The issue of tax avoidance cannot be divorced from the nature of the tax system, and that in turn cannot sensibly be discussed without thinking about what governments spend.
We have a hugely complicated system of corporate and personal taxation, and a tax code which is reputed to be one of the longest in the world at some 11,000 pages. The complications inherent in this system involve the creation of schemes to ensure that people and organisations who are not supposed to pay tax avoid doing so out of ignorance. Churches and other charities, which incidentally avoid about £4 billion of taxes every year as a result of their status, employ people to ensure that they gain all the exemption to which they are entitled. Every time we donate to a charity and it claims gift aid we are involved in tax avoidance.
Most attention focuses on corporations, of course. But here are strong arguments for saying that we should not have a system of corporate taxation at all – we didn’t until the 1950s. Corporations are legal fictions, not people. They are owned by shareholders. If there were no corporation tax, individual shareholders would pay income tax on increased dividends. Shares owned by pension funds and other financial intermediaries produce incomes for individuals who would then pay tax. Income which is not returned to shareholders goes to investments which generate incomes for individuals.
It is harder for individuals to avoid income tax than it is for corporations to avoid corporation tax. Scrapping corporation tax would largely be offset by increases in income tax, particularly since there is a net inflow of property income in this country: we own more corporate assets abroad than other countries’ residents own UK corporate assets.
Of course income tax itself needs reform. It is too complicated and there are too many exemptions. We should also merge it with national insurance, since there is no meaningful national insurance fund and the system misleads people into thinking that there is a distinction between employers and employees’ contributions. There is in reality no economic distinction between them: both fall on individuals, reducing their take-home pay (and also reducing employment). They also add substantially to the administrative costs of the system.
Income tax can in principle be progressive: in practice it is a crazy hotchpotch, with marginal tax rates rising and falling in bizarre ways as means-tested benefits and personal allowances are withdrawn. Something approaching a simple negative income tax would be much easier to administer and understand than the present system.
As for expenditure taxes (VAT and excise duties): we have increased our reliance on them in recent decades and they now raise three or four times as much as corporation tax and virtually the same amount as income tax. Yet they are regressive, with the heaviest burden falling on the poorest: ‘sin taxes’ on alcohol and tobacco are the most notorious examples.
So the tax system needs reform: but so too does government spending. Far too much of this spending simply involves recycling taxpayers’ money back into their own pockets – but with added administrative costs. I currently pay taxes but receive back ‘free’ travel with bus pass. I am entitled to ‘free’ winter fuel allowance and my daughter gets a ‘free’ 15 hours of nursery a week and will shortly be given ‘free’ school lunches. Why exactly? Much of our enormous (and expensive) tax and spend machine simply gives us our own money back in terms of services which we might have bought anyway – but would have preferred a choice.
The coalition government has made noises about attacking tax havens and preventing multinational firms from directing their profits to low-tax jurisdictions. I doubt it has the will to do this, and I’m sure it hasn’t the ability to do it in isolation. Can international action succeed? Again it seems doubtful. To a degree this is a zero-sum game: if the UK squeezes more tax out of Starbucks, less tax is paid in the USA or the Netherlands or wherever the coffee shop chain is currently hanging its corporate hat. Even ignoring this, the experience of international negotiations over carbon emissions surely shows the difficulties involved.
For the UK I am quite sure there is not a pot of gold which would relieve us of our need to rein in our spending. Corporation tax will bring in just under £40 billion this year. Suppose by some unspecified miracle we could increase that by 50% in one year with no adverse effects. Then suppose we could dramatically raise income tax on the 20,000 UK residents – the Jimmy Carrs and the Wayne Rooneys and so forth – with an income greater than £1 million a year. Let’s suppose, indeed, that we raised an extra half a million pounds a head from them on average (again a very optimistic assumption). Together the extra tax raised would be £30 billion. Not to be sneezed at, but less than a third of the projected deficit for this year. Or less than a seventh of our benefits bill.
The reality is that in a country with 60 million people a policy of squeezing money out of the rich and out of large corporations is not going to serve to cover all the things people want to spend public money on. The burden must inevitably fall on the average taxpayer in the long run, particularly if, as we see just across the channel, the rich resist expropriation and head somewhere more congenial. And the only way taxpayers can pay more, even if they are willing, is for productivity to increase - and this means encouraging, not discouraging business.