Tax avoidance is the product of a greedy government

Janet Daley:

David Cameron said something last week that was the precise opposite of the truth – by which I do not mean, obviously, that he told a deliberate falsehood. What he did was simply relay the perversely inverted logic that has become conventional wisdom. What the Prime Minister said was: “If you want a low-tax economy, you have to collect the taxes that are owed.” When what he should have said, of course, was: “If you want to collect the taxes that are owed, you have to have a low-tax economy.”

Mr Cameron’s statement was one of the more subtle threats contained in the declaration by the G8 – which was pretty much all they could agree on – that they are now the rightful owners of all the wealth produced by anyone except for certain exemptions that they will, subject to minimal notice, decide upon. His remark, presumably designed to provide moral justification for the unprecedented levels of shared surveillance and breaches of data protection that governments are preparing to launch, actually stood on its head the truth about effective tax collection. Which is that the lower rates of taxation are, the less likely it is that payment of them will be avoided or evaded. We have had yet another demonstration of this famous principle (the Laffer curve) in our very recent national history. The introduction of the 50p rate of income tax caused two-thirds of those earning a million pounds per year simply to disappear from the reach of HM Revenue & Customs. Whereas under the previous highest tax level of 40p, 16,000 people were prepared to declare earnings of one million pounds, that number shrank to only 6,000 after Gordon Brown, bless him, raised it to 50p. Result: the Treasury lost £7 billion in revenue.

Got that? If people regard levels of tax as fair (in the true sense of the word, not the Left-wing sense, which actually means “vindictive”), they will not go to expensive and dangerous lengths to escape from paying. The more punitive and discouraging of wealth-creation taxes are, the more they are avoided by stealth or geographical relocation – or by the even more economically disastrous measure of people being disinclined to increase their own productivity. Ah yes, but isn’t this the problem that those heads of government are determined to address? Rather than lowering taxes to levels that those who are taxed find acceptable, they will simply close off all the avenues of escape. There is to be no more possibility, by international agreement (which is to say, the coercion of smaller, less rich countries), of geographical movement for tax advantage. It will not be acceptable any longer for large corporations, or even private individuals whose profits or income are global, to lodge themselves in places that charge low business or personal taxes. These wicked places, known as “tax havens”, are the criminal “fences” of the international financial world: accepting, and sometimes agreeing to hide, the wealth that rightly belongs to other governments.

There are two really big things wrong with this view of things. One is that it conflates, as does almost everybody now, tax evasion with tax avoidance. Tax evasion is the criminal use of deception or fraud to pay less tax than you legitimately owe. Tax avoidance is what you do when you invest in an Isa, or put your life insurance policy – as any good solicitor will advise – into trust so that it will not count as part of your estate when you die. Tax avoidance (as opposed to evasion) is perfectly legal and, in the great majority of cases, morally unexceptionable because it helps individuals to save and therefore to prevent themselves and their families from becoming welfare dependents. (And that is what the Government is urging us to do more of, right?) Countries that are “tax havens” can make such legal avoidance easier. But, so long as they are not colluding in evasion, all that their wickedness consists of is offering lower rates of tax.
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Will they target Texas next?  European manufacturers are already moving operations to low tax Texas where they can also use low cost natural gas at about a fifth of the cost of European equivalents.   Within the US we are already seeing that dynamic at work as blue state companies look for a less hostile environment to their operations.  What high tax countries need to do is start competing with low tax countries which would mean cutting spending on the welfare state and rationed health care.