Let's talk about tax

[Quattrocento]

Policywonk raised the subject of tax avoidance techniques on her G20 blog

"Effective taxation (the eradication of tax avoidance and tax evasion) would enable a world without development aid. Each year, approximately $400 billion of taxation revenue is lost to governments through the use of evasive taxation techniques. This sum would pay for the achievement of the Millennium Development Goals eight times over. Every year."

I haven't checked the statistics but I am sure they are right. Except there's a flaw in the logic.

Even if every government in the world were to clamp down on currently legitimate tax avoidance, not a fraction of that revenue would go towards development aid.

It'd go to all the stuff that governments waste money on. Wars in Iraq, bailing out banks that weren't properly regulated in the first place, porn movies for home secretaries, that sort of thing.

Discuss

PS Do you reckon that Switzerland, Luxemburg and Ireland will make the list of tax havens?

Ooh, hello quattro.

You're right that the governments in the West would snaffle the money for themselves. However, a lot of the taxation revenue that's currently lost is lost to developing country governments. Richard Murphy, the G20 tax blogger who helps to run the Tax Justice Network, calculates that of total illegal money flows out of developing countries:

3 per cent is corruption;
30 per cent is criminal activity (drug trafficking, etc); and
67 per cent is lost revenue due to tax evasion.

So it really could make an enormous difference within developing countries.

And before you say 'but they'd only waste the money because they're all corrupt too' - Richard reckons that tax evasion, as a problem in developing countries, knocks corruption into a cocked hat. (Another blogger at the summit, a corruption expert, did take issue with these figures, although he didn't argue with the overall point.)

Interestingly, Richard reckons that one reason why developing countries suffer a lot of tax evasion is that their tax rates tend to be higher. He argues that if average tax rates fell into the 20 per cents (instead of the 30s, where they are at the moment), tax evasion would fall too.

S'interestin innit

Let's talk about tax, baby
Let's talk about you and me
Let's talk about all the hypothecation and ring-fencing that will be...

Switzerland and Lux were on the list but not Ireland. What's the issue with Ireland then? (Genuine question - all I know is that Bono's a tax evader.)

We are taxpayers in two countries - UK and USA. The sentiment of each country is to do what it takes to minimise your tax bill.

UK taxes, for our finances, are very simple. We earn money - we pay a % to HMRC. US taxes are a lot more complicated. We aren't in any of the categories that get tax relief - they tend to be for primary industries.

I don't really understand how anyone can be looked down on for using a loophole. Loopholes are deliberately put there by government to influence behaviour. It would be very easy to eliminate all loopholes by having a simple earnings/taxation rate policy. Instead, they offer deductions and allowances for certain categories of income - a government decision. If they don't like it, they can take it away.

Meanwhile, I enjoy our US economic stimulus payment and tax refund for our five children , even though we have no US income and pay very little in US taxes.

I had that lyric in mind Policy

Thanks for posting the link. I hadn't realised that a list had been published. Luxemburg/Switzerland are jurisdictions where large corporates can more or less strike a deal for a low tax rate - between 5% and 10%. Contrast this with 28% in the UK and 35% in the US (which has state and local taxes on top).

Ireland is another jurisdiction which is favoured for large corporate tax avoidance schemes because it has a structurally low tax rate (16.5% from memory).

At the frontiers of legitimate tax avoidance, multinational companies try to ensure as much profit as is legally possible is "earned" in these low tax jurisdictions. These are legal loopholes of course. And I agree with you Scienceteacher, that organisations can't be criticised for using legitimate tax planning devices.

Policy, the list of tax havens doesn't affect developing countries as such. These are developed countries.

Is the issue in developing economies not entirely separate? Of course they need to be developed more fully, but I don't see how clamping down on tax havens is going to do anything other than give GB a (much needed) boost to the coffers.

I think there are two issues there ST (did you post on the blog btw? There was a comment on there from someone who pays tax in two countries, that's all )

Ordinary individuals like you and me - whether there's a moral issue around minimising your tax bill - this is a matter of political persuasion I guess. I actively like to pay my fair share of tax; I don't seek to maximise my tax deductibles. I think tax is an important mechanism for wealth redistribution, which is something I've a strong ideological commitment to.

The issue around tax havens is different. I take your point about governments being in charge of their own loopholes, but the tax haven issue is that they're not in charge of loopholes in other countries. Inidividuals with high net worth (we're talking billionaires) and multinational corporations route their financial activities through tax havens simply to avoid tax in their 'home' countries.

50 per cent of world trade is routed through a tax haven at some point. Of course, the goods never physically go near Jersey or Antigua; it's a simple ruse to avoid paying. Richard used the example of bananas: almost all non-Fairtrade bananas are invoiced via Jersey. No banana boat ever goes near Jersey.

Quattro, it affects developing countries because multinational corps in those countries (mining natural resources, agriculture for export etc) use byzantine invoicing methods to avoid paying tax in that country. Look at that bullet list below - 67 per cent of illegal money flows out of developing countries is lost tax revenue.

You're completely right that this is only on the agenda now because Western governments suddenly need the tax revenue. I believe it's called 'win-win', unless you're a billionaire or a giant multinational.

Anyway, have you smashed any capitalism recently? The first step is always the hardest

I don't think there is a moral obligation at all with your tax bill - it is absolutely fine to minimise what you pay/maximise your deductions.

It makes up for reckless rsdistribution via the benefits system that views hard working individuals as mere cash cows.

Well yeah, you and I don't see eye-to-eye on that one. But what you're doing is completely legal, of course it is - and, as you say, implicitly condoned by the government.

A lot of jurisdictions in the developing world tax turnover rather than profits. The western developed world generally taxes profits. So it's quite hard to structure legitimate invoicing routes - byzantine or otherwise. I spect he is talking about unlawful methods of tax evasion, which is, well unlawful.

Just one vowel out. Good try though.

Yeah, it's easy to have a take-take-take mentality when you are not the one that is working-working-working.

Oh, for a Conservative govt and social responsibility.

I work.

hey quattro, do you know my RL name now? And if so, have you worked out who I was on your, erm, lively first ever thread? (Is this sufficiently gnomic?)

Me and DH are both self employed, we run a B&B, I amd fastidious about what our income in and what our outgoings are, we work it out to be 50/50 for heating, water, electricity etc. We have 2 DC's who are both in nursery so we claim CTC and the childcare bit of WTC, we don't qualify for WTC, and we get more back than we pay in taxes.

I've been ploughing through the OECD grey list. Fascinating stuff, Policy. Some of it is frankly laughable. How can Switzerland claim not to be a tax haven?

I'm Rowan (this info is pretty much ineradicably out there now) - I was sticking up for you!

sorry, can you really put Conservative govt AND social responsibility in the same sentence....