George Osborne says he’s dealing with tax avoidance. He is and he isn’t. It all depends what you mean by ‘tax avoidance’. As Richard Brooks demonstrates in his excellent book ‘The Great Tax Robbery’, the government has made some moves to clamp down on ‘tax avoidance’, but only understood on the very narrow definition according to which tax avoidance involves transactions that are ‘unintended and unexpected [by legislators].’
According to this definition, Phillip Green did not ‘avoid tax’ when he arranged matters so as not to pay a single penny of tax on his 1.2 billion dividend from Acardia (the company that owns Top Shop, Dorothy Perkins and British Home Stores) by putting the company in his wife’s name (she happens to be a resident of Monaco). According to this definition, Starbucks is not avoiding tax when it shifts profits outside the UK and so manages not to pay UK corporation tax. It is the corporate structures of Google, Amazon and Starbucks that the British public is angry about, and yet according to the government’s definitions, what these companies are doing does not count as ‘tax avoidance’.
Brooks points to a BBC survey finding that 84% think that ‘the government should crack down on tax avoidance by business operating in the UK,’ in which ‘tax avoidance’ was defined as ‘where people or businesses arrange their financial affairs to minimise the amount of tax they pay while remaining within the law.’ It seems that when the British public say they want action on ‘tax avoidance’, and when the government says it is taking action on ‘tax avoidance’, they mean different things. Indeed, the treasury’s relaxation of controlled foreign company laws, laws which try to restrict the shifting of profits to tax havens, positively encourage the tax-minimising corporate structures of companies like Google and Amazon.
And yet whilst the government’s definition of ‘tax avoidance’ is too narrow, the definition used by the BBC survey, which Brooks seems to favour, seems too broad. I arrange my financial affairs with a view to minimising – or at least lowering – my tax bill when I pay into an ISA or a pension, and yet intuitively this does not constitute tax avoidance. This is an important point, as it is a common ploy by the economic right to equate the actions of Green and Starbucks with the ordinary citizen’s use of an ISA, and in this way to dismiss all moral concern about tax avoidance. We need a definition that allows us to distinguish these cases.
I think the answer is startlingly simple. We should define ‘tax avoidance’ as ‘where people or businesses arrange their financial affairs to minimise the amount of tax they pay in an unethical manner.’ One unethical way of minimising your tax bill is by breaking the spirit of the law, and this kind of tax avoidance is to some degree covered by the government’s definition. But it is also unethical for a transnational corporation to arrange its affairs so that the sharing of taxable profits in each jurisdiction in which it operates grossly fails to reflect the economic activity in each of those jurisdictions.
Indeed I think there a good case can be made that any indulgence of ‘tax competition’ is unethical. Competition between companies can have good consequences, in terms of innovation or lower prices for consumers. But when countries compete with each other to attract big business and wealthy individuals by slashing their tax rates, the result is a race to the bottom in which less and less of a proportion of global profits goes to state-funded education, healthcare and public services. When ‘tax scabs’ like U2 Ltd or Gerard Depardiue indulge this process because they fancy a couple more million to play with, they are behaving abhorrently.
Of course, as with any moral matter, there are going to be tricky cases, and evaluating the moral status of any case will involve judgement. But that’s what civilisation is all about. And the vast majority of the public doesn’t seem to be having trouble regarding the ethical status of the tax affairs of transnationals discussed above. The important point is to see tax as a deeply important ethical issue. If you’re ever in doubt about that, read the recent African Progress Report, which finds that Africa loses more from profit shifting that they receive in foreign aid (the effect of tax dodging on the developing world is laid out in chapter 10 of Brooks’ book).
In the last few years the public has woken up to the moral significance of tax. If this is to put genuine pressure on government, we must expose the government’s overly narrow definition of ‘tax avoidance’, and move to a definition that actually covers the forms of tax-minimisation people care about.