinational of tomorrow. If anything (following the biological analogy) you could make a case that these small companies should be nurtured and have lower taxes than big multinationals – not the other way round which is what is happening at the moment.
So just as you wouldn’t describe a society that allowed its stronger/richer individuals to avoid any laws they didn’t like as a ‘free society’, then why would anyone consider that such an economic set up would constitute a ‘free market’?
Part of the problem is that the UK tax system is now so opaque and complex – not long ago rated the second most complex in the world by the OECD – that it can only be understood by employing armies of accountants and solicitors. This makes it more costly for small businesses than their bigger rivals: a UK Treasury report put tax compliance cost at £288 a year per employee for a business with 4 or fewer employees, but just £5 per employee for one with more than 5000 employees.
It is also a vicious circle. The more complex the tax system the greater the number of civil servants that are required to administer it, requiring higher taxes to pay for them along with the drag on productivity within the companies being taxed through their having to spend more time complying with it and ever increasing amounts of money on accountants and solicitors to help them do so.
The system is also bad for individuals. If you include National Insurance Contributions (which you should), then UK basic rate taxpayers now pay 40.25% tax. VAT pushes up the price of the goods they can buy with any money left after tax and housing and disproportionally hits the lowest paid who spend a greater proportion of their income on these sorts on rateable goods. The price of beer, for example, includes about 32% tax plus VAT, so 59% tax of the cost of a beer is tax. The situation is the same for petrol, of which tax constitutes about 81.5% of the total cost. These sort of tax rates for the should be considered oppressive but just don’t seem to be on the political agenda.
Then of course anyone who can claim to be overseas for a sizeable period of the year can avoid paying UK tax on some or all of their UK income as well. Another massive anomaly that helps those already well off far more than the lower paid. Phillip Green, the owner of Topshop among other companies, avoided £100 millions in tax by channelling £1.2 billion to his wife in Monaco.
Ronald Reagan once said that ‘no citizen should be expected to arrange their affairs so as to maximise the tax they pay to the state’. In other words, if the law allows you to avoid tax then it isn’t wrong to do so. It may be annoying to see the Google chairman Eric Schmidt smugly insisting that he is “very proud” of the company’s tax structure but unfortunately he is only doing what he is legally obliged to do and that is to maximise the money he can pay as dividends. Ultimately the problem is with our governments. Some of the tax avoidance systems operated by accountants for the well healed are just blatant tax evasion, being given tax free loans that you never have to repay, for example. The government is just to slow and reluctant to do anything about it. The rules are simply too complex, too difficult to apply and expensive to administer and too easy for people or companies with money to hide from.
For individuals a simple flat tax system combined with taking as many people as possible out of taxation altogether would be a distinct improvement. A system like this would also allow a massive reduction in the number of civil servants required to administer it and therefore the cost burden on the economy. The left often portrays flat taxes as unfair and regressive but the truth is, as illustrated above, that the current tax regime is deeply regressive and a simple flat tax would be a vast improvement. The problem with all other solutions is that the moment you introduce any complexity the better off can pay people to manipulate it and governments must employ armies of staff to administer it.
For corporates one option might be to impose a higher minimum wage rate on large companies. Not necessarily a good move if the company involved can offshore the labour but many, coffee shops and supermarkets for example, cannot. Anyway, it just cannot be right that a large multinational can employ staff at such a low rate that the local governments feel obliged to top up their income with benefits to give them a living wage (as currently happens in the UK). An option for dealing with those companies without local presence might be to impose an extra level of sales tax on them.
The ideal solution would, however, be for the major governments or the world to come up with some fair, transparent and binding agreements to handle corporate and individual tax avoidance. This needs to be sorted out now as matters will only get worse. In the not too distant future we could quite conceivably face the situation where a multinational company or billionaire starts mining an asteroid, probably under the flag of a tax haven, and invites a friendly bank to set up a token branch there for tax purposes! How on earth would we handle that?