Wednesday, 6 April 2016

Panama Pandemonium

Panama HatsThe leak of the Panama Papers has focussed a little light on the shady world of offshore shell companies and sent the press into complete meltdown as they feed like a shoal of piranhas on the juicy details contained within.

There is a very good analogy of the situation on reddit that explains the furore. Essentially it all looks really dodgy and it looks like you've been hiding the truth from MoM. And that means MoM is going to have to investigate these things thoroughly now - even though she sort of had an inkling what was going on before.

Tax evasion is illegal and should be prosecuted with the full force of the law. Here in the UK the long rubber-gloved arm of Revenue and Customs was once feared for reaching the parts where the sun don't shine and extracting the proper dues. Stones bled spontaneously in their presence. Not so much these days as successive governments have failed to hire sufficient staff of high enough quality to keep on top of the sophisticated techniques used by the wealthy and the finance sector.

Policing the finance sector has not been much in vogue over recent decades. Perhaps now governments will look at that and start charging them the cost of containment. The Regulators and Tax collectors should have the best people, which means bidding them away from alternative roles. And that should be charged back to the industry that is creating the alternative roles. There can be no better example of the MMT principle that taxes free up real resources for other uses, than a tax on the finance industry to fund a proper enforcement regime to keep the finance industry in check.

However as the analogy above shows, many of the people using shell companies are evading no taxes at all. They are often used shielding purposes - some reasonable, some less so - and for tax planning.

So then we get onto the thorny issue of tax avoidance.

Let's be absolutely clear here. Tax avoidance is legal. Not only is it legal it is required, because otherwise none of those 'tax engineering' nudges so beloved of certain political classes would work. And we all do it. If you pay into a pension you're avoiding tax. If you pay into an ISA you're avoiding tax. If you use a work computer then you are avoiding tax. If you claim travel expenses you are avoiding tax. If you're a business investing in R&D and get credits for that, you're avoiding tax. If you decide to invest in one company rather than another based upon one being eligible for the Enterprise Investment Scheme, you are avoiding tax.

Tax avoidance is everywhere. It is legal. It is required.

The problem arises due to the political process. We don't all agree on interpretations. Almost certainly my interpretation of social security is going to be different from Iain Duncan Smith's. Tax law is a minefield of interpretation.

Ultimately whether a tax break ends up as avoidance or evasion is a political matter. Every entry in the tax code is supported by a group of people and opposed by another group. Those in the ratio 95/5 - like paying into tax relieved schemes - barely get discussed. But those where the groups are more 50/50 over a particular interpretation get debated all the time. It's when the mood changes and the majority of people are against something that action must be taken.

But that action is a matter for government and the legislature. If the representatives sense the mood of the people have changed, then they have to take action, pass a law and change something from avoidance into evasion.  Only then does it become illegal and can be stopped.

Tax has to be seen to be fair and fairly distributed. That means supported by the majority of the population and their representatives. Which is why those representatives linked to Panama are the ones that are under the most scrutiny. You can't have those setting the rules abusing them.  They must be whiter than white.

But at the same time we can't have tax lynch-mobs and self-appointed 'tax experts' going around trying to dictate what is and isn't 'moral' or 'acceptable' on their own grounds. You can't have sons held accountable for the alleged crimes of their father.  I have no more time for vigilantes in tax than I have for vigilantes in crime. There is a presumption of innocence and due process to follow for a reason. Make your arguments through the legislature.

In general excessive unacceptable tax avoidance is nature's way of telling you that your tax code is too complex and needs simplifying. It's an important check and balance on those who think social engineering via tax breaks is clever. The whole concept of tax engineering relies upon avoidance in the first place. That ought to flash warning signs, but it never seems to.

Once tax is seen to be fair, it becomes  enforceable and it can drift into the background as the 'hygiene factor' that it is.

So I agree with Jeremy Corbyn when he complains that there appears to be one rule for the rich and one rule for the rest of us. In fact the rules are ridiculously complicated and need massively simplifying so that you don't get emergent behaviour in tax. The love of complexity first introduced by Gordon Brown has been a failure and it needs reversing - however many squeals that produces from those people enjoying 'tax breaks'.

Where I part company with Jeremy is when he starts talking about tax as 'revenues', and linking them to government spending.

Although dealing with tax dodgers is vital from an equity point of view, none of it increases the government's capacity to provide services. It is a mistake to link them, and it is a hostage to fortune that will come back to bite the Labour party. They should be working to break that down rather than reinforcing it all the time.

Government's capacity to provide services is down to whether there is anything available to buy in its currency that will provide those services. If there is then government can buy them, and that will automatically create its own funding for any positive tax rate. There are no fiscal constraints on government.

If there isn't anything available to buy then government needs to look at what the required resources are currently being used for and stop that from happening. Tax is one power that can do that, but only if it stops current spending on the required resources. Taxes on savings just change what is essentially voluntary taxation into compulsory taxation.

For example if a rich person is buying property and has been evading taxes, then it is unlikely that imposing the tax on them will free up the property. Why? Because they will simply go to a bank and borrow the difference. They have the income stream to support that.

Property prices are high, not because of tax evasion, but because of an excess of borrowed money in the market chasing a supply that is being constrained by low productivity techniques, land hoarding and a lack of investment.

The idea that tax havens are somehow an El Dorado that can be used to create the new Utopia is a myth. Taxing rich people doesn't solve the root cause of the problem. It never does. Because taxes for revenue is an obsolete concept.