Tax Reform

I'd like to talk to you about tax reform....wait, don't go. What you've just remembered you have a doctor-haircut-dentist's appointment now, so you can't possibly read this blog?

Bueller.....Bueller.... anyone want to talk about tax reform?

Unless you are a tax lawyer, tax accountant or have Asperger's (the three conditions can co-exist quite comfortably), avoiding a discussion on tax reform is perfectly normal. Tax, like immigration, is one of those flypaper topics that draws out weird insectoid lifeforms, the type of person who posts on newspaper comment boards with nicknames such as 'Freeborn Englishman', 'No to EUSSR' and 'Straight Shooter'. Their avatars are often a reworked version of the EU flag, made to resemble the Soviet Union's hammer and sickle or the cross of St George with a bloodstain. The subject also attracts the ranters of from the left, less numerous than the hard-right headbangers but persistent. They tend to use aliases such as 'The Real Che' or 'Rosa Luxemburg', with avatars ranging from 'Stop the War' banners or effigies of Margaret Thatcher hanging from a noose. The net effect is to make balanced, reasonable people associate the subject with oddballs and cranks.

There are other reasons why tax reform is never properly debated. Most obvious is the headache inducing complexity of the subject. Britain's tax code has doubled in size since 1997, now ten times longer than 'War and Peace'. Read Tolstoy's classic and you are taken on an epic journey, in the company of cast of engaging and complex characters. Read Tolley's Tax Code from start to finish and you are likely to go insane. If you do manage to read it and don't lose your mind, then it's likely you are already suffering from a severe personality disorder, requiring immediate psychiatric intervention. So bewildering, so baffling, so Byzantine  is modern tax legislation that not even tax experts can agree on what it means. I remember reading a newspaper article last year about a recent change to the tax code. Twelve of the finest tax lawyers, accountants and academics were gathering to discuss its implication; they were unable to reach a consensus.

Then there is the issue of vested interests, who would rather the general public did not look too closely at the tax system, otherwise they might start to ask awkward questions. An unholy trinity has formed in Britain, as it has in many countries, between politicians, bureaucrats and multi-nationals that prefers the current system to any radical reform. These groups all benefit from an overly complex and convoluted tax structure; they fight attempts at transparency and clarity. Politicians like a myriad of reliefs, allowances and tax bands; it enables them to reward their voters, hide the true level of tax and play politics with the nations finances.


Civil servants, whether they are central or local government functionaries or quangocrats, seek to protect their jobs and influence. When you ask a bureaucrat about cutting down the tax code, you are asking a turkey to vote on the subject of Christmas or Thanksgiving. They vote no, unless they are seriously depressed with life as a turkey. Multi-nationals too prefer things the way they are. An opaque, confused and contradictory system grants them a competitive advantage over small and medium size businesses who struggle with the burdens of compliance. Moreover, these multi-nationals can exploit a system so complex it is by its very nature full of holes, to avoid paying as much as individuals or entrepreneurs. Your local corner shop cannot employ transfer pricing or register its property holdings in Lichenstein, Tesco can and does.

There is an overwhelming temptation therefore, given the Herculean nature of the task of reform, for both politicians and electors alike to add further laws rather than remove them or to tinker with the existing status quo. Yet collectively burying our hands in the sand, we are no better than the ostrich - a dumb birds waiting to be plucked. We should care about tax reform, because the current situation constitutes a confidence trick played on the general public to serve base political and corporate ends. Let me give some examples from the current tax system, to illustrate my thesis:

National Insurance 

NI, levied on employers and employees, is perhaps the best case of a tax that creates misleading expectations and perverse outcomes. Firstly, it is not insurance by any reasonable definition. Money raised by NI goes straight to the Treasury, there is no NI fund which acrues over time. Government uses the money to pay previous obligations with current funds, a set-up which if copied by a private insurance firm would land all the directors in prison for a very long time. What's more, NI doesn't even come close to meeting the pensions and health care liabilities, so the shortfall is made up by general taxation. Whether you have paid NI all your life, it makes no odds. The money has been spent and is long gone, which is an incentive to pay the absolute minimum.

Employers national insurance is a whopping 12%, which most people who don't run businesses never notice. What this levy does it make it much more expensive to create permanent jobs, instead of casual or freelance contracts. The employer receives no benefit whatsoever. Boo hoo, you might say, that's the cost of doing business. Companies benefit from the education system (sort of), roads, police etc, so it's only fair that they should contribute. Maybe, but employer's NI isn't linked to profits, turnover or cashflow. The burden falls more heavily on smaller businesses, who have less access to credit that multi-nationals.

So you have a tax that is misleading, doesn't raise enough, stifles entrepreneurs and makes job creation expensive.

45 or 50% income tax 

I realise that suggesting that progressive taxation is a bad idea may in some people's eyes relegate me to realms of the swivel-eyed tax nuts, but hear me out. Let's say you are a Guardian reading, Labour voter who wants to redistribute wealth, surely more progressive taxation is your answer? The numbers suggest otherwise. The super-rich pay an effective tax rate of 8% as they can engage in bizarre tax avoidance schemes using offshore trusts. Chris Moyles is in the news for a tax dodging scheme where he claimed to a second-hand car dealer. Lots of us can think of words to describe Chris Moyles, there's a four letter one beginning with 'c' that trips of the tongue. None of us would every describe him as a 21st century Arthur Daley.

What these tax-avoidance capers do indicate is that people will come to extreme lengths to avoid paying tax. Guy Hands, the private equity guru, won't even change planes at Heathrow for fear of affecting his non-dom status. And even at a 45% rate of tax, the British system is already very progessive with the top 1% of tax payers providing 33% of the tax take. Yet inequality is at record levels. Even if we returned to the 50% band, the extra revenue raised would be at most £1 billion and do nothing to dent the gulf that separates the poorest and richest.

Under Gordon Brown, the Treasury commissioned a study about the effects of moving to a flat income tax rate, abolishing NI and raising personal thresholds. The results were startling, tax yields were predicted to rise as compliance become easier to enforce and tax avoidance less rewarding. Those on low incomes, once the threshold was raised were better off. Gordon Brown insisted that the report be redacted, with much of the conclusions removed.

There's also the other question of the fairness of income tax. Top rate income tax is after all levied on those in work, which is something we wish to encourage and reward. Make income tax too high and those top earners may chose free time over office time, as their net returns are minimal. Meanwhile, the real source of inequality in Britain, the distribution of land and wealth remains completely untouched. Much as you may feel a financier of £500,000 a year is overpaid, he or she still has to turn up for work each day. The Duke of Westminster, whose net worth is close to £4 billion, gets richer every year by several £100 million thanks to rising property prices.

Why tax those in work over those who don't have to work by accident of birth? It's illogical and leaves government finances dangerously reliant on those 300,000 top earners.  So progressive taxation is a convenient myth. Those on low incomes may pay 20% in income tax, but they pay 20% VAT on goods and services and punitive taxes on cigarettes and alcohol. Factor all these other taxes into the equation and the end result is we tax the poorest 20% far more harshly than the Duke of Wesminster, relative to income.

Very high rates of income tax are avoided by the super-rich, raise minimal revenue and make tax compliance expensive and difficult. Even a socialist would wonder why we bother.

Buy to Let Tax Relief

This is a more minor tax issue, unlike the big strategic questions of income tax and NI (which is really an income tax in all but name). Yet it is a perfect illustration of the madness of modern tax. The UK is experiencing an acute housing crisis in the South East. Too few new homes are being built, with market wide open to international buyers that are snapping up available stock. So what you want to do in this situation is surely encourage more house to built, right? Wrong, what we do instead is give private buy-to-let landlords a tax break on their mortgage interest.

Your average buy to let investor is in their 50s, already owns one home without a mortgage and has one or two other properties to provide rental income. In other words, they are well-off individuals who are then making up to a 15% return on capital, from charging rent to their tenants, typically young people in their twenties, on lower incomes at the start of their career. Who in this scenario deserves a tax break?  Remember too that this investor does not build new property, they merely drive up the prices of existing housing.

Logically, the tax system ought to favour building houses to meet demand. Logic doesn't win elections. As is often the case, tax and tax breaks are all about politicians looking after their client base. Buy-to-let owners vote and usually vote Tory, votes Cameron desperately needs.

Mortgage tax relief helps the well-off extract rack rents from those worse off, subsidises property speculation and rewards the rentier over the worker.

This blog is just a tiny glimpse into the sheer lunacy of the Britain's tax system , a monster that has outgrown its original purpose. I've got more examples if you are interested, what about business rates for example....hey...come back, that cat dressed as shark video can wait...it's important...hello....

Bueller...anyone...Bueller?

 PS All that it takes for the evil taxes to prosper is for good people not to pay attention.

Offshore Madness

The 31st of October 2011 is the deadline for submitting your personal tax return on paper, which in the digital age seems rather quaint, a relic of a bygone age where people use fountain pens to write cheques,  denominated in guineas, for life's essentials such as top hats, shooting sticks and steamer trunks (whatever they were).

Nostalgia aside, no one from any era is a fan of paying tax, unless you do in fact work for HM Revenue and Customs when paying tax is more akin to the staff of John Lewis shopping at John Lewis - you genuinely are keeping yourself in a job. Although I suspect tax inspectors do not get a staff discount on their income tax. If they did, they might be more inclined to pick up the phone. That's directed to the Chapel Wharf Area Tax Office, you know who you are.  When I owed you money, I received menacing letters warning that you were going to repossess my left kidney (my favourite one, since you ask) and sell my wife to a sex trafficker. (Strictly speaking the letters they sent me did not actually threaten organ loss or spousal slavery; but they were curt and I know how to read between the lines). Of course when the debt is the other way round mysteriously enough the income tax refund gets stuck, as if the funds were somehow an overweight feline that had outgrown its catflap.

There is, however, one species of cat that has no problems wiggling out of tight spots.  It's a fat one, who receives a special  tax discount not available to the the little people (as the rest of humanity, tall or short, shall now be known). What's more, this type of moggy is well-greased by Her Majesty's servants. You guessed correctly, fat cats are back in the news again: in this case Goldman Sachs for a backroom deal  with the Revenue that avoided a £10 million liability.

Interesting the contrast between the small trader whose VAT receipts are late: he gets the knock and his property seized. But the likes of Goldman have a cozy arrangement that would do an African kleptocracy proud. For those of you that missed this latest banking wheeze, they had set up a Virgin Islands subsidiary to pay bonuses to its UK employees and after a chat with Dave Hartnett, the UK's most senior tax collector, were let off the money they owed. He did a similar deal with Vodafone, who by some accounts owed the Exchequer £6 billion and paid only £1.2 billion.

Scroungers in suits

Judging by the standards of the 25% of FTSE 100 companies who were named and shamed in the Action Aid report this month, the use of offshore companies located in tax havens to avoid UK taxes is widespread. Two prime offenders are Lloyd and RBS; yes state-owned banks have scores of offshore vehicles designed to avoid UK tax. It is beyond parody, beyond politics, beyond belief.

Brand Values 

In a sense, the rampant tax evasion and freeloading by high net worth individuals and corporations, with the supine assistance of accountants and lawyers who betray their own professional codes, would somehow be more acceptable if it were done brazenly, as a colossal 'Fuck You' to civil society. I guess it might not sit so well with their brand values. You would have to ask Barclays, Vodafone and BP what those values are exactly, if they do not include being a decent corporate citizen and paying your dues.

Yet those involved must have some twinge of conscience because they have to couch their immoral behaviour in the veneer of respectability,  so this is not  rampant tax evasion, parasitism and freeloading of the type if displayed by a member of the underclass would provoke The Daily Mail to new heights of indignation.  No, it is tax competition: a form of free enterprise and a bulwark to socialism.

The concept of tax competition

There is little point dealing with the substance of their arguments as there is none. Tax competition means every country must join in a race to the bottom, where you'll find Afghanistan, the country with one of the lowest tax takes in the world. Reform must take place within the context of people and corporations paying tax; evasion by offshore havens undermines the basic contract that a citizen and corporation makes with the state: live here, trade here, pay tax. Those hedge funds based in the Cayman Islands should actually live in the Cayman islands, the Tesco stores located in the UK owned by a Lichtenstein holding company should be relocated there, breeze block by breeze block if necessary.

Growing deficits in developed economies have coincided with an explosion in tax avoidance via offshore activities, with lost revenue accounting for over half the deficit by some calculations. Crack down on benefit scroungers and welfarism if you want, but how else would you describe an individual or multinational who derives all the benefits of UK civil society but avoids paying their dues?

Tax havens should be shut down by old fashioned gunboat diplomacy, using a boat with guns on it. Even though the British navy has been reduced to a canal barge with canon of Napoleonic vintage and a couple of blokes in outboards with cricket bats, they could still handle these offshore jurisdictions. Seriously, what exactly could Jersey do if we decided to send over some marines and forcibly open its books?  Likewise, the French should storm Monte Carlo, the Spanish march into Andorra, if the Germans can't quite bring themselves to invade Lichtenstein, subcontract the job to the Poles if you to get the job done properly.

The law needs to change: if it looks like duck and quacks like a duck, it's a duck. If it looks like tax evasion, then the burden of proof should be reversed so that companies must prove that setting up numerous shell companies in tropical islands that are notorious for laundering drug money is in  fact a legitimate way to structure a business. Likewise, lawyers and accountants who help offshore tax evasion should be held accountable, with criminal charges if appropriate. If a little person dodges his tax, they can face prison, why should it be any different because miscreant is better dressed?

Let's call time on this offshore party at our collective expense.