by Peter Watt
Is paying tax a moral duty? It is the sort of question that has those on the left and right frothing at the mouth.
The question has recently come to the fore once again with row after row over tax avoidance by some of the rich and famous. On the face of it the case is obvious.
At a time when budgets are being squeezed and services cut there are people who are really suffering. Jobs are going and much valued support services to some of our most vulnerable are being cut so that we can reduce the amount we are borrowing as a country.
We all need to do our bit by paying our taxes and if you choose to deliberately avoid paying yours then what does that make you? Selfish? Unfair? That’s certainly the common view; and with George Osborne and Ed balls united in a desire to clamp down on such “aggressive” schemes it seems that there is a degree of consensus; paying tax is our moral duty.
But, on the other hand I have an ISA that means that I don’t have to pay tax on any interest I accrue. I take advantage of duty free (tax free) shopping when I travel abroad. I took advice on planning my pension and made sure that my arrangements were tax efficient. And I am hardly alone, millions of people do it. If you have to undertake a self-assessment then you don’t start the process trying to maximise what you have to pay you look to minimise it.
It may not be in the same league as the Jersey based K2 scheme made famous by Jimmy Carr, but it is still tax avoidance.
And companies rightly look to make tax-efficient investment decisions. Their duty is to maximise returns for shareholders and part of that is to legally minimise the tax that they have to pay. Paying less tax means that they can maximise reinvestment in innovation and jobs; which will in turn generate more tax.
Bigger profits mean better returns for shareholders, many of whom are millions of people with savings and pensions schemes.
When the Labour party bought a London property a few years ago, it used a company to buy it. The party did that so that when they sold the property it would be more tax efficient and indeed, when it was sold it saved tens of thousands of pounds as a result. Quite right too!
At the same time there has been further evidence this week that family incomes are being squeezed. Figures from the Office for National Statistics show that real household incomes are falling with people being estimated to have on average a disposable income of £273 a week.
Real household actual income per head is at its lowest level since the second quarter of 2005. The result is that families are cutting their spending and saving levels. Who can blame them with prices going up and jobs being more and more insecure?
On top of that, for those working you have to work for a total of 149 days of the year where everything earned is paid in tax. So tax represents a massive outgoing for millions of families.
This is why the tax debate is so depressing. It is characterised by all sides in stark moral terms when the reality is more complex.
On the left we should not, as we so often seem to do, start from the premise that paying tax is somehow good for people.
If someone is reliant on a service or benefit provided by the state then tax pays for this. But at the same time, the tax taken from the pay packets of millions of families across the country reduces their ability to spend on the things that they want or need.
Getting this balance right is vital for the Labour party. We are very strong at showing why there is a need for the state to act to support those who are most vulnerable and how the state can be the most efficient provider of universal services like health and education.
But we are weak at showing that we understand that it isn’t our money and that we have a duty to spend wisely so that we only ask people to pay what is absolutely necessary.
This lack of balance goes some way to explaining why people still worry about us and the economy. They assume that our instincts are to tax more. The general public might support closing tax loopholes but that isn’t the same as being eager to pay even more themselves.
So, it is right that we clamp down on so called “contrived” avoidance schemes and the planned general anti-abuse rule should be welcomed.
But we also need to be honest that tax avoidance per-se is not wrong, morally or otherwise. And that the line between “good” and “bad” avoidance is not always clear. We should state clearly that while government must collect taxes so that it can deliver the services and protections that we expect them to, we understand that tax is a necessary evil and that people have the right to try and legally minimise the amount that they pay. Furthermore, any government should have a duty to minimise the amount that people and companies have to pay in tax and to spend the tax that it does collect wisely.
Peter Watt was general secretary of the Labour party
Tags: morality, Peter Watt, tax, tax avoidance
It’s difficult to see how this view is consistent with anything that Labour stands for.
“People … assume our instincts are to tax more”. Everything Labour did over its 13 years in power was aimed at increasing public spending, which required increasing taxation. What wasn’t appreciated was that to do all that Labour wanted needed even higher taxes to pay for it than Labour was able to raise, leading in part to the debt we now have.
Many people on the right would agree with the sentiments in this article, but I can’t see how you can justify higher public spending on the one hand while supporting every effort to reduce the taxes that will be needed to pay for it.
The comment about the Labour party reducing the tax on its London property seems particularly hypocritical. It says, we’ll raise taxes on the little people who don’t have the ability to get out of paying them, while we employ accountants to avoid paying the tax ourselves.
The only consistent message is that Labour believes taxes should be high to pay for public services and will support that belief by not finding ways around the taxes that a Labour government would put in place.
“Their duty is to maximise returns for shareholders and part of that is to legally minimise the tax that they have to pay.”
Hmm… dunno about that. It does not reflect what directors’ duties are as set out in the Companies Act (which we brought in!), see below. Their duty is to the company, not the share price. Sometimes maximising returns might be bad for the company in the long run.
Companies Act 2006, Section 172
Duty to promote the success of the company
(1) A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to–
(a) the likely consequences of any decision in the long-term,
(b) the interests of the company’s employees
(c) the need to foster the company’s business relationships with suppliers, customers and others
(d) the impact of the company’s operations on the community and the environment,
(e) the desirability of the company maintaining a reputation for high standards of business conduct, and
(f) the need to act fairly as between members of the company.
Taxes are the price of government services.
Taxes up, services down means you are inflating the price because you can force people to pay with violence as the means of ensuring control.
Meanwhile with 7,000 bn of debts to pay, the money going on that isn’t going on services.
Time for the state to bankrupt itself.
It’s already started.
2 years later retirement is 20,000 pounds stolen from a median wage earner.
That’s the state for you.
If that same worker had put their money in the FTSE they would have a pension of 19K a year instead of 5K a year.
The government and people like Peter Watt have stolen that money off people who are poor, in order to run the state.
A post so colossally wrong it is difficult to know where to start.
Yes, paying tax is a moral duty.
It is not the paying of tax that squeezes household incomes.
ISAs and pensions are set up in law to deliberately influence behaviour. Funneling ill gotten gains through offshore tax havens are not the intention of any government (although it is difficult to tell with this discredited one).
Seeking out blatantly artificial structures to avoid tax – at a time when we’re supposed to “all be in this together” – is outrageous and immoral. It is right this behaviour is called out for what it is.
As for companies – there are legitimate and above board ways of claiming tax relief for investment spend which do not involve squirrelling funds offshore. Moreover, there is zero evidence that what the Right narrowly and erroneously thinks is more favourable tax treatment has any beneficial effect on companies and / or the economy.
When I pay tax, that money damned well belongs to the government. When I pay for groceries I don’t claim ownership of what Tesco or Asda does with what was formerly my money. And yes, I am forced to purchase from these outlets because 1. I have to eat and 2. there is no diversity in the marketplace.
To repeat – Tax avoidance is morally wrong.
And finally Peter keeps on starting from the point that cuts are necessary. This is a false starting point as the GDP and borrowing figures make abundantly clear.
Tom P thanks for the comment. I am not arguing that people/companies shouldnt pay tax just that it is their right to try and minimise their tax bill, I don’t believe that paying more than you need to is complying with Companies Act 2006, Section 172 whilst trying to minimise tax is not. We all want a state that is able to do what it needs to do but the State (and the Labour Party) need to change their attitude from ‘State is entitled to take what it needs’ to ‘it’s not our money’.
What a refreshing and sober post. Many are so hugely hypocritical of tax avoidance issues that the liturgy is sickening. Deliberately mixing up tax evasion and tax avoidance is standard rhetoric, and so many people seem to criticise others for actions that they themselves do and consider natural when it’s about themselves.
Tax revenues are important. What is not important – or what is actually harmful – is punishing people you don’t like, by trying to impose punitive taxes (that don’t even collect any revenue).
Hi Peter
Sorry if not clear, my point about Companies Act was that director’s duty is not to maximise returns. Therefore I don’t really accept that paying the minimum tax possible is a duty of any kind either – though I agree it there is no (legal) reason for them not to. More broadly I would question whether it’s necessarily in a company’s long-term interest to engage in aggressive tax avoidance, since it can become a reputational issue. Depends a lot on the company and what they do (ie are they public-facing, so vulnerable to consumer reaction etc).
In addition, these days I wouldn’t claim that returns to shareholders in UK companies are beneficial for the UK population as whole. Large chunk of UK shares held overseas, and those held by domestic pension funds and insurers are skewed to the better off.
All that said I don’t actually fundamentally disagree with you! Your last two paras aren’t miles away from my view of this stuff.
BenM – the fact that you actually seem to think that growth alone will sort out any need to make cuts says it all.
Indeed. A point: the real reason people were annoyed with Jimmy Carr and Ken Livingstone was not their “tax avoidance”, but the hypocrisy of saying one thing and doing another. Otherwise many thousands of other people would have been in the news who do exactly the same.
There’s really no point allowing people to do something under the law, then complaining or moralising when they do. If you don’t want people to do something, either make it illegal, or shut up about it. Both main parties are getting this wrong at the moment.
There are a few things in this article that are flat out wrong and one thing that I think almost everyone misses when talking about taxation.
First off there’s this statement:
“Paying less tax means that they can maximise reinvestment in innovation and jobs; which will in turn generate more tax.”
Despite the general downward trend of corporation taxes in almost all nations over the world we’ve seen very little in terms of an increased pace of innovation. If we judge the results in terms of GDP growth it looks like, if anything, lowering the burden of corporate taxation has made things worse. In economic circles it’s often remarked that many corporations are sitting on huge cash piles, not exactly evidence for this money being reinvested. As a final point, I’d like to point you in the direction this article explainging how high levels of tax on profits pushed Boeing towards the development of the 707 one of the greatest technological innovations the world has seen.
The other issue that almost eveyrone misses is the issue of class, people can identify with a tradesman struggling on a modest income taking cash in hand for a few bit of extra spending money. They don’t feel the same way about millionaires and corporations stashing money in tax havens. The problem that most people have with tax avoidance is that it feels like it’s one rule for the rich and powerful and another for everyone else, which is a very important reason why Labour should not relax it’s moralising on taxation.
“But we are weak at showing that we understand that it isn’t our money and that we have a duty to spend wisely so that we only ask people to pay what is absolutely necessary.”
Damn right – I hope a lot of people on the left read that.
Essentially it’s the knife edge balancing act between tax avoidance and tax evasion, and let’s be honest, the difference is whatever the Inland Revenue say it is.
Not that I’m necessarily arguing this, but the best argument I’ve heard about why it is in fact moral to pay tax stems from the international evidence. If you look at countries around the world that exploit natural resources instead of imposing taxes in order to stock their treasuries, then you tend to observe that the citizens of those countries live in unpleasant societies with low levels of social democracy. You could make the claim that tax is not only correlated with democracy, but in some way necessitates it.
Still, doesn’t stop me wanting to put my fist through a window every time I fill up my petrol tank.
Great blog Peter.
Livy
Is the revelation that a tax avoidance scheme was used in the purchase & sale of the Labour Party property the explanation why Labour, when in Government, did not end Stamp Duty Land Tax avoidance schemes?
JohnM – it’s not a revelation. It was public knowledge at the time.
I’m not sure that a general acceptance of low-level tax avoidance would justify Labour taking a “nothing to see here” approach to the worst accesses. Whilst I would agree that Labour has to justify its support for maintaining public spending by demonstrating that we spend wisely and effectively, I think that means that we need to campaign harder to reduce tax avoidance.
However, your opening points on ISAs did get me thinking about why we still justify them: abolishing them would both reduce the deficit and remove an incentive that harms economic growth. So, I’ve written a piece on it here: http://www.allthatsleft.co.uk/2012/08/time-to-end-isas/
(sorry – “excesses”, not “accesses”!)
Tax avoidance rules need to be tightened up.
Labour will need to tax in order to pay for public goods.
If people want a low tax. low service option, then they have the Conservatives
@Peter Watt
Reading your posts always leaves me with a large blank space inside my brain where my short term memory should be, I cannot actually remember what you’ve said in the above post. I’ve read it twice but all I’m left with is a slightly dead feeling inside and a sense of deja vu. I think maybe it would be an interesting and useful diagnostic test to use on Alzheimer’s patients – the more of your article they remember the less their affliction. Though I fear the banal logic used throughout will send many patients into the head splitting mental collapse I’m currently suffering from.
I mean you actually wrote such a trite sentence as:
“So tax represents a massive outgoing for millions of families.”
What the hell is this? Insight? I must resist the urge to talk about bears or the pope but ffs, amoebas have worked this out.
“We are very strong at showing why there is a need for the state to act to support those who are most vulnerable and how the state can be the most efficient provider of universal services like health and education.”
No we are not – we spent the past few years trying and succeeding to undermine these very principles.
So, are you arguing that we should attack Osborne from the right on tax avoidance and that we’re really happy for all those bankers to avoid tax as much as possible? Doesn’t sound like a very good line to take to all those millions of families who don’t have enough money to live comfortably let alone use up their ISA allowance.
In summary, your article is a banal mix of neo-liberal economics and statements so obvious primates have progressed past such thinking.
The difference between tax avoidence and tax evasion is the thickness of a prison wall. More to the point is what is tax for! In this country it used to be used to provide a literate. healthy and regulated work force to service the needs of industry/commerce. In other words schools, medical facilities and a legal structure.
Tax also paid for armed forces and for a transport system that was maintained and usable. The fact that companies can claim the protection of Ltd status is legal procedure worked out in law by a parliamentary system also financed by taxation. Fire fighters, police service, refuse collectors – all thes things are paid for by taxation. How much would it cost to hire your own private army/police force etc. Much better to spread the cost amongst many small donors in an equitable way than try to build your own roads/infrastructure. Why is it that some people see avoiding their fair share as some sort of divine right?
You make a valid point that there are many valid and customary means which companies and individuals use to avoid and reduce their tax burdens – and in many cases these are provided by the state in order to encourage certain behaviours which are meant to benefit society as a whole. That is not the same as saying that all tax avoidance is ok providing that it is legal as many on the right argue, usually on the basis that they see taxation in general as immoral – and indeed you do seem to acknowledge that there can be both “good” and “bad” tax avoidance. I am not sure however, how you propose to draw this line without some degree of moralising – if you don’t you are really sharing a position with the right that any tax avoidance is ok providing its legal. It is pretty naive to assume that it will be possible to beat all the very clever people involved in designing tax avoidance schemes purely by legal means – I’m afraid the legislators just don’t have the necessary levels of skills to win at that game.
Well for me its a moral duty ,we should never think that paying taxes is a burden but in some way think that we help others who are less fortunate.But were not sure if the taxes really goes and utilized properly .Anyway for more knowledge about tax matters then ask assistance from tax resolution Ladera Ranch.