How much extra tax did you volunteer to pay last year? Not much, I’m guessing. That doesn’t make you a mean person; it more likely shows that, if you have money to spare, you prefer to give it to good causes than to government officials. And you’d be right: Charities are generally far better at realizing their aims than state bureaucracies.
When it comes to giant companies, though, we apply a very different standard. When we pay the legal minimum, we call it sensible tax planning; when they do the same thing, we call it aggressive tax avoidance.
Don’t get me wrong, I’m no fan of big multinationals. I’ve seen enough of how they operate in Brussels to convince me that, for the most part, they are instinctive monopolists who profit from lobbying, targeted regulation and tacit cartels. But, in this instance, we’re aiming at the wrong target.
It’s not Google or Starbucks or Amazon who set national tax rates. It’s finance ministers. Sometimes, they do so because they have reached a deal with a mega-corporation to relocate to their territory. More often, they inadvertently create loopholes for exploitation by the accountants who work for these companies — who are always more expensive and smarter than the ones who work for national treasuries.
In my own country, for example, successive chancellors of the exchequer, hoping for plaudits from movie directors, created exemptions to encourage the domestic production of films. It didn’t take long for the super-rich to spot an opportunity: All sorts of legal schemes were set up which allowed plutocrats to invest in unsuccessful movies and write off the amount against their overall tax bills. Who is to blame here? The plutocrats who, like the rest of us, chose to pay no more tax than what they were obliged? Or the politicians who, in pursuit of a good headline, inserted yet another complication into the tax system?
It is always tempting for politicians to tax companies, because companies don’t vote. But, in reality, a company no more pays corporation tax than a car pays road taxes. All taxes fall on people, and firms must pass their costs on to customers or shareholders. Talking about ‘taxing Google’ is a cop-out: We all end up paying.
We may now have reached the stage where not a single person can understand, in its entirety, either the American tax code or its British equivalent. Whom does that benefit? Not the individual citizen, who must wrestle with the needless complexity. Not the economy: Think how much time could have been spent on making or selling things, but was instead diverted into tax minimization. No, the only beneficiaries are the wealthiest firms and individuals, who can afford clever accountants and high up-front fees. As they pay less tax, the rest of us are left to pick up their bill.
It won’t do, either, to blame ‘tax havens.’ While international agreements on transparency are laudable, plenty of supposed tax havens do nothing underhanded; their offense is simply to have lower tax rates than their neighbors. The island of Guernsey, for example, in the English Channel, is a classic offshore economy. It has no inheritance tax and very low business levies and applies an upper cap to income tax. Yet it manages to maintain social services that are, on most measures, better than the United Kingdom’s. It has build up a massive financial services industry since the 1980s, not by doing anything clandestine, but by being more competitive than its rivals
Since international competition is generally the chief restraint on national tax rates, it indirectly benefits citizens of onshore economies, too.
What is the solution? Surely to have lower, flatter, simpler taxes. Think of the tax take as a giant Swiss cheese. Each air-pocket is a rebate or exemption created by political meddling. If you collapsed all the holes, the overall height of the cheese would fall. We’d all pay lower rates.
And here’s the best bit: The super-rich would end up paying more in both proportionate and absolute terms. A flat tax makes legal avoidance purposeless. If people and companies were taxed at the same rate, there would be no point in deferring income, or setting up shell companies, or putting money in your wife’s name.
For some on the Left, of course, redistribution matters more than efficiency. If you’d rather the poor paid more provided the rich paid even more, fine. But, in that case, please shut up about tax avoidance. It’s your system that incentivizes it.
Dan Hannan is a British Conservative MEP.
