Look behind the fiscal tree but don’t expect to find any money

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Russell Long, the southern Democrat who was long-serving chair of the US Senate finance committee, composed the ditty “Don’t Tax You, Don’t Tax Me, Tax the Fellow Behind that Tree”. His point was that, when politicians explain that public budgets will be balanced without pain through the elimination of waste or an assault on tax avoidance, you know they are not serious. There is plenty of waste and avoidance — but if eliminating them was painless, it would have happened.

Researcher Maya Forstater has done valuable service in puncturing the extravagant claims of campaigners that the lives of the poorest people could be transformed by money from behind the tree. Some of these arguments are simply laughable. Christian Aid, a charity, has claimed the import of 66m refrigerators to Spain from China in 2007 at an average cost of 38 cents represents a shift of €8bn out of China (through trade mispricing). According to the Christian Aid report: “The money lost could be used to provide schools, hospitals and better living conditions worldwide.” I have always tried to teach students that the most likely explanation of a startling statistic is that it is wrong: but, it seems, to no avail. There are only 18m households in all Spain.

Winnie Byanyima, executive director of the Oxfam International charity, has asserted that the UN’s Millennium Development Goals could be achieved “twice over” using the proceeds of an attack on multinational corporations avoiding tax in developing countries. This is barely more plausible than the 38 cent fridge. Most tax avoidance by multinational companies reduces revenue in developed countries, not developing ones — the biggest victim of these strategies is the US. The main impact of such avoidance on lower income economies is felt, not by the poorest countries, the sub-Saharan Africa states where global poverty is concentrated; but in the large emerging economies active in global trade — Brazil, China, South Africa.

George Osborne, the UK chancellor of the exchequer, is right to attack both artificial avoidance schemes and outright evasion, although his fine words are undermined by less publicised measures to beggar our neighbours by encouraging multinationals to report profits in Britain rather than elsewhere.

But the fantasy of Jeremy Corbyn, leader of the opposition Labour party, that austerity could be avoided by money currently behind the tree is indeed a fantasy. Calculations of the scale of tax avoidance and evasion — like estimates of “tax expenditures” from reliefs and allowances — assume that, in all other respects, behaviour would remain unchanged if tax that is currently avoided or evaded were collected. It would not. Many relevant transactions would not occur at all. It is an open question how much additional company tax could actually be collected by poor countries without discouraging the external investment essential to their development.

But one need not believe in pots of gold behind the tree to be concerned about tax avoidance. More thoughtful tax campaigners — and the UK’s HM Rev­enue & Customs — have defined avoidance as a situation where most reasonable people would agree that, if the facts are as described, tax should payable whether or not it is legally payable.

Tax is thus a moral issue. Not because we should take pleasure in paying tax but because the behaviour of well off people, and large companies, should conform to the expectations of most reasonable people. It is not just the rule of law but also a sense of shared values that makes economic and social life possible in the modern state. That is why multinational businesses should not engage in transactions without commercial substance; and why celebrities faced with large tax bills as a result of failed avoidance schemes deserve what they get.

 

This article was first published in the Financial Times on December 16th, 2015.

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