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Tax, ethics and the botta segreta

22 May 2013

Many years ago I was asked to give a talk at a conference on Tax and Ethics at the Chartered Institute of Taxation. Amidst the continuing rows with multinationals,  Margaret Hodge’s vigorous pursuit of the topic at the Public Accounts Committee and Ed Miliband’s address to Google reported in today’s Guardian, I thought I would have a look at what I said in 2005.

It must by now be obvious to all that avoidance on this scale is unacceptable – and unsustainable. But what is to be done, and who is to do it?

Here are a few observations around a concise summary of my 2005 argument.

Firstly there’s nothing new in this debate (other than scale). It isn’t new now, and it wasn’t in 2005. And you can lay pretty good odds that it will still be raging in 2025. The specific issue of indefinite deferral by US mulitnationals of tax on foreign source income goes back to 1921, and was attacked by President Kennedy in a presidential address on 21 April 1961.

Secondly, while I welcome Ed Milband’s recognition that “The first and primary responsibility of government is to get the law right”, politicians are better at rhetoric than action. Following Kennedy’s attack, Congress introduced Subpart F rules the following year, but limited their scope to income from “artifical transactions, income without value added, and without economic activity.” (In other words they would have no effect on the basic prinicple of deferral.) In 2005 it was all about the new powers given to HMRC to require disclosure of tax schemes. Although this was awkward for advisers who weren’t lawyers, it had very little effect on the overall result. This was not so much because there were brave individuals who explored ways around the disclosure obligations (although there were many), but because, as the recent discussions about large US multinationals have revealed to a wider public, you don’t actually need clever schemes to reduce your tax bill: you just use the standard planning techniques that have been made available to these companies courtesy of governments around the world (including the UK) that just can’t stop themselves wanting to attract new business by offering incentives through tax systems.

If you play Scrabble for money, you will find that some of the competitors will memorise lists of obscure and otherwise useless two-letter words. It’s not cricket, but you can’t really complain about the players’ behaviour when what you need to do is change the rules of the game. Heaping social opprobrium onto the chevalier de Jarnac didn’t bring La Châtaigneraie back to life after their infamous duel (150 years later Louis XIV was still trying to stop his nobility slaughtering one another pointlessly, if honourably, instead of slaughtering Englishmen). Ed Miliband’s appeal to Google’s sense of fairness isn’t a useful response when it’s the playing field that isn’t level in a game where the highest score wins.

Three powerful tools could help deal with the present scale of tax avoidance. One requires governments to get together and collaborate on a single global tax code for transfer pricing and capital rules: you can be fairly certain that politicians will recommend this, without having the slightest intention of implementing it (just mention Europe and they all go swivel-eyed). The second, on a unilateral basis, is to have an effective general anti-avoidance rule (with an accompanying pre-clearance system). Again the Government will claim that they have introduced one – which they have, so that they can make the claim; but they have ensured that it is completely toothless, so as not to frighten the horses of business. The third is to make the tax affairs of all companies completely public: it is difficult to see why this is not already the case.

If the Government isn’t prepared to tackle these issues effectively, their approach in attempting to shame corporates, the courts or even their own agents (here is the judgement in the UK Uncut case against HMRC over its conduct of the Goldman Sachs case) to do what they are not able to do is nothing short of hypocrisy.

The other dogs that aren’t even barking in broad daylight are the institutional shareholders. Each company that they invest in that reduces its tax bill increases that of their other investments. That made avoidance particularly pointless at shareholder level when substantial fees were paid for schemes, but now that avoidance is so cheap, and when shareholders are even further geographically divorced from companies than governments, the idea of collective action at this level is plainly hopeless.

You might think (as Margaret Hodge does) that taxpayers ought voluntarily to make good deficiencies in the tax system that politicians have laid down. Or you might believe that the Duke of Westminster‘s gardner was the last word on such nonsense. I don’t think Ms Hodge’s position is nonsense, and I think it could be formulated with considerable intellectual coherence, perhaps within the framework of Amartya Sen’s powerful book, The Idea of Justice (2009), in which he argued that we cannot use the excuse of waiting for complete, global solutions to ethical dilemmas to absolve us of the individual responsibility of doing what we can at a local level now. The difficulty is that I’m not sure that we individually can do anything at all at a local level: my withdrawal from the structured finance market had no impact, and one of my main arguments is that the rebellion of individuals is ineffective when the system ensures that they are replaced by those who will continue to explore whatever the law allows.

In my talk to CIOT I discussed at some length an issue which is even more topical today. If politicians are good at verbally abusing tax avoiders (while letting them get on with it), what of the great many other activities in the City which are certainly equally bad in ethical terms, in that they lead to increased inequality of wealth in a manner that would fail any Rawlsian test of fairness, but which do so through dishonesty (whether or not they cross the legal boundary into fraud)? My point was that good tax planning takes an idea, such as the ambiguities of the tax classification of capital or income, and creates a benefit in full view of the Revenue. The general public is impoverished, but no one is deceived. Most other structured finance activities, in contrast, create “value” by finding counterparties who haven’t priced a transaction correctly. To me that makes them worse. But no politician has the stomach to take this on: they simply can’t afford to admit, or even enquire into, how the City makes money. As we have seen since 2008, lip service is paid to the idea of removing the state support for banks on which so many of their one-way bets rely. But the watered-down Vickers recommendations will have virtually no impact on what is happening.

Back in 2005, I shared the platform with a former City banker who was then a minister in the Labour government. When I had finished my attack on the ethics of socially useless trading activity and Government accounting scams such as the private finance initiative, he responded by telling the audience that my picture of the City was nonsense. It couldn’t possibly be true, he said, because “the invisible hand” would have prevented it. (Jarnac of course would have found one of those rather useful.)

Sadly, as you know from this blog, Labour is still in thrall to the City (even if Ed Miliband is more circumspect than his business spokesman). Don’t expect any of this to change under either party – and don’t expect to be rescued by a misreading of Adam Smith. Because banks and mulitnationals have discovered the perfect thrust which no government can parry, and which ensures the survival of their kleptocracy. Ralph Miliband would have understood that perfectly.

From → Politics, Tax

  1. Fascinating post (as ever). I’d take issue with the statement that ” Most other structured finance activities, in contrast, create value by finding counterparties who haven’t priced a transaction correctly”. An arbitrage can exist without one side getting it wrong; different assets can legitimately have genuinely different values for different parties, and even different books in the same legal entity.

  2. Of course that’s the theory. Securitisation, for example, we were told made sense because different investors have different profiles. But what happened in practice? All the components ended up back in the banking sector (in many cases). So I’m talking about the actual outcome, following the industrialised scaling up of these transactions, rather than the theoretical possibilities which drew people into them in the first place which remained too few and far between to create an industry.

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