Tax: share the burden fairly or anger will grow
Those who dutifully pay PAYE are in danger of being squeezed and squeezed again as high earners and the super-rich perform all kinds of financial somersaults
While David Cameron is "relaxed" about revealing his tax returns, on Friday President Barack Obama took action. He disclosed that he and his wife Michelle paid just 20% on earnings of almost $800,000 last year (£504,000), below America's top rate of 35% but ahead of the Republican presidential candidate Mitt Romney's 15.4%. If re-elected, Obama has promised to reform the American tax system to "ask the wealthiest Americans to pay their fair share" while protecting families on much lower incomes.
In the surreal and anarchic way in which politics, swept along by events, sometimes delivers far more than it intends, so it is with Taxgate. The question of who in society pays what, and the issue of how to rein in the overweaning profits of increasingly powerful transnational corporations (and transnational individuals who flit between countries), may yet prove a defining moment for both the US and the UK. This is a moment in which modern capitalism ? increasingly the object of anger from those it is leaving behind ? has to decide whether to recalibrate, faced with higher levels of resentment and resistance.
The most immediate manifestation of the current tax furore is, of course, the impact of George Osborne's decision to tackle what he termed "morally repugnant? aggressive tax avoidance". Tax avoidance such as moving transactions out of the UK, is legal; tax evasion ? claiming, for instance, to deduct an expense not incurred ? is not.
In the budget, Osborne announced that high earners can only claim tax relief worth 25% of their income (or £50,000, whichever is higher) in a year. The Charities Aid Foundation says that as a result, 83% of big donors will give less. The trigger for Osborne's action is a confidential study that revealed Britain's 20 biggest tax avoiders legally reduce their income tax bills by £145m in a year. Osborne was reportedly "shocked", though as chancellor, and previously shadow chancellor, it is difficult to understand why.
As chancellor, for instance, he must have been aware of the excellent research conducted by tax specialist Richard Murphy. In 2008, in a paper for the TUC, "The Missing Billions", Murphy estimated that £25bn is lost annually as a result of tax avoidance; £13bn from individuals and £12bn from the 700 largest corporations. This undermines the integrity of a tax system that is vital for a modern democracy, especially when we are meant to be "all in this together".
Taxes allow the chancellor to fund an infrastructure from which every citizen, rich or poor, benefits. This includes the shoppers at Topshop, owned by Philip Green. Green avoids paying huge sums of tax in Britain by registering his company in the name of his Monaco-based wife, Tina. The government seemed relaxed about those arrangements when they invited Green to advise on how to cut public spending. The message sent out was: it's acceptable to avoid paying taxes in Britain, even when you live here and benefit from the legal, physical and cultural infrastructure that those taxes support.
In the most recent budget, Osborne cut the 50p top tax rate by 5p; imposed a "granny tax"; and announced measures that, according to the Institute for Fiscal Studies, will pull another 1.3 million into the 40p tax bracket by 2014. This contradictory mix of measures brings to mind the late psychologist Stuart Sutherland's classic study of irrationality. "Most decisions," he wrote, "are based on intuitive estimates of probabilities." On a balance of probabilities, Osborne could not foresee just how many of these measures would create such a furore.
Osborne has a point about tax relief on donations. It can foster inequality and give the super-rich undue clout in public services and our cultural life. If Osborne contemplates robustly engaging in such a debate, however, he will need a loud voice, such is the clamour for politicians to publish their own tax returns. In the Scandinavian countries, inevitably, tax returns have been published for decades as part, it is argued, of forging civic bonds in countries where the wealth gap is not so extreme.
Last week events took a further twist in the continuing attempts to establish how much tax Ken Livingstone, a London mayoral candidate, has paid. Meanwhile, on Thursday, Google, employing 33,000 around the world, demonstrated even more clearly that this is "a golden age for capital". In the first three months of this year it made a $3bn profit. Google can domicile its profits not in each country in which it trades but wherever, in more than 100 territories, the taxes are least onerous. These arrangements are in place at the same time as many multinationals are shedding proper care of employees in regard to health, pensions and employment rights ? leaving governments and taxpayers to pick up the bill. That is morally, economically and socially wrong.
Something has to change. Obama knows it. His "Buffett Rule", named after billionaire Warren Buffett, stipulates that millionaires pay 30% of their income in tax. It attracted 60% support in one poll.
At present in the UK, cuts to benefits, pensions and social care implemented at the same time as unemployment and taxes are rising impacts most bruisingly on one section of society. Worse is to come. Last week, the Organisation for Economic Co-operation and Development predicted that Britain could face decades of spending cuts and tax increases. If that is to be the case, then the tax burden will have to be shared equally. Those who dutifully pay PAYE are in danger of being squeezed and squeezed again as high earners and the super-rich perform all kinds of financial somersaults. This is not fair, and resentment and anger will grow if these issues are not addressed. The government could start by not inviting tax avoiders to advise them on public spending cuts.
Taxation on income (including assets) requires an overhaul. HMRC is facing significant cuts. They should be reversed so it can ensure fairness applies to all. We have a muddled chancellor, an unravelling prime minister and an apparently dumbstruck opposition (who completely failed to grasp the issue of tax avoidance and evasion while in office). As philosopher Erich Fromm argued, the glue of a sane and decent society is shared experience. That is beyond reach when the rich man in his castle benefits hugely because the tax burden is shouldered by the poor man at the castle gate.
www.guardian.co.uk/commentisfree/2012/apr/15/observer-editorial-tax-should-be-fair