Tax

A couple of times on this board I have mentioned that I like tax. I realise that this is not what I am supposed to think and that it is rather taken as a given in the UK that any politician who argues in favour of tax will render himself unelectable. I find that really odd and so I thought it was worth making a thread about this

At present many people appear to dislike tax, and I am not sure why that is. One reason may be that they cannot see a link between what they pay and what they get for the money. There is no direct hypothecation and it is no accident that the right have sought to make a conflict between "the hard working taxpayer" and the government. They started with the obvious fact that tax is the only source of revenue a government has: there is no dispute about that. But that somehow was taken to imply that the money is not the government's money: it belongs to the taxpayer. And that is arrant nonsense.

A democratic government is elected to do things. What it is elected to do is govern in the interests of all the citizens, and to do that it needs money. It is an intrinsic part of living in a civilised society that you pay tax so that can be done. There is nothing odd about this and nothing to resent. If you do not like how government spends its money you have a recourse: don't vote for them. That is how the system works and to pretend that the money you pay in tax still belongs to you is not different from pretending the money you pay a shop keeper still belongs to you. You cannot say what the shop will stock on the basis you spend money there: you cannot say how many people will work there: you cannot determine the opening hours. Spending your money gives you none of these rights (though the mantra of consumer sovereignty might lead you to think otherwise if you happen to be asleep). So why do people seem to think differently about tax?

Perhaps one reason is that the goods you get from a shop are handed over then and there. But that cannot be the whole story because you do not think the money you pay in insurance premiums still belongs to you: and those services may never be handed over (hopefully they won't for most insured things). The case of insurance is interesting however, because just as we seem to have become confused about what tax is for, I see the same trend in insurance, and for the same spurious reasons. Insurance works by pooling risk because the hazard it covers is high, but the risk is low. Some insurance companies are now marketing their product on the basis of reduced risk for all by imposing criteria on whom they will insure. In the past the premium paid reflected the risk to some extent: but that is not so true now and I see adverts for companies which refuse the business of what they perceive to be higher risk people altogether. This is generally done on the basis of statistics and it can mean that some people cannot get insurance at all: if your house is built on a flood plain, for example. In short those who need it most can't get insurance sometimes: and that is crazy.

A government cannot make such arbitrary decisions because it is responsible to the whole people. Thus the services government provides must be universal. Think about postal services, for example. The post office was nationalised in this country, and in terms of coverage and efficiency that led to a huge improvement over the private services which had gone before. There is no doubt about that. Whether you lived in central london or the wilds of orkney you paid the same to send a letter and you got the same service (within very practical constraints of time to physically move a letter). To do that "profitable" areas were used to subsidise those areas where the distance was great and the population small. The same was true of rail travel and of buses, as discussed in another thread. And if there was not sufficient money to cross subsidise directly the shortfall was made up through general taxation. This does not happen when services are run by private companies. They just do not provide service where there is no profit. It also applies to schools and health care and almost anything else you care to mention.

What services a person needs is a matter of politics and our judgements. What we cannot do, as a society, is deny that there are such essentials. So anything you consider to be necessary to your own basic well being is, perforce, necessary to every other citizen. You have no right to deny others what you demand for yourself. And that is true whether you choose to pay for that service privately or not. So it does not help to say, for example, that you will pay for your own health care, and use that to justify a refusal to pay tax for someone else's health care. Anything you cannot do without is a necessity for everyone else as well.

Our income/wealth comprises both money and services. We get money in exchange for work or through capital accretion of varous kinds. But money has no intrinsic worth. What we actually get is current or future goods and services. So remuneration is really a combination of those goods and services we can command. And that is not equal. Many would argue it should not be: that is for another thread. But what is obvious is that some people get most of their remuneration in the form of money: and some get a greater proportion in the form of universalist services (you could say it is in kind). It is all remuneration. So a rich person gets food+ water+shelter+ health care+ schools + roads + defence + planning laws which protect their nice wee villages+ and + and +. And a poor person gets exactly the same list. After that the rich person has remuneration left over and the poor person doesn't. So the rich person can add some of their wealth to get better or different things on top of the basic list.

One consequence of that way of looking at it is that it allows us to compare policy on equal terms. We, as a society, have a certain amount of goods and services we produce. They are produced for the benefit of the whole society and they are distributed amongst the population according to the values we hold. This is done partly through private sector remuneration and partly through taxation. In civilised countries it is recognised that all of the people have a right to a share of those goods and services which allows a decent life, in whatever terms we conceive that. And since we know for sure that the private sector will not deliver that, we agree to pay tax so that distribution can happen. Once those needs are met for everyone you can do what you like with what is left over, if anything. Even rich people can meet with disaster: it is surprisingly expensive to suffer a chronic illness between treatment costs and loss of income: and such things can indeed happen to anyone. But the rich have the same safety net as the rest of us, whatever that may be.

I have asserted that "we know for sure that the private sector will not deliver that". It is of course not beyond dispute: neoliberals will tell you that the private sector is in fact the only (or the best) way to ensure it. I am not going to let that detain me, because it is obvious nonsense. If anyone wishes to make that case I will address it: but since it rests on the notion that a person who is starving, but has no money, does not "demand" food, I do not think the case is sustainable. It is only through misuse of language that we can entertain that for a moment.

There is however a more serious counter and it comes in the form of "what makes Sammy run?". That is to say that there are those who argue that we need insecurity to make us work. According to that conception of human nature we are intrinsically lazy and if there is no threat of starvation (or at least real discomfort) we will all lie back and let the state take care of us: we will contribute nothing and we will be parasites. It is interesting to note that those who argue that do not think it applies to themselves: only those "others". Since nobody is an "other" to themselves I think that is a complete answer to that position. With a well functioning social sector people do not stop working (though they do demand a balance between hours of work and hours of leisure, which seems to me a wholly good thing) and again a glance around the world seems to me to demonstrate that is true. From social democratic states which seem to manage to produce stuff, to rich folk who do not retire after they make their first billion, there are examples all round us showing this argument is based on a false premise.

Taxation is inherently redistributive: but there is nothing at all wrong with that. We can argue at the margins about how much redistribution is reasonable. But the principle of redistribution is ethical and it is civilised and it leads to good outcomes for us all. I argue that we all contribute to the wealth of our society and we all have a claim on that wealth. Our remuneration is a mix of goods and services and our contribution is that too. We are misled by the focus on money, and it is helpful to me to think about this in terms of a wider conception of contribution and benefits. I say hurrah for tax!!

The arguments against tax are a cluster of propositions which follow from the neoliberal conception that people are at all times rational and are motivated primarily by economic self interest. The individual decisions made on that basis lead to optimal outcomes in all spheres, and any intervention by government can only make things worse. I don't accept any of that, but let us suppose it is true, for a moment.

According to this one should take the absolute minimum in tax, so allowing people more control of the money they earn: and they will then put that money to sensible use in their own interest, as they perceive it.

I have been thinking about that in the context of pensions. It is obvious that there will come a time for all of us when we are unable to work. That may be early or late, but it will come. So how does one provide for an income in old age?

In societies where there is no welfare state one can rely on children or extended family. This is one of the reasons that the birth rate falls when a country gets richer: through a combination of the introduction of social welfare, availablility of contraception, a better survival rate for the children you do have, private insurance, and perhaps more surplus income available for savings, the horror of a poverty stricken old age diminishes, and so people can make a rational decision to limit family size. How far one can do that is affected by culture and religion and a lot of other things: but generally that is a pattern we have seen in many places. One may argue that this demonstrates that people are mainly motivated by money, as the neoliberals say. I would differ because I do not think there are all that many women who wish to have a child every year, even if it is their best chance of a "pension": child birth is dangerous and they may not live to need it. It follows that the rational economic actor would make a different calculation if they happened to be female: by itself that seems to me to refute the analysis. But it has deeper implications, I think.

The neoliberals wish to reverse the move to social welfare, and return all responsibility to the individual and, by extension, to the family. They wish to do that by removing tax and letting people use the extra income to make those provisions for themselves. There are two problems with this that I can see: the first is already outlined above. In order for this to happen one must assume that some members of a family will sacrifice current income for the future gain of support in old age. But if everyone is motivated by economic gain there is an inherent contradiction which I do not see addressed. For it to work one must assume either that current income, as increased by reduced tax, will let everyone save enough to give them an adequate income in old age. In that case, and assuming that women are people, why would they have children? There is no certainty that the children will contribute; there is no certainty of survival. A rational woman would do exactly what a rational man would do: she would work and make certain of her financial position throughout her life: and she cannot do that if she has kids. In short the neoliberal position depends on women acting differently from men: and that means they cannot be fully human in the terms the neoliberal conceives of human nature. The alternative is what we see in the third world: current income is not enough to provide for old age and so we are to rely on children and extended family. I will come back to that.

The fact is that most people do want to have children, and that is taken as a given: but there is no equality in the sacrifice made and, given the biological facts, there cannot be. It is true that men can take equal responsibility for the care of children after birth (they don't, even now, but they could) but that will not change the fact that for some period the woman will not be able to work. It might be quite a short period, but she will be disadvantaged vis a vis a man no matter how short: and why would she do that if the neoliberals are correct?

At this point the neoliberals move from the individual as the unit, to the family as the unit. They have to. But already this undermines the whole thesis. If we are to rely on cooperation between individuals on the basis of "the family" then what is to stop us relying on "the community" or "the society"? Nothing whatsoever that I can see. The neoliberal depends on the altruism of women and there is no escaping that. Yet per his stated position altruism does not exist. The othering of women is essential to the neoliberal position: it is intrinsically sexist. It also relies on the altruism of men, actually. The man in this conception is to sacrifice some of his income to support his children: and that is also at odds with the characterisation of human nature. Since he can provide for all his needs across the life span through work etc there is no benefit for him in doing this. So he won't. The neoliberal position is incoherent in this sense. If the proposition is that, sans tax, we can provide for ourselves throughout our lives we have no economic incentive at all to form families. And it is all about economic incentive ! It follows that this cannot be the argument underpinning the proposition: it must depend on inter-generation cooperation and not on the ability to provide for yourself by your own efforts (assuming they do not wish to see the extinction of the species)

If we rely on children to provide for old age there is another curious consequence: we are loading a debt on to the next generation. It happens that the iniquity of doing this is, in another part of the forest, used as a justification for the "austerity" we are invited to accept in order to reduce debt. There is no difference here: we demand that the next generation work to support us, as we work to support our parents and grandparents now. But if we do that through an equitable arrangement for support of the elderly that is somehow a bad thing. Well why is it? It is because it is imposed by government rather than voluntary, perhaps? Well if that is the case then it is wrong because we do not allow the next generation to decide to let their parents starve. That is freedom of a sort, I suppose. You can keep it, for me. Once again the neoliberal position is either nasty or it is incoherent. They do not believe anyone will take that decision, in which case they are utopian, which I have mentioned before in other contexts: or they do, and don't care. They also have to believe that there will be no one who would like to support their parents, but can't: so presumably there will be no-one without sufficient income in this bright future. But we only got here because it is assumed that people will not have enough income to support themselves across the life span if they make the rational decision to keep all their money for themselves (which, you will note, is the whole justification for a reduction in tax in the first place): and if that is true of the current generation how is it not going to be true for the next? I suppose they think it is a transitional problem: the parents paid tax so couldn't save to support themselves: the children won't, so they can support the parents: and they will still have enough left over to save for themselves? Without the economies of scale attendant on redistribution through tax? I don't think that will work.

On a more practical note, we are told that we can no longer afford pensions and so people must save more for their old age. Once again the reduction in tax is supposed to allow them to do that. So let us think about that. At present in this country the state pension is unfunded: it is paid through current taxation. There are also private pensions, which are funded, and those rely on saving some part of your income which is then invested to provide income in later years. This does not work. It does not work for two reasons: in the first place private pensions eat up all the profit from investments in management fees and profit. That has been the subject of some consternation just recently and I need not go into that which has been covered in the news extensively.

The other reason it does not work is because of inflation. A normal working life in the country is 40 years. Even when inflation is very low savings do not keep pace with the rise in the cost of living all the time: and for many years we have been wedded to "low interest" as a positive benefit, for reasons unrelated to pensions etc. That may or may not be a good thing: but that does not matter in this context. The fact is that over 40 years the amount saved in the early years CANNOT generate enough to meet expenditure when the period is over. To illustrate: Say the average wage in 1970 was £30 per week and that it is £475 now. If we assume that the amount required to meet current expenditure is 80% in both cases (not very realistic as it is far too high, but it serves) then a very prudent person in 1970 could save £6 per week. £312 per year. If all else remains equal (which it doesn't but let that pass), and assuming interest at an average of 2% on savings throughout, and inflation at 7.34%, then total savings over a lifetime of work are £88,139. If you change the interest/return to 5% it results in savings of £139,424. It bears no relation at all to what is need to keep you in old age: and it cannot. What it means in practice is that if you live 15 years after retirement you can spend 15% of average income each year on the 2% assumption: and about 30% on the 5% assumption. Which is poverty by anybody's standards. If you live any longer you leave behind a debt: which is a problem for the next generation though that is one of the problems this whole idea is supposed to solve...And as Vninect just pointed out, it means you save 20% of your entire income over a whole working life to live on 15% of the average income for 15 years. Is that a good deal?

The actual amount you can save in the early years cannot increase enough because, whatever inflation does, interest rates and returns on savings are not high enough, and saved wealth is taxed by inflation. The rate of interest/return can vary and be higher than that: but the fact is that low levels of saving get low returns. I used 20% savings because that is close to the level of income tax in this country: so that is the amount one can reasonably expect if that tax is reduced by 20%, as neoliberals propose.

Edited by FionaK - 31/12/2011, 13:31

www.bbc.co.uk/news/health-16396120

*sigh*

As some of you know, I was away from home during the working week while my latest job lasted. I stayed in a very pleasant B&B and most of their business was people who are doing what I was doing: working away from home 5 days a week. These people did a variety of jobs: there were engineers and construction workers and people who repair leaks for the water board, as well as a number of social workers. All of them are what I would characterise as the skilled working class. Talking to them was instructive for me: frustrating but instructive.

One thing that is usually true is that people in such circumstances do not discuss anything that might be controversial, over breakfast or in casual encounters in the evening. That is because it is necessary to get along with these total strangers. People working away from home put their lives on hold, very largely. They do not have the normal circle of friends who agree with them on the things they believe to be important: so perforce they must live what little social life they have with folk they might not naturally associate with otherwise. There is a sort of adage which arose in a different context and that is the prohibition on discussing politics and religion at the dinner table: it is the same idea and it encapsulates and aspect of "manners" which we all recognise. Topics like football are specially designed to meet that kind of need and there is a lot of talk about that kind of thing. So it was a surprise to me that attitudes I found totally offensive were regularly raised and discussed. It appeared that such views were accepted as mainstream. Or perhaps the prohibition does not apply when the forced interaction is longer term. For whatever reason I listened to their views regularly: and since I am not always mannerly I did join in eventually: thus causing a lot of friction and discomfort. I regret that because it is not productive; and latterly I did keep silent even in face of a conversation which seriously proposed that "criminals" should replace the fox, and hunting with dogs be reinstated. By then I had realised that there is no point in talking seriously about such things: I am slow, but I am teachable.

That is an extreme view and not shared by most of these people: I do not wish to suggest that the person puttiing that forward was typical. But there were other things which were shared and those are what is relevant to this thread

As I said, these people were skilled working class, or lower middle class (engineers and social workers would probably see themselves as professionals, and to some extent that is correct). Many acknowledged origins in the "real" working class and were proud of those roots. They saw themselves as hard working (which is a hurrah term) and as having "bettered themselves" through their own efforts and values. They also saw themselves as unfairly put upon: the phrase "squeezed middle" seems to have appealed to them and I heard it used quite explicitly more than once.

From their perspective they were keeping the parasite rich and the parasite poor. Some of them were resigned to that fact, and some of them were angry: but whatever their response they did not question the truth of that slogan. It was almost a source of pride.

One of the things they agreed about was that there had been a change in the poor: they believed that in the past the poor were "respectable" and had values of community and hard work and pride and aspiration: and they thought that their own position had been achieved because of those values. They think that the poor now have no such values: that they are "welfare dependent" and unwilling to work. In short they think of them as an "underclass". Some believe that change is irreversible: some think that it can be altered by withdrawal of the "unaffordable" social support which they provide at great personal cost. All of them agree that the change has occurred and that it is regrettable. There was much talk of families where "3 generations" have never worked. This is the stuff of tabloid headlines (and of other news outlets, by now) and it betrays the power of the press like nothing else. There is no thought behind these views so far as I can tell. There is no recognition that they are controversial, either: and on the few occasions I sought to challenge them it was clear that the challenge was what was impolite: for they were not saying anything they thought of as divisive: I was.

The reason this is in this thread is this: not one of these people, who complain about the fact they are supporting both rich and poor, were paying due tax. Every single one of them was constituted as a "limited company", though in reality they were working for a wage just like most folk. I know this because they did not attempt to hide it: they had no compunction about it at all. Some were quite proud of it: seeing themselves as smart to avoid the bulk of taxation. Others saw it as mere pragmatism given that everyone works for money and any way of increasing your income is therefore legitimate.

It is possible that you do not understand the significance of that fact. Let me explain.

Most people in this country pay tax under a system called Pay As You Earn. You receive your wages net of tax and national insurance, because the employer deducts that at source. The rate of tax is determined by your "tax code" and is affected by things like your level of pay, and family circumstances. The tax rate is applied to your earnings over the "personal allowance" and that is more or less that.

The important thing to note is that very, very few of your costs are deductible. What the tax law says is that if you are an employee (which means that you are a PAYE taxpayer) any claim for an expense to be set off against tax can only succeed if that cost is "wholly, exclusively and necessarily" incurred because of your work.

For a person who is not PAYE the rule is different: in that case the expense is deductable if it is "wholly and exclusively" incurred because of your work. An apparently subtle difference: but one with enormous consequences.

As an example: home to work travel costs cannot be claimed if you are PAYE: it is deemed that you choose where to work and so the cost does not "necessarily" arise from your employment. But if you are a company that test does not arise: so you can set off those costs against your tax liability. Similarly with the costs of accommodation: and food which you have to eat out, being away from home.

Let us say that you earn £10 per hour for one working week of 40 hours. Let us say that your accommodation costs £20 a night and you pay it for 4 nights that week. Food out costs, let us say £5 per day. And you travel 200 miles to get from your home to your work place and back in that week.

Excluding the personal allowance etc for simplicity, the PAYE person pays tax on £400 that week: at 20% that is £80: and she pays, let us say 5% in national insurance: while the employer pays twice that as their NI contribution. So the worker gets £300 and the exchequer gets £140

The limited company pays tax on £400 - £80 for accommodation: -£25 for food: -£100 for travel (using a notional 50p per mile allowance which is not far from what the revenue estimates, depending on the type of car etc). This person pays tax on £195 and at 20% that is £39. NI for the self employed is a flat rate of £2.65 per week and of course the employer pays nothing. So this person gets £358.35 and the exchequer gets £41.65

That is not all. Social workers who do agency work, as I do, can choose this method if they wish. In fact it is very strongly promoted by the agencies and I have to fight hard to continue on PAYE. Because they promote it I happen to know that if I accept the offer of company status I will earn significantly more per hour. That is because the employer does not have to pay NI contributions for me, as I understand it. The difference is around £5 per hour in my case. So the calculation above does not reflect all of the benefits of company status. The higher hourly rate actually increases the tax liabilty back to something near what a PAYE person pays, on this example: but the loss of national insurance contributions from the employer is still in play and it represents a loss to the public purse: as does the fact that they are paying the same amount of tax on a much higher wage

Note that the substantial increase in take home pay is directly derived from a reduction in tax: it is pure loss to the public purse. It is scam against all of us: but for these people "us" is "me". It is particularly rich in irony when social workers do this: for we are paid out of taxation and our whole department is funded that way. We are enormously underfunded and the social workers who are doing this complain bitterly about lack of resources etc. But they don't make the connection and they get angry when I do.

This sort of thing caused a great commotion in the press recently when it was reported that some high up government officials were using this same mechanisms to avoid tax: but it is very widespread indeed. Far more so than I had realised.

I agree that there has been a change in the attitudes of a group: but it is not the attitudes of the poor: it is the attitudes of the "squeezed middle" which have changed. In the past the skilled working class saw themselves as having something in common with their unemployed counterparts: not now. It is necessary to the sense of self wrongteousness that they distance themselves from the poor: and they do.

Edited by FionaK - 17/5/2012, 11:05

The change in the attitudes of ordinary working people to their obligation to pay tax is another example of the success of the very rich in convincing us that their interests are identical with our own. They have a variety of arguments which purport to justify their conclusions, founded on their conception of human nature, and elaborated through such notions as the Laffer curve. Most of them necessarily relate to the individual, but of course a great deal of the income and wealth in this country is generated in the form of profit for businesses, great and small.

For the plutocrat the imposition of tax is illegitimate whether it is to be paid by individuals or by companies, and so it is necessary to develop tales which justify tax avoidance for businesses as well as for ordinary people. There are a plethora of such arguments and they have resulted in multinational companies which do not pay tax on very much of their income at all. They transfer the location of profit to what Richard Murphy calls the "secrecy jurisdictions", (otherwise known as tax havens) which charge very little tax: and those places live off that income.

Richard Murphy reports today that he is at an international conference in Helsinki devoted to consideration of "tax justice". One of the speakers is Chinese, and he has told that conference that 73% of China's trade is channelled through those secrecy jurisdictions. That is a startling figure, is it not? It is extremely unlikely that the Isle of Man can absorb a huge amount of chinese goods, given the size of the place, and the same goes for the other tax havens. How can one pretend that 73% of china's total production is bought and used in the Isle of Man, the Cayman islands, Luxembourg, British Virgin Islands etc? It is laughable. Or that 73% of what they buy is made in those places? It is also an indication of the amount of tax avoidance/evasion which goes on. A great deal of it is legal: because of weak taxation laws and the blackmail that is "try to tax me and I will move my operation somewhere else" there is a great deal of indulgence of this. And we are told it is not possible to take any other decision because of the complexity of multi nationals' structure and operations. Well they are complex precisely because they are smoke screens: but if 73% of China's trade goes through those tiny wee places you do not really need to guess that the purpose is to avoid tax: for there is no other reason at all for doing that.

The only reason we do nothing about that is that we do not want to: the political will is not there. The devil is in the detail, certainly: but this is taking the piss.

http://www.globalwitness.org/sites/default...aundering_2.pdf

Richard Murphy linked to this on his site and I thought I would reproduce it here because it is instructive to realise how easy this is

www.guardian.co.uk/politics/2012/ju...hmrc?CMP=twt_fd

As you are no doubt aware, there has been a lot of attention paid to tax in this country recently. It is quite a shift, because for some years the conventional wisdom has been that nobody likes tax, and avoidance (the legal version of not paying what you are due to pay) is natural, and indeed justifiable. Most people do think one should pay what you have to, and no more: so evasion (the illegal version of not paying what you are due to pay) has been seen as wrong. The public have not been much exercised by it, however: I think they assumed that HMRC dealt with it, and that the residual was an irreducible loss, much like shoplifiting. Shops make a provision for inevitable loss through theft. and it is reflected in prices. Folk don't pay much attention to that and I think they accept that the costs of total prevention would outweigh the savings. They trust the shops to have made that calculation and that the balance is where it should be, in terms of profits and prices.

For some reason that has changed. Perhaps through the efforts of pressure groups people have become aware that very rich people and companies don't pay much tax, and that it matters. Campaigns against such people as Philip Green, have been widely reported; HMRC's cosy deals with Vodaphone and Goldman Sachs have been subject to parliamentary inquiry and have been drawn to public attention; and most recently the Tax Justice Network have shown that between £13 and£21 trillion is lodged in secrecy jurisdictions and tax avoided thereby. People have realised that this is not a small problem after all: if TJN's figures are correct a great many countries currently in debt would not be: and that is not something we can or should tolerate. It is theft on a very grand scale indeed.

So our government has decided to respond and it seems that they believe the problem is plumbers!!

It is well known in this country that certain trades will give a discount for work done if the customer pays in cash. It is equally well known that the source of this discount is the fact that the payment is not declared and is therefore received tax free. This is known as the black economy. It is legal to pay in cash: but it is illegal not to declare the income for tax purposes. The customer can therefore pretend that he believes all is well: and take the benefit of the other person's tax evasion. This is not a defensible situation for either side: but it is wholly risk free for the customer and it has gone on forever

Revelations about industrial scale tax evasion and avoidance have led to a great deal of public anger: and it is not against plumbers. Now this might be characterised as a "two chickens" argument, and to some extent it is. But as with the shoplifting, it is possible to take the view that pursuing this aspect more than we do now is not cost effective: that may be true (unlikely) but this government is drastically cutting the staff who engage in tax enforcement and it is simultaneously launching initiatives against this kind of thing: which further reduces the numbers who are trained and equipped to investigate large scale abuse by big corporations. Those people are already handicapped by the fact that they are few: and typically one tax inspector is pitted against an army of accountants and such, who are dedicated to tax avoidance on a massive scale: a very unequal contest, further hampered by the utterly ridiculous policy which dictates they should work "in partnership" with those they seek to police. Not plumbers, naturally: just big business. That rot is throughout the public service, however, and the corrosive and corrupting effect is well know

According to the government there is £35 billion a year lost to tax evasion and avoidance. ( Other commentators put the figure far higher, but that is an argument for another place.) What is interesting in Mr Gauke's remarks is that he estimates that only £5 billion of that is due to tax avoidance, a figure impossible to believe given the evidence of the offshore stashes. But he says they are going to clamp down on that too: it is no accident that the only big organisation mentioned is the BBC: that is part of the ongoing attack on the BBC which is being fought on many fronts and which aims to abolish the BBC in the long run.

So the problem is plumbers and the public service: and it is long standing. Mr Gauke says so: he says people sold themselves into slavery in ancient rome in order to avoid tax. Believe that if you like.

On thing he said, I agree with:


Quite.

Richard Murphy has once again cut through the "big words" to get to the heart of the issue of tax. This is an area where language is used very effectively to obscure the issues, and to make the indefensible appear quite reasonable. It can be difficult to sort out what we are actually talking about as the debate slides between tax evasion;tax avoidance; and tax planning. Mr Murphy makes plain the distinction between avoidance and planning here:

www.taxresearch.org.uk/Blog/

Thought I had - oh well, he is usually worth reading anyway

http://middleclasspoliticaleconomist.blogs...e-to-intra.html

This is a blog post about trade deficits. The figures are american, but think it is safe to assume that a similar pattern will be shown in most developed countries where "globalisation" has been pursued and where multinational companies account for a lot of the trade. It happens that this week we have had very poor trade figures in the UK and despite what the government says, this is not attributable to contraction in they eurozone. Trade with the rest of the world was, if anything, worse. So this is pertinent.

Tax is a big part of this story. It can be argued that it is also about wages, and that is the usual story we are told to account for the movement of production overseas. Obviously it follows from the latter story that we must accept lower wages; more labour market "flexibility"; and greater job insecurity. At least that is what the elite and their puppets in the IMF etc tell us.

But these figures tell a different tale, arguably.

What they are showing is that a huge proportion of the US trade deficit is due to trade within multinational groups. It does not give comparative figures for many countries but it shows that this is not confined to poor countries which are presumably low wage economies. Three countries are actually shown and two of them are Ireland and Canada: hardly third world.


For both of those countries almost all of the US imports are bought from related parties - that is companies in those states which are at least partly owned by the same people as the purchasers. Why should this be? The author suggests it is because of the low tax regimes in those countries: unfortunately he cites the figures for Ireland but not for the two other examples: Canada and Mexico. I do not know what the tax arrangements in those countries are, so this is not enough to support the case being made but it is suggestive

Let us think about Ireland. It is a rich developed country (despite the impoverishment it has suffered from the banking disaster): and Ireland achieved that status through a very deliberate policy of low corporation tax to encourage inward investment. That policy was successful: indeed it is one of the reasons they are in trouble now because a lot of foreign money poured into the country and fuelled the property boom which is at the root of the problems they have

But what is the reason for a lot of exports to the US through related party trading? Does Ireland have skills or resources which cannot be found inside the USA? I dont think so. So why would US companies base in Ireland and produce stuff there, then export that stuff to America will all the attendant costs of transport and exchange rate commissions etc? One may argue that distances within america are huge and so transport may be a problem either way: but that seems thin, and there are always costs when using different currency so those costs presumably make a difference.

Transfer pricing works like this, in theory. Company X realises it can make product A quite cheaply in country number 1. So it sets up subsidiary to do that, called S1. S1 then makes the goods and sells them to Company X, which is based in the home country. Prices in that home country are higher than they are in country number one: and so long as the costs of transfer etc are not enough to make the total cost of production as high as they are at home, Company X can sell the stuff more cheaply and still make profit. That depends on adhering to "arms length pricing" and there are rules and regulation supposed to ensure that. They don't seem to work very well, but leave that aside.

This is justified by the apparently legitimate pursuit of cost cutting and profit. So long as you do not lift your head and look beyond the interests of the individual company, that looks ok. It is acknowledged that it costs jobs in the home country: but hey, that is a price worth paying: and in any case it redistributes wealth from rich countries to poor ones and so that is a good thing: redistribution is morally right and people in the developed world have been over privileged for far too long. It will be painful to redress that, but it has to happen. Narrow nationalism has had its day.

To support that story we are invited to look at places like India and China a lot of work has gone offshore to those countries and they have benefited from it in terms of economic growth. It is quite hard to argue against that simple story.

It kind of falls to bits if we are looking at countries like Ireland and Canada, though. And it really unravels when you consider that the benefit goes to the parent company, since that company is not based in the country concerned. Some benefit goes to the host country, certainly. They get jobs and some tax from the profits generated there: but the loss to the host country includes those jobs and the due tax: and also includes a trade deficit which leads to higher borrowing and thus to more calls for austerity and higher interest on government bonds.

That is true even if the "arms length" pricing is adhered to. The fact that a great deal of the profit is generated in tax havens gives the lie to even that safeguard. The related company often pays a high price for the imports and it is difficult to say what the prices should be, so it is difficult to regulate. According to neoclassical theory price sort of emerges from the interaction of supply and demand but when the transactions are within a group of companies that is at best unlikely. The company benefits from showing the profit in the low tax regime so it has a strong interest in selling to the producer in that country at an artificially low price (if, for example it supplies raw materials to the subsidiary through the first or a third company based somewhere else); and buying the stuff at an artificially high price. It makes minimum profit at home when it sells the stuff on: and the subsidiary makes most of the profit.

Hard to see how that can be prevented: it often isn't, or tax havens would not exist.

http://www.guardian.co.uk/commentisfree/20...ult-belgian-tax

Excellent article from Richard Murphy about the flight of wealth predicted if we actually tax rich folk

I am quoting that because there is now a row here about BBC staff who are paid through companies rather than PAYE and this reduces their tax bill, in line with what I discussed above. This is being discussed in terms of a public sector scandal: which it is. But it is curiously narrow: the widespread use of it in the private sector is hardly mentioned. Yet the BBC has had its funding reduced and has been told to be more like the private sector: which seems to me to be what they have done. What is the problem.......?

Starbucks: ever heard of that? You might have, because they have a lot of branches in a lot of countries. Quite a big company you might think. And not exactly cheap.

Starbucks makes a loss in the UK. Every year. On sales of £1.2 billion in the last three years. You wonder why they bother. It is sort of accepted that start up businesses make a loss often, at the beginning. But this is not a start up. If they are not making profit by now then it is hard to see how they ever will. Time to chuck it? Well no. Although they tell the tax office they are making a loss they tell their shareholders they are making such a good profit that they are going to introduce some of the business practice in the UK to their parent organisation in America.

So which is it? Profit and a reasonable explanation of why they keep trading: or consistent losses on large turnover which results in them not paying any tax?

I would boycott them on the basis of which I think is correct: but I don't use them, so I can't make that puny gesture.

http://ht.ly/ewSxK

http://www.guardian.co.uk/business/2012/oc...ees?INTCMP=SRCH

Apparently the Tax Office is to face questions about starbucks tax affairs from parliamentary sub committees. Odd. Nobody seems to be saying they have done anything illegal (though since the company appears to have no idea at all about tax law if the link is anything to go by, that may not be true) so it does not seem to be the civil service which needs to answer questions. That would be the politicians themselves, since they make the law ...