UK Uncut is wrong about tax avoidance

UK Uncut is a pressure group which has achieved prominence recently by publicising allegations of tax avoidance by firms such as Topshop, Vodafone, Tesco and Boots. Its visibility has been enhanced by social-network-arranged demonstrations at high street branches of these companies. This is a minor though embarrassing inconvenience to firms and a source of bemusement to unsuspecting customers. In the video clips and photos the demonstrators look to be having a great deal of fun, and they have not been particularly violent. But do they have a point?

The group claims that public sector cuts would be unnecessary if our corporate giants abandoned – perfectly legal – arrangements by which taxes are paid in offshore jurisdictions with low rates. It is claimed that as much as £100 billion is lost annually to the Exchequer by such devices. If this could all be recovered it would be unnecessary to make public spending cuts which will amount over the next few years to around £80 billion.

It does sound appealing to those who think that all public spending, wherever and whatever, is fully justified. Such people are probably a fairly small minority, but of course every possible cut has its vociferous opponents who make common cause against any government attempting to keep a grip on public spending.

However, UK Uncut is not very realistic. For one thing corporation tax is not a major contributor to our tax base. This year it is scheduled to bring in £40 billion or so, a sum which is dwarfed by Income Tax (£150 billion), National Insurance (£100 billion) or VAT (£80 billion). Even if it suddenly doubled – a very optimistic assumption indeed – spending cuts or increases in other taxes would still be necessary.

I have no idea where UK Uncut gets this figure of £100 billion. It resembles those estimates of the size of the shadow economy (cash in hand for builders, cleaners etc) which could probably bring in £50 billion a year if everybody paid their taxes and nothing else changed. In fact it wouldn’t of course: fully taxed, much shadow economy work wouldn’t be worth doing or paying for. The same goes for corporation tax. Economic activity would just switch abroad where most manufacturing and many service industries could easily service the UK market.

Many of the predominantly young protestors see paying maximum tax as some sort of moral responsibility. In a very small closed economy where we were all able to vote on tax levels and public spending they might have a stronger case. In reality tax is arbitrary (look at this week’s announcement about the bank levy), difficult to predict and adopted for blatantly political rather than economic reasons. We are offered no choice of policies before elections. Rates are in many cases probably set above the revenue-maximising level (for instance the 50% income tax band) out of prejudice, spite or plain ignorance. And of course in many cases tax avoidance schemes are made necessary because of potential double taxation where national jurisdictions overlap.

We all avoid tax, often quite unconsciously. If tax on petrol goes up, people drive less. If the duty on a packet of fags goes up, the IEA’s Director General probably cuts down on his wicked habit. Should they public-spiritedly decide to keep on driving and smoking as much as before in order to boost government revenue?

So why should firms pay higher taxes than they need to do? It isn’t company boards’ money to give away, after all. They are custodians of the assets of the shareholders, which will be worth less if, in a fit of misguided generosity, excessive tax is paid. This means that pension funds and other financial intermediaries will be able to return less to millions of ordinary people who have not been consulted about their munificence. My 90-year-old parents oop north would suffer to keep open Arts Centres in Islington or support Diversity Officers in Hackney.

We need to reform the tax system urgently. Part of this would be a fundamental rethink on corporate taxation which would obviate the need for some of the admittedly bizarre arrangements which UK Uncut are highlighting. But we would still need to have a downsizing of the role of state spending which the coalition, to its credit, has at least made a start on.