The world is becoming less welcoming to tax dodgers
economist.com
economist.com
'No man in the country is under the smallest obligation, moral or other, so to arrange his legal relations to his business or property as to enable the Inland Revenue to put the largest possible shovel in his stores. The Inland Revenue is not slow, and quite rightly, to take every advantage which is open to it under the Taxing Statutes for the purposes of depleting the taxpayer's pocket. And the taxpayer is in like manner entitled to be astute to prevent, so far as he honestly can, the depletion of his means by the Inland Revenue'
Lord Clyde: Ayrshire Pullman Motor Services v Inland Revenue [1929] 14 Tax Case 754, at 763,764:
But some of these tax avoidance schemes are only legal because tax authorities do not have the number of staff needed to investigate and prosecute all of them. They use weird loopholes (which get closed, and which sometimes require repayment of unpaid tax) and bizarre corporate structures which only exist to avoid tax.
Tax avoidance has changed its meaning from normal tax planning to become that gray not-yet-regulated area near outright tax evasion.
There is a difference between something that is legal and something that is illegal but difficult to prove. You seem to be conflating the two issues.
They use weird loopholes (which get closed, and which sometimes require repayment of unpaid tax) and bizarre corporate structures which only exist to avoid tax.
If tax law were not so onerous and burdensome, there would be no incentive to crease these corporate structures and to manage business in such a way.
There is nothing legally or morally objectionable about using the rules, written by your adversary, to your own advantage.
For instance deducting your purchase of a computer because you need it for your company is seen as beneficial for both society and for you.
Deducting large investments is also seen as in balance with what you get out of the society you conduct your business in.
Channeling money out of the country purely to avoid paying them in taxes is not.
The difference between what I would consider "morally just" tax planning and suspicious tax avoidance is trying to take money out of the ecosystem that you benefitting from to make those money.
It's not black and white but it's not entirely fuzzy either.
Taxes are routinely used to punish and influence people. Alcohol taxes, tobacco taxes, fuel taxes, they all have the dual purpose of raising revenue and discouraging behavior that the state wishes to limit.
That's your choice. You could also see it as paying your dues, or even as doing your part in maintaining your society. The optimal attitude is probably somewhere between those views.
> Taxes are routinely used to punish and influence people. Alcohol taxes, tobacco taxes, fuel taxes, they all have the dual purpose of raising revenue and discouraging behavior that the state wishes to limit.
Well, that's the point of having a state. It's often a good thing, especially in the examples you mentioned. One of the most important function of a state is to serve as a coordination enforcer - in situations when people, out of their self-interest, would predictably chose something that aggregated over the entire population leads to bad outcomes for everyone, the state is there to alter the incentive landscape and make sure they chose the better thing.
My duty is only to pay the minimum amount I am legally obliged to pay. Not one cent more.
Well, that's the point of having a state.
That is only one point of view.
Some people feel the purpose of the state is to protect us from ourselves. I subscribe to the belief that the purpose of the state is to protect us from each other.
Namely, if I want to knowingly ingest poison (tobacco, alcohol, heroin or even drain cleaner), it's my decision to make. If someone wants to surreptitiously lace wine with antifreeze and distribute it to others, the purpose of the state is to stop/punish them.
How much you are obligated to pay is the point of contention. Ideally, everyone pays taxes proportional to the amount of benefit they get from public services, programs and infrastructure, so that those things can be maintained. The issue with tax-dodging is that it sidesteps this moral imperative by taking advantage of a legal loophole.
Governments are amoral entities. I'll clarify because the last time I said this, it was misinterpreted...
Governments pass, enforce and obey laws. It is beyond the scope of government to determine morality.
It's not legal for a group of us to say "Give us $X percentage of your income, under these rules, or else we'll send men with guns to take you away." but it's perfectly legal for a government to do it. Morality isn't the concern here, legality is.
Correct, but paying the appropriate amount for the services and programs you benefit from IS a moral matter. Taxes simply happen to be the avenue through which this is accomplished.
If you consume X dollars of government services and infrastructure, you should pay X dollars in taxes, regardless of whether loopholes exist through which you can pay less. Because if you pay less, you are doing two things: passing the tax burden on others, AND causing harm to the services and programs. Both of these are immoral. Therefore, not paying your fair share (note that I didn't say "legal share") is immoral.
You know how there are certain actions that aren't illegal, but are clearly against what's called "the spirit of the law"? This is one of those situations. Tax breaks are always created to encourage certain actions or facilitate certain results (e.g. Growth in a certain sector) but others figure out how to take advantage of them through creative accounting practices. That's when a tax break becomes a loophole. It's basically hacking the system.
Fairness is subjective. Morality is subjective. Legality is objective.
It's not "fair" that 51% of people get to decide which services to provide, how much to pay for them, under which conditions to provide them, then use force and the threat of force to compel the other 49% of people to pay for it.
I didn't ask for these services. I have no moral obligation to pay anything for them and I have no legal obligation to pay anything more than the law requires.
We don't legislate morality.
It's basically hacking the system.
Agreed and it's not immoral to hack the system.
The state has every advantage. The state can write the laws. The state can interpret the laws. The state has men with guns to enforce the laws.
Even with all of these advantages over the individual, sometimes the state doesn't come out on top. That's a failure of the state, not the individual.
If you write the rules in your favor, interpret the rules in your favor and enforce the rules in your favor, it rings hollow when you cry that it wasn't fair that the little guy beat you using the rules that you wrote, interpreted and enforced.
There isn't much that is subjective about paying the appropriate amount for the services and programs you benefit from. If you disagree that you should pay $5 for a cup of coffee that costs $5, then we have some very fundamental differences and can't come to any agreements in this debate.
>>We don't legislate morality.
On the contrary. Murder is illegal because we have decided as a society that killing people without just cause is immoral.
>>I didn't ask for these services.
But you still benefit from them, either directly or indirectly. A homeless shelter benefits you even if you aren't homeless, because it takes care of the homeless and makes it a lot less likely for them to commit crimes for survival. A fire department benefits you even if your house isn't on fire, because they put out fires in neighboring buildings and prevent them from spreading to and burning down yours. You are part of a society, and taxes are required to maintain the proper operation of that society, whether you have asked for it or not.
Again, you used a subjective term "Appropriate".
You are attempting to present subjective opinions as objective facts. They are not.
If you disagree that you should pay $5 for a cup of coffee that costs $5, then we have some very fundamental differences and can't come to any agreements in this debate.
If I feel that $5 is too much for a cup of coffee, I am free to not buy it. To adopt the statist's mentality and apply it to commerce, one could argue that since people need jobs and Starbucks pays their employees well, it is a societal good for Starbucks locations to be profitable and therefore, everyone should have to pay for Starbucks coffee, whether they drink it or not.
I reject this notion.
On the contrary. Murder is illegal because we have decided as a society that killing people without just cause is immoral.
The state regulates homicide, not for moral reasons but for reasons of social stability. No prohibition on homicide would lead to mass scale killings and retaliations.
A fire department benefits you even if your house isn't on fire, because they put out fires in neighboring buildings and prevent them from spreading to and burning down yours.
Where I live, fire departments are volunteer organizations that are funded by donations. I donate to them because I believe that the service they provide is worth my money.
You are part of a society, and taxes are required to maintain the proper operation of that society, whether you have asked for it or not.
My obligation to supply those funds is determined by the law and I'm only obliged to pay the minimum required by law.
I pay my taxes, not because I have a moral obligation to do so. I pay my taxes because I have a legal obligation to do so. In other words, if I don't the state will send men with guns to take me away.
All of the homeless shelters, fire departments and police officers in the world are worth less to me than my freedom.
I don't understand what's wrong with this generation. I look around and see people hell bent on destroying the system that brought them up. If you really don't like state that much, move to Somalia, and let those of us who like it enjoy civilization.
That's alright. Not everyone has to share my view.
You seem to view the state mostly as an enemy, a higher power you need to fight to extract some goods for yourself.
I have to take exception to two of the terms used here. The state isn't a higher power, it does have greater power.
I do not wish to extract anything from the state, I wish to maintain what is already mine.
Others, like me, tend to view the state as their friend, or at least a helpful entity with occasional personality problems, but generally friendly.
Like fire, the state can be a powerful servant or a terrifying master.
I don't understand what's wrong with this generation.
With all due respect, you do not know to which generation I belong.
I look around and see people hell bent on destroying the system that brought them up.
The system didn't bring me up, my family did.
If you really don't like state that much, move to Somalia, and let those of us who like it enjoy civilization.
I do not leave for the same reason that your love of overbearing government hasn't lead you to move to North Korea. I like it here.
I'm doing my level best to keep statists from destroying this republic the way they did Somalia. I'd suggest that you learn how Somalia got to be in the condition that it now finds itself.
Here's an abridged version of the events... https://www.facebook.com/bruce.fenton.page/photos/a.37280974...
I second enraged_camel's response. He described it better than I can.
That sounds very convoluted. If you want to charge proportional to usage, why not just charge for usage?
You have a legal and a moral duty. Would you say it is moral of Facebook to pay (virtually) no corporation tax in the UK whilst benefiting from things like the NHS providing healthcare for its workers?
Facebook also collects VAT and pays VAT in every country where it is generated, including UK.
And I don't know about UK corporate building taxes, but in Spain every company pays local taxes depending on the size of their buildings.
So little corporation tax is quite different from no tax.
Do those employees, who are based in the UK, pay taxes on their income?
I'd like it if taxes were earmarked by the people filing their returns. Say that there's a number of categories that you can assign percentages to.. defense, education, etc. An unpopular war? The people withhold defense funding. You get the idea - a lot more representative of the will of the people.
The fact that you earn anything at all, or that you don't get robbed, or that you have any property rights at all, is a function of the state. I'm sure you consider the state your ally for those reasons.
The state would publish a simple tax table, if people just followed it without going into legal word games and battles over verbiage and what the word "income" means.
>they all have the dual purpose of raising revenue and discouraging behavior that the state wishes to limit.
The state limits the behavior that they have been elected to limit. Occasionally, such limits get repealed when the citizenry chooses that they no longer wish to have that behavior be controlled.
The reason I earn is because I provide value for my employer. The fact that I don't get robbed, the same reason I have property rights, is a function of my readiness to beat the shit out of anyone stupid enough to try it. The state didn't show up to my job interview, and the state doesn't have my back when I'm walking the city at night.
The best the state can do is not screw up my contributions to society or property rights- they are derived from my own self, not some organizational structure that humans came up with so we could survive without learning how to respect each other.
Obviously, if these allowances are to the disadvantage of the state (and the society at large), politics should remove them. But blaming the companies for using them in the meantime seems to be barking up the wrong tree to me.
Isn't that what he said? That many of the schemes are clearly illegal but the authorities just lack the resources to investigate and prosecute them (from what I've heard from people who work at HMRC it's not that at lot of them are "difficult to prove", it's more like shooting fish in a barrel and more convictions would be trivially achieved by hiring more staff and the higher ups having the political will to do it). The rest of your post is irrelevant given the above.
> But some of these tax avoidance schemes are only legal because tax authorities do not have the number of staff needed to investigate and prosecute all of them.
I.e. claiming legality by saying that they are not prosecuted.
Legal = white. Illegal = black.
If you stray from legal, you should suffer consequences. Not suffering consequences because of lack of staff does not automatically make your action illegal.
It's more like this: workers and employers benefit greatly when the workers can get paid in a way that doesn't count as income for them, but does count as a expense for the company.
So there's an incentive to find ways to buy workers stuff they'd pay for anyway and claim it's an expense; the strength of this incentive increases with the tax rate. So you might have situations where employers buy "office supplies" and let employees walk away with them. That $1 pen gives $1 of consumption to the worker, when $1 of salary would only have bought say $0.65 worth of pens.
Then if it becomes a big thing, the tax authority has to squash it with a rule that says "hey, you can't deduct more than $X per employee for pens, where a pen is defined as ... zzz ...".
(A more common example is business travel and expense accounts, in which you're relabeling consumptive behavior as a cost of doing business that can't be used for consumption.)
Most of the debate about tax rates is framed in terms of "gosh, how much do you really need", and completely bypasses the question of "how much are we incentivizing intelligent people to wastefully characterize consumption as expenses?"
In the US you even see the President after his term be openly welcomed to the Board of some large corporation or another that his regime benefited...
The reality is that some corporations and most all politicians (at least at the federal level) form a blob of power sharing that many people refer to as "cronyism".
If you want to refer to the corporate/political amalgamation as the problem, great. But referring to corporations as "making tax law" is technically inaccurate and seems like an effort to push a particular anti-capitalism ideology.
Well, you effectively got halfway there in your description. only it goes beyond "cronyism" to direct influence on lawmaking. This is not something debatable and "subjective" like the old/young lady image -- it has been shown time and again in the courts, reporting and historical research.
>and seems like an effort to push a particular anti-capitalism ideology.
And that's bad because? Did anybody prove that capitalism, and especially as practiced now, with said corruption, cronyism etc, is the last and final word of politics and civilization?
And whose fault is that, the huge and powerful government's for being so easily susceptible to corruption or much smaller and in no way as powerful businesses for seeking easily-obtained influence? Since the rules are set by those in government, it seems rather disingenuous to point the finger back at those using those rules to their advantage.
If we were serious about dealing with this specific problem, we'd join hands in implementing term limits, lobbying regulations, much stronger limitations upon politicians' ability to enter the lobbying community after leaving office, stronger congressional ethics controls regarding prosecution for obvious quid pro quo relationships, etc.
If we'd take the bait away, the corporations would wander off on their own.
And that's bad because?
It's a deception. It puts the blame on something that is only part of the problem. It refuses to even acknowledge the collusive nature of both business and government.
The government is not some Borg like entity. It's made of people, and each of these people are way less powerful than those other people -- the rich guys with the tons of money to bribe that run businesses.
As to whose fault it is, besides the direct perpetrators, underneath it all it's the citizenry's fault for not being more vigilant about it. After all it's their interests those politicians and businesses are stomping on.
>Since the rules are set by those in government, it seems rather disingenuous to point the finger back at those using those rules to their advantage.
Like, it's not like those "using those rules to their advantage" don't know they're doing some wrong AND breaking the law, when they buy politicians. So, we can and we should blame them too.
Law is a mix of legislation and case law. If there isn't case law something might be considered to be not valid by tax authorities, but valid by the people doing it.
This is the grey area between normal tax planning and illegal tax evasion.
Tax laws have loopholes because exceptions were made.
If there were no exceptions there would be no loopholes.
So the real goal should be instead of trying to patch the infinite number of loopholes created by ever increasing complexity is to throw it all out and come up with a simple ruleset that applies to everyone and everything with no exceptions.
So we add in an exception that says "You can deduct from revenue the cost of goods sold" (i.e., tax on net instead of gross). Now all the business has to do is find ways of hiding profit in the cost of goods sold.
Then there are products which contain materials that changed hands many times before it got to the final product. So if a raw material (lets say, cotton) is the majority expense, it has to go to one company to refine it, a second company to turn it into thread, a third to add color, a fourth to make it into fabric, and finally a fifth company to make a shirt. So that cotton gets taxed 5 times before it gets sold to the end consumer.
So let's add another exception, that goods sold for use in making another product aren't taxed -- that way, large businesses that produce the entire vertical stack in-house don't have an unfair tax advantage against smaller companies. Gee, now we have another loophole that can be creatively exploited.
Thousands of companies spend millions on accountants to avoid taxes. Getting rid of the corporate tax would change the economics. Instead of one company hiring accountants to save them millions in taxes, you would have millions of shareholders needing to hire accountants to save them thousands.
Edit: And it's easier to police the single-person companies. They can't afford the army of lawyers and accountants the large enterprises can.
We should tax wealth instead.
By not taxing income you avoid placing the burden on those that don't have and thus avoid needing to create loopholes for them.
Basically, the truly wealthy will start living in luxury apartments while shuttling their wealth to the Costa Rican villa in which they are planning to reside during retirement.
1. What jurisdiction does one country have to tax assets held in another country?
2. Why wouldn't the country where the assets are located be the one to tax them?
3. How would you address the possibility of double-taxation?
4. How would you prevent the wealthy from shifting ownership of these assets to corporations or family trusts that are incorporated in that foreign country. Assets located in a foreign country, owned by an entity in the country would be taxed in that country.
Look at this. New York's tax burden is so great that it was economically advantageous for this man to pay someone to keep track of the number of days he spent in New York just so they couldn't claim he was a resident and force him to pay their taxes.
http://www.newyorker.com/magazine/2012/03/19/tax-me-if-you-c...
i.e. spend $50k to setup some complex structure to save $60k in taxes? no thanks, spend $75k to save $1m? i'm listening...
a) the companies in question aren't lining their pockets, and
b) the politicians start to lose votes because of it.
That would appear to run directly up against the Ramsay Principle.[1] Specifically, if a company does a series of pre-ordained business transactions with no commercial purpose, specifically with the goal of reducing their tax burden, Inland Revenue can look at the whole transaction and assess payment based on what would have happened otherwise.
A similar case happened in the US with Gregory v. Helvering[2], with the out-of-context quote from Judge Learned Hand in the predecessor case (Helvering v. Gregory[3]) saying roughly the same thing as Lord Clyde.
[1] https://en.wikipedia.org/wiki/Ramsay_principle [2] https://en.wikipedia.org/wiki/Gregory_v._Helvering [3] http://www.leagle.com/decision/193487869F2d809_1591/HELVERIN...
That's the stated reason behind "know your customer" laws and international pressures to enact the same. However, once you have the information, nothing requires that it only serve that purpose...
If he had, would he have approved? I doubt it.
The U.K. passed legislation in 1925 that made it easier for individuals to use trusts to keep their financial affairs under wraps. Four years later, London courts ruled that Egyptian Delta Land and Investment Co. Ltd., which was registered in London and headquartered in Cairo, did not have to pay tax in the U.K., setting a precedent for future tax avoidance.[1]
[1]http://www.bloomberg.com/news/articles/2013-05-03/offshore-t...
Again I doubt the person quoted envisaged shell companies for avoiding tax across international borders when they are in fact based in the country they are avoiding tax and using the infrastructure.
http://www.financialsecrecyindex.com/introduction/fsi-2015-r...
...Something I think the journalists should have done in the story, btw.
If you putz around with their servers, you can get access to their 'source' material: http://www.financialsecrecyindex.com/database/USA.xml insert any given country + xml, you should be fine. I have an archive I just wget'ed that I'll SCP to one of my servers in a bit.
I'm wondering if maybe there might be a correlation between unreasonably high taxes and tax havens? If the tax rate is reasonable, say 20-30%, then I probably won't bother trying to evade taxes myself and I won't have much sympathy with others doing it (greedy assholes!). However, if the tax rate is like 70-80%, then yeah, putting some money in a tax haven becomes tempting and I will have much sympathy with other tax dodgers.
At a certain point of earning lawyers and accountants (and shell companies) are cheaper, earnings are not direct and it's hard to make people pay their fair share (without making it difficult for smaller firms, etc)
Why is a percentage reasonable? Why not a fixed tax? Why have tax brackets at all as opposed to a smooth curve? Why should taxes scale proportional to income and not amount of services consumed or potentially thousands of other variables? Why should a pacifist pay for the military? Why should a pedestrian pay for the roads? Is it fair to use taxes to manipulate the incentives of consumers to they consume more or less of specific products (like corn and tobacco respectively)? Is is ethical to use taxes (or lack thereof) to steal businesses away from other states or countries? Should people who work in certain industries be taxed more or less? How about different tax rates based on age, race, sex, or gender as there's probably data to support different risk factors for different segments of the population. Should people who have been on welfare be taxed more to compensate? Should the tax rate be negative for certain income levels?
I have absolutely no doubt that you can answer all these questions relative to your own personal definition of reasonableness but there's no chance in hell any sufficiently large group will agree on any or all of these.
Of course, there are other things that affect whether a tax rate seems reasonable, too. For example, in a country where the difference between rich and poor is great, it might make sense to tax the rich more than in a country where the difference is small.
Would you like to get a $100 pay raise and get only an effective $20 pay raise? Would you bother working more for that?
People will always have a sense of fairness. And we're not talking about the very rich there (which usually pay a smaller effective rate), we're talking about people with high earnings, but usually not millionaires.
And when you look at income relative to GPD, the US is only just now returning to it's historical average in eighties and nineties.
http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Doc...
http://www.cbc.ca/news/politics/federal-pension-board-used-o...
It seems that you're beginning with the assumption that the expenditures are all sensible or necessary, thus the "need" to make up the revenue. To be sure, a deficit is a deficit, but when we start talking about people paying their "fair share", they're probably going to want to know, "fair share of what, exactly?" If politicians keep spending themselves into debt, regardless of how much more money they extract from the population, can we speak of one's "fair share" of the irresponsibility of the people holding the public purse?
If the taxes not paid creates increased growth then tax will simply be made up in the future.
Imagine two countries each with a $1000 economy, both have a 50% tax rate, but in one country every person 'dodges' 50% of their taxes, if that country grows its economy at say 3% instead of 2% then after 100 years two economies will be at $7,386.22, $20,068.17 thus the country with the tax dodgers will collect ~$5K in revenue while the other collects ~$3.5K
There is a HUGE financial incentive to find alternatives and a simple example would be cryptocurrencies.