There are two strands to the big fat tax debate. First, there is the little amount of tax wealthy firms and individuals pay; and second, where they pay their tax. It is perfectly understandable at a time of squeezes on living standards that people are outraged about the ‘fairness’ of the tax system, as far wealthier people pay less in proportion of their income or earnings in tax, compared to them.
But firms and some individuals can legally avoid tax by using the tax code to their’ advantage through a tax scheme or some other loophole allowed by the tax code. By employing a ‘good’ accountant, they can minimise their tax liability to much lower levels in proportion to those on the Pay As You Earn (PAYE) system that most people are enrolled onto. So funnily enough, tax avoiders are actually complying with government legislation and have the absolute right to do so.
The inequity of the system is because we have a bloated, bureaucratic, and complicated tax system. The tax code is 11,000 pages long and with all that space for individuals to move in, those not on PAYE can take the system for a ride. When Jimmy Carr avoided so much in tax, it was because there was a scheme there allowing him to avoid paying a lot more in tax. This applies to many more people, and even those who run small companies, as they are on a different tax system to most people.
The second point relates more to firms and how much they pay. They can use the complicated tax code to reduce their tax burden domestically, but also can use other simple ways to pay less tax because of EU law.
There have been a number of stories recently about tax avoiding technology companies. eBay for example earned £181 million in 2010 in the UK, but only paid £1.2 million in UK corporation tax. If they were fully based in the UK, they would have paid £51 million in tax. eBay however is based in low tax Luxembourg and therefore pays far less. As the EU/EEA (European Economic Area) is a free-trade zone, a firm can set itself up in the lowest tax environment member state, but trade and sell its services anywhere in the EU, therefore complying with EU law and pay less tax.
I have mentioned tax havens within the EU/EEA, but why do firms base themselves in the Cayman Islands and Bermuda? Because corporation tax is too high in the UK and Europe, and it is one of the worst forms of taxation. If we tax the means of production, and capital is mobile, then it can move offshore pretty easily even if they operate on our shores. By taxing capital that is essential to productivity, it lowers output and wages.
It is not the government applying the tax code incorrectly that the misinformed accountant Richard Murphy and UK Uncut seem to believe, but the system is terrible and open to manipulation. In addition, high taxes on capital push firms away from our shores to somewhere else, leading to productivity losses. So what are the solutions to these problems?
First of all we should pursue a radical slimming down of the tax system, through simplification and lower taxes so that the principle of Equality Before the Law is better enforced. This will make the tax system fairer domestically, and will attract some offshore individuals back to the UK.
Second, we should abolish corporation tax; we need to remember corporations don’t pay tax. The burden of the taxation falls on the profits of shareholders and with less profit is less reinvestment to grow. Employees are effectively taxed as well, because less capital is employed, leading to lower output, corresponding to lower wages. We should raise either land value or consumption taxes to offset corporation tax abolition.
Wealthy individuals and big firms would rather be based where they produce their wealth as it costs them money to relocate. If we had simpler, transparent, lower and less distortive taxes, we will welcome them back from exile.