…..and General Anti-Avoidance Rules (GAAR)
Following on from the Aaronson report in November, 2011, George Osborne stated in his budget speech to Parliament this week that he has decided (no doubt after Liberal Democrat pressure) to adopt General Anti-Avoidance Tax Rules (GAAR) after due consultation. This is a major departure for the UK and has potentially huge benefits on a world-wide scale.
Osborne stated his abhorrence to excessive tax avoidance and this repeated, in effect, the Aaronson dictum that only excessive tax avoidance should be the subject of any GAAR. Any law should focus, it said, on excesses – where schemes were devised that provided for a “moderate rule” that does not penalize proper tax planning. This would, Aaronson said in November, 2011, not need elaborate clearance systems because it would be clear that centre ground tax avoidance was not likely to be the subject of HMRC wrath. Guidance (rather like that provided with the 2010 Bribery Act, no doubt) could be provided.
Tax and avoiding commitment
Taxation is not an exact science. In the rush to comment on George Osborne’s 2012 budget, the focus has been on how the proceeds of taxation are used by the State. The Moral Maze on Radio 4 this week highlighted this issue. The discussion was not that illuminating but revealed the continuing problem that society has in determining the mix between public and private sector, taxation and philanthropy in a democratic state. The extremes were in good evidence – at least in the ‘conversation” between Richard Murphy (of Tax Research UK) and Melanie Phillips (Daily Mail).
In the US, the Tea Party and similar Republican and libertarian factions have called for minimum state intrusion in the private affairs of individuals and corporations: to allow them to make their profits and earn their income and spend it however they wish. Reagan’s opinion that the State was “the problem” is reflected in rightist policy in the US. Here, entrepreneurial spirit takes precedence over the “so-called” needs of those who can’t make it economically or fail through ill-health (or, it is assumed, lack of opportunity – opportunity is what you make yourself). State spending should be for defence (and maybe policing) and little else. The private sector should be responsible for everything and pricing through demand and supply should be responsible for sharing out the needs of the population.
Opposite to this are state run economies – the failed economies of the Soviet Union, for example – which proved that state monopoly failed. The attempt to centralize pricing when the number of SKU’s (stock keeping units) may run into billions was seen to be a huge error. China has awoken to that reality and the market economy is now much more the norm.
So, market economics rules and pricing is, wherever possible, market driven by supply and demand.
The problem is that the “market” (Adam Smith’s “invisible hand”) is not always right and the drive of many individuals and other organisations (the market) coming together is often imperfect on timing, often leading to monopolies of supply and often the result of market imperfections. Of course, there are also wider social issues on which government develops obligations to intervene. Global Warming may be one; re-armament in the UK in 1939 is another – no market would supply the needed response (at least in the latter).
This leads to the need for some societal intervention beyond the market. However, as soon as one section is taken outside the market economy, then the economy is further driven in directions that are imperfect. The requirement for a nation (or city-state or whatever) to defend itself from potential invasion has, throughout civilization, meant that central government has needed to collect tithes or taxes from the population it is defending. Of course, ancient monarchies were defending the monarch rather than the people, but newer, democracies have a similar aspect. Until we reach the perfect state where no-one needs to defend themselves, defence spending will be “allowed” through taxation. This is a basic need and taxation results. Governments (that take on the responsibilities that society gives them through the democratic process) then extend that remit to tax and supply “needs” such as policing, a legal system, health, social security and market intervention. It also has the power to alter the direction that markets take through taxation or incentivisation – e.g. 100% capital allowances or allowances for R&D and geographical location.
The question is no longer whether market economies should exist but the degree of state (on behalf of society) intervention through taxation and the ability of society to accept that taxation and / or devise ways to minimize individual and corporate tax burdens (in the same way that computer hackers attempt to break down IT security defences).
The Moral Taxation Maze
If we believe that democratically elected governments have the right to raise finance through taxation based on the mandate they have been given by society, then it cannot be too far a push to agree that the collection of tax receipts should not be stymied. Tax evasion is a criminal activity; tax avoidance has long been seen as the right of the clever (and the wealthy) to find ways to minimize the tax they (individuals and companies) pay.
This “right” has pitched the seemingly able and spirited against government bureaucrats and tax inspectors in a battle that the public seemed to want the former to win. After the banking and credit-induced damage inflicted in 2007/8, the “spin” has changed direction. It is no longer just bankers that have questionable business ethics. We are now engaged (world-wide) on a deleveraging project of austerity and public sector cut-backs. This is made much more difficult by those individuals / organisations who are engaged in tax avoidance and try to minimize the tax-take made by government. This impacts directly on the need to save even more public sector spending – impacting directly on those sectors of society that can least afford it.
The fact that tax avoiders inhabit the same off-shore jurisdictions as drug dealers, kleptocrats sending oil and energy wealth into their own accounts and organized crime is maybe a clue that tax avoidance is not a wholly respectable activity – whether done by individuals or corporations. The debate seems to be changing and the world is now waking up to the debilitating impact of the “legal” flouting of tax laws through manipulative mechanisms and offshore tax havens. Ethical considerations are now allied to the deleveraging process.
Tax: Society’s writ, Government implementation
The moral tax maze may becoming a lot simpler to navigate. Taxation in each country should now be based on a wide-ranging general anti-avoidance law, which should go further than the Aaronson proposals. While tax will continue to be a competitive issue between nations (within broad guidelines set by trading agreements), tax havens located where value does not arise should be outlawed and value-adding nations (where goods and services are produced, designed and /or sold) should have the sole rights to levy taxes and, through a broad-based anti-avoidance rule, collect those taxes from those operating there (with double taxation only operating between those signing up to the general provisions in operation).
George Osborne’s discomfort with the worst excesses of tax avoidance (based on Aaronson’s GAAR proposals) is a start. But, in a world, which will take a decade or more to rid itself of the excesses that began to unravel in 2007/8 and where economic strength will continue to be more broadly based internationally, governments (where properly representative of society and elected by that society) will need to ensure that society’s wishes are carried out. Taxation is a key to that (as it has always been). As transparency grows and we know more about tax take and where it is spent (as Osborne is keen to provide information on – or so he stated in his budget speech), the ability of the wealthier and most powerful to manipulate their taxation burden must diminish or the outcry from society will become too loud. In the same budget that reduced the top income tax rate from 50% to 45% (because earners had been able to manipulate the tax take from an estimated £3bn to just £100m!), we are given some hope that the fight back is taking hold.
A few weeks ago, retrospective action was taken against Barclays Bank. Now the consultation is under way on general anti-avoidance rules on tax. Modern economies should not shy away from the essential need of society to see that the governments it elects carries out its wishes. Tax laws (and the ethics behind them) should be implemented and be seen to be implemented. This is an international requirement – the UK may be at the forefront of something transformational – if it does not get too scared by being out in front.