Not being unlawful isn't the same as being acceptable

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Most people will have some sympathy, initially at least, with the protests from Sunak and his supporters that attacking his wife is an unfair political tactic. He, after all, is the politician and therefore fair game, not her. Their protests might have a bit more credibility, however, if they didn’t come just days after the UK government decided to sanction the alleged (they don’t even seem entirely sure of that) step-daughter of the Russian foreign minister on the grounds that “those benefiting from association of those responsible for Russian aggression are in scope of our sanctions”. It's a simple fact that any close association between individuals can mean that someone benefits from the wealth or activity of another, and there are few associations closer than marriage. Sunak might not need his wife’s money, but any income she receives is part of his household’s income and must therefore be open to a degree of scrutiny. A Chancellor who claims to oppose tax avoidance yet whose household benefits from it ought to realise that he has questions to answer; the fact that he doesn’t tells us a lot about his sensitivity (or lack of) to what others might think.

By the same token, his marital arrangements are, in principle, solely a matter between the two of them, but when the spouse of someone who thinks he should be PM is openly declaring her intention to return to India where she claims to be domiciled, he really shouldn’t be surprised if people start wondering about the extent of his own commitment to the country which he seeks to govern. With that ambition in mind, his protests about opposition politicians would sound a great deal more sincere if it wasn’t almost certain that the information had been leaked by someone on his own side determined to stop him achieving said ambition.

He and his supporters are claiming that neither he nor his wife have done anything wrong, and in legal terms they are correct. But is merely being ‘legal’ enough? It isn’t just Sunak; time after time politicians caught out doing something which others might feel is perhaps a little dodgy respond by denying any wrongdoing and stating that ‘no rules were broken’. Confusing what is right or moral with what is legal has become increasingly common as politicians outsource any sense of morality to whoever makes the rules. Being legal, however, isn’t the same as being ‘right’; the fact that something hasn’t yet been legislated against doesn’t make it acceptable. It is not at all unreasonable to expect those who govern us, or seek to govern us, to give at least a little bit of thought to whether what they are doing is not only ‘not currently banned’ but also stands up to scrutiny in terms of what the governed might see as reasonable. They do, after all, keep telling us that a sense of fair play is one of the great British values which allegedly unites us. It does not, however, seem to be one of the values which they think is important in terms of their own actions.

Tax returns - who cares?

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In refusing to release his income tax details, UKIP’s leader in Wales said that he thought that the rush by other leaders to release theirs was a bit of ‘grandstanding’.  His refusal succeeds in making him look a little shady, but the comment is one of the few things he’s ever said with which I agree.  A question about whether the Prime Minister has gained from the tax avoidance benefits of an off-shore arrangement has been diverted into a competition between politicians to see who can appear to be the whitest.  And the original question has been completely lost in the process.

I’m not particularly interested in seeing politicians’ tax returns.  All they really tell us is that the individuals concerned have paid the correct amount of tax on the income that they’ve declared.  That should surprise no-one; it’s actually very difficult to avoid paying tax on income once it’s declared.  HMRC may have its faults, and they may sometimes struggle with the arithmetic, but the formula for calculating tax is straightforward, and once the income is properly declared, they will eventually get it right.  It strikes me as highly unlikely that any tax return published by any politician is ever going to get that wrong.

But the question asked of Cameron wasn’t whether he had paid tax on the income received; it was whether he’d ever benefited from a tax avoidance scheme.  Whilst it seems clear that he has paid all the tax due by him personally on the monies received, it remains the case that a company incorporated off-shore was able to avoid paying a penny in corporation tax for many years (even if, as the PM claims, that was never the prime objective of the off-shore arrangement).  It is probably reasonable to assume that not having to pay tax on company profits allows a company to accumulate profit at a faster rate than an equivalent company incorporated elsewhere, and therefore that the beneficiaries of the arrangement ultimately gain from the tax-free status.  That, I thought, was the original question, but it seems to have been lost in the rumpus over tax returns – a good indicator of why ‘hue and cry’ is not the best way of dealing with complex issues.

But let’s get back to the question of tax returns.  ‘Tax returns’ is being used as some sort of cypher to assess the openness and transparency of politicians (which is why, although he may have a good point, the refusal of UKIP’s Welsh leader to release his makes him look dodgy).  But what do we really need to know about politicians and money?  Fundamentally, it seems to me that there is only one relevant issue.  In essence, that is the source of their income and wealth, so that we can judge whether any decisions that they take are likely to be influenced by considerations of personal advantage, or to what extent, as a corollary, they are able to benefit personally from the rules that they change (or fail to change) whilst others are not.  If the rules on declarations of interest aren’t good enough to ensure that, then they need to be changed; tax returns don’t actually add much useful information.  And anyway, if someone is dishonest enough to make an incomplete declaration of interest, why would anyone expect that they’d then tell HMRC the truth?

Legality and morality

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The Panama Papers have highlighted for me an increasing trend amongst politicians, bankers etc. to transfer all responsibility for deciding on the morality of a given action to the legislators in parliament.  Anything which isn’t specifically illegal is thus automatically deemed acceptable.  The phrase “no wrongdoing” is glibly equated with “no criminal activity”. 

The law company at the centre of the scandal has gone one step further in defending itself by drawing attention to the fact that it’s never been charged with any offences in 40 years of activity.  True, but the parallel which came to mind was with a very successful bank robber who’s never been caught.  Never having been caught isn’t at all the same thing as never having committed any criminal acts, yet that seems to be the essence of their defence.

Cameron in particular is squirming under the pressure, and rightly so given his previous condemnation of others for similar activities.  His latest line – that the infamous trust wasn’t set up to avoid tax, merely to allow trading in dollar-denominated securities – is an attempt to tell us that the tax-avoiding consequences of the decision to set up the trust in that way are merely some sort of ‘incidental’ result of an action taken for an otherwise entirely proper reason.  Perhaps from his perspective that sounds credible, but I doubt that many will be convinced. 

It’s bad enough when the bankers fall back on the simplistic equation of morality and law, but for ministers and legislators, it’s a much bigger problem – because, after all, they’re the ones who make the law.  For them to defend an action on the basis that they themselves haven’t actually legislated to outlaw it simply doesn’t wash; rather, it makes the offence worse.

It’s probably unreasonable to expect that legislators and ministers, drawn as they are on an almost random basis from the population, will be on average any more honest or less venal than those outside parliament.  And given the electoral processes, there is no easy way for the electors to keep them honest, not least because there can never be any guarantee that any replacements will be any better than those they replace.  But we can and should challenge the simplistic assumption that morality and legality are one and the same thing.  And especially so in the case of those making the laws.

Don't do evil

Tweet Google’s motto was rather thrown back at them last week by the Chair of the Commons committee looking at tax avoidance by some of the major companies.  I’m not sure that it was entirely fair though.

It’s not that I support tax evasion; I don’t.  Clever schemes to avoid paying tax in one jurisdiction by transferring the transactions to another are at the least immoral, and from some reports, may even be illegal.  But are immorality and illegality the same as evil?  Evil suggests something much more deliberately malign to me.

Killing people – now that would be evil.  Building and possessing weapons of mass destruction, or supporting and acquiescing in such – now that would be evil in my book.  (And, purely coincidentally, would put most members of the said Commons committee higher up my list of evil-doers than Google.)  But using the letter of the law to avoid paying tax doesn’t seem to be in the same league to me.

It made a good headline, though; which was probably all that it was ever intended to do.  Publicly castigating the bosses of such companies is great fun, and attracts attention to the castigators.  But I can’t help feeling that our legislators would be better occupied simplifying and strengthening the laws under which such companies operate rather than engaging in witch hunts.  To say nothing of ensuring that the authorities prosecute through the courts when breaches of the law are discovered.

Expecting capitalist companies to do other than maximise the profits of capitalists by every means that they can is unrealistic.  It’s what they’re there for.  Enriching themselves at our expense is what capitalists do; the evil is in the system rather than in the individuals.

PS – Another thing to emerge from last week’s news on tax avoidance was that Amazon paid less in taxation than it received in government grants.  Am I the only one to be wondering how on earth we can be in a position where a company making billions in profits is getting grants at all?  In this case, it’s the Scottish Government paying them an incentive to build a new distribution centre in Dunfermline; but presumably similar incentives were paid for the centre in Swansea.  We’re paying grants to companies to establish themselves here and then transfer all their profits and taxes elsewhere, in effect.

It makes for an interesting comparison with the call by Iain Duncan Smith a few weeks ago for pensioners who don’t ‘need’ the benefits they’re being paid to give them back.  What about capitalist companies which don’t ‘need’ the grants they’re receiving?

Mob rule

Tweet The proposal put forward last week by the Public Accounts Committee that those who sell aggressive tax avoidance schemes should be ‘named and shamed’ is likely to prove a popular one.  Few of us have much time for those who seek to avoid ‘paying their dues’.  But although I have as little sympathy for them as do most other people, I’m still more than a little uneasy about the idea of officially-backed public vilification.

Like it or not (and I don’t), the reason that there are people prepared to develop and sell such schemes is that there are others who are keen to buy them.  In this case, the sins of the purchasers are at least as heinous as the sins of the sellers.  Besides, none of them are actually doing anything illegal; they are merely using an excessively convoluted tax code to their own advantage.  That may be immoral, in the eyes of many; but it ain’t illegal.

But who sets the standards for morality?  It’s clear that parliament sets the standards for legality (leaving aside the question of being able to abide by those standards themselves!), and for those things declared illegal, the full force of the law can be used against perpetrators.  Public opprobrium is simply a bonus in those cases.

But once we start giving the green light for the media and others to start the opprobrium where there is no illegality, merely a transgression against an unwritten and largely arbitrary moral code, where does it end?  It’s a form of mob rule; and officially sanctioning it makes it uncomfortably similar to some aspects of the former totalitarian states.

Rather than encouraging a process which they are unlikely to be able to control once unleashed, our elected representatives would be more gainfully employed re-writing – and simplifying – the tax code; removing all the little complexities which create the opportunities to avoid tax.  Making tax avoidance schemes illegal, and dealing with the perpetrators under the law, might not be so populist in the short term, but it’s surely more effective in the long term.

It doesn't have to be this way

Tweet The decision by Starbucks to pay some Corporation Tax over the next two years highlights a feature of the tax system which is widely used but not so widely known.  For large multi-national companies, Corporation Tax is essentially a voluntary tax.  They can decide how much to pay and where.

It isn’t new.  It’s something which large oil companies in particular have long been able to do.  If you own the whole supply chain from exploration through to retail, vesting different parts of it in different companies based in different countries but within the same group allows you to set transfer prices in a way which generates the ‘profits’ in the most favourable jurisdiction. 

What Starbucks and the others have been doing is simply a variation on that.  And the main thing that they’ve done differently is to be greedy – wiser companies have taken advantage of the rule in a more moderate fashion which leaves them paying something to everyone.

The recent stories have also highlighted another factor – the use of nameplate companies.  These are companies, set up in low tax jurisdictions, which don’t do anything very much other than act as a repository for profit, and a means of avoiding tax.  Ireland has been doing a bit of that of late; setting a low rate of company taxation has encouraged companies to set up nameplate companies in Ireland.  Ireland has gained, the companies have gained – it’s just the rest of us who’ve lost.

It underlines the danger of seeing company taxation as a competitive tool, and potentially gives ammunition to those keen to avoid devolution of Corporation Tax in the UK.  A race to the bottom might generate local benefits, but those benefits are not always based on real economic activity.  A race to the bottom helps no-one in the end.

What’s noticeably absent from the Starbucks statement is any commitment to change their accounting practices in the long term.  The PR that they’re getting from this gesture is good; but there’s no sign that they are really going to change.  They also haven’t given, a far as I’m aware, any commitment that they won’t simply use the tax paid ‘voluntarily’ over the next two years to offset any taxes which might become due in future years; something which they’re perfectly entitled to do.

Since none of the companies concerned have actually done anything illegal – indeed, they are under a legal obligation to maximise shareholder value – it’s unrealistic to expect any great change in behaviour unless the legal framework in which they operate is changed.  The government is showing little sign of any willingness to tackle that issue.  Again, that’s not really surprising – looked at as purely a tax collection issue, it’s hard to see what they could do effectively.

But what if we looked at the issue more widely?  Why does the law say that companies are obliged to maximise shareholder value (within the law, naturally) regardless of the interests of other stakeholders?  Setting the interests of capital above other interests might be a reflection of where we are; but there’s nothing inevitable about that.  We can order things differently if we wish.  It’s not a proposal I’d expect from the current government – but I’m not hearing it from any of the opposition parties either.  Why are they all so wedded to the rule of capital?

Taxing donations

Tweet The furore over the Chancellor’s change to the rules about tax relief on charitable donations has been confusing, as different sides play with statistics to present different pictures of the impact.  There’s been rather more heat than light on the whole. 

The charities stress how much they stand to lose, the large donors threaten to donate less in future, and the government points to the way in which charitable giving reduces the effective tax rate of some of the very rich.  And it seems to me that they’re all correct, despite drawing different policy conclusions from their differing interpretations.

If I correctly understand the tax rules concerning donations, the sums turn out to be surprisingly complex; but let’s take the grossly simplified scenario of two millionaires, M1 and M2, each of whom receive £2 million per annum.  M1 decides to ‘keep’ all his money whilst M2 decides to give half of it away to charity.  And let’s assume, again for simplicity, that the effective marginal tax rate on the whole of their income is 50%.

M1 gets to keep £1 million and the Government gets £1 million in taxes, nice and straightforward.  His tax rate is clearly 50%, and he has a million pounds left over to spend.

M2 pays £1 million to his favourite charity (which then gets a tax credit from HMRC on the basis of an assumption that tax at basic rate has already been paid, meaning it actually receives £1.25 million).  He’s already paid £1 million to the Government in tax, leaving him with nothing, but he can then reclaim tax at the remaining 30% on the grossed-up £1.25 million, so the Government repays him £375,000.  In total, therefore, he’s paid only £625,000 tax on his £2 million – an effective tax rate of only 31.25%, and he has to struggle along on a mere £375,000 for the year.

(And the government has received only £375,000 net – around a third of what it got from M1, which probably highlights their real problem.)

According to the government, M2 is a bad guy, because he’s reduced his effective rate of tax to less than those on smaller salaries will be paying, whilst M1 is a good guy because he’s paid his full whack of tax at 50%.  But which is the better citizen (leaving aside the question of whether either of them deserve to receive £2 million in the first place)?  It’s far from being so clear cut.

Part of the answer might depend on what the chosen charity or charities do, as well as on the perspective of those making that judgement.  From my perspective, a donation of £1 million to Oxfam looks a lot different from a donation of £1 million to another of the UK’s major charities, Eton School.  (And in the second case, my judgement might be further coloured if the donating Millionaire sent his progeny to said school, effectively gaining some personal, or family, benefit from his ‘charitable’ donation.) 

That, though, is really an argument for reviewing the basis on which charitable status is bestowed on organisations, rather than about the tax relief on donations to charities per se.

The more significant question for me is that whole principle of tax relief on charitable donations.  I don’t blame charities for wanting such a system, nor for making the most of it.  And I can understand why governments (of both parties) have used the system to try and encourage more charitable donations – after all, things done by charities mean that they don’t need to be done by government. Voluntary donations are always more popular than involuntary taxes.

But the granting of such generous tax relief means that our friend M2 is actually donating only £625,000 of his own money, and another £625,000 of money which would otherwise go into the government’s coffers.  Is it really his to give?  That’s a much more challenging question than the Chancellor has been prepared to ask.

Capital Gains and tax avoidance

Tweet I'n quite enjoying the spectacle of Tory backbenchers getting het up about proposed changes to Capital Gains Tax. It's one of the policies insisted on by the Lib Dems – and goes directly contrary to what the Tories themselves would otherwise have done, so I can understand the backbench frustration.

Part of the problem with the debate on the substance though is that the two different viewpoints are based on very different perspectives on the issue.

Plaid, like the Lib Dems, called for an increase in the rate for Captial Gains Tax. We actually argued that it should be set at the same rate as income tax, and subject to the same single tax free allowance. The principle behind that was, very simply, that 'income is income', and should be taxed as such.

We were mindful of the way in which the differential rates of tax were leading some people (hedgies, for instance) to take their income in the form of capital gains, which means that people with a very high income end up paying tax at a lower rate than the most low-paid in society. It's a practice which costs the Treasury around £1billion a year in lost revenue.

Those objecting to the change seem to be doing so on the basis that it hits long-term savers, including those who have invested to fund their retirement. I'm not entirely unsympathetic to that position, but I somehow doubt that there is an easy way of differentiating between the two different things without creating more loopholes which those who simply wish to avoid paying tax would seek to exploit.

Avoiding both tax and the question

Tweet After ducking and diving for 10 years, Lord Ashcroft has finally admitted what most of us suspected all along – he doesn't pay full UK taxes. It's still not entirely clear whether his donations to the Tories are from his UK earnings or from the overseas earnings on which he's avoided paying UK tax.

The Electoral Commission are still investigating whether the company used to make most of the donations is actually trading in the UK or whether it's just a device to channel money from Belize to the Tories, which would otherwise be illegal. Their investigation has taken a long time. It could have taken less, of course, if the Tory leadership had not been so "evasive and obfuscatory", presumably in the hope that all would not become clear until after the forthcoming election.

The proceeds of Ashcroft's tax avoidance do not seem to have found their way directly into local Tory coffers, but their own annual accounts reveal that staff from Ashcroft's office are regular attendees at their campaign meetings. Of course, they do not need money from Ashcroft locally, because they are largely financed from the proceeds of hedge funds with the single objective of repealing the Hunting Act.

(As I've noted before, one of the advantages of the way in which hedge funds are generally structured is that the profits are treated as being capital gains rather than income, and therefore taxed at a lower rate. It's another legal form of tax avoidance, and one which Plaid are pledged to stop.)

What I found hardest to believe was Cameron's response to Ashcroft's revelation. The first part was that everything is all right now, because after 10 years of ducking the question, we now know the truth, and the second is that there are one or two Labour donors who make use of the same tax avoidance loopholes. Wrong on both counts.

Finally admitting that one of their donors is avoiding UK tax on a massive scale, and pointing out that others do the same is not enough to excuse it. The second part simply means that Labour also have questions to answer; it's absolutely no reason to condone the practice.

After all that's happened recently, it just amazes me that they still don't get it. They really don't seem to understand why anyone would think that there's anything at all wrong with someone who avoids paying UK tax on most of his income sitting in the UK legislature and using his money to influence the results of a UK election.