Friday, June 22, 2012

Tax avoidance is not just legal, but moral

The feeding frenzy is out.  In the UK if you legally arrange your personal affairs to minimise your tax liability then the Prime Minister thinks it is immoral.

It all came out when a newspaper reported that comedian Jimmy Carr is apparently using a legal tax-avoidance scheme through Jersey.   Carr's humour is ascerbic and rarely has anything political to say, although it was notable he poked fun at banks and tax avoidance not long ago.

However, David Cameron's jumping on the bandwagon of condemning tax avoidance as immoral is about participating in a radical left-wing campaign that essentially supports more tax.  A campaign pushed by the economic-illiterates at UK Uncut.  That group supports increases in the size of the state, opposes spending cuts and wants more money collected in taxes from businesses and those on relatively high incomes.  Its demand to further infringe on the property rights of businesses and individuals is matched by its supporters invading and occupying private property to "make their point".   However, give them credit for being consistent - these people don't believe in property rights (until you take anything they claim).

As I'm a libertarian, I believe taxation is legalised theft.  It is money taken by force because people engage in behaviour the state has deemed it wants to charge for, such as employment, making a profit, buying certain goods and services and the like.  It isn't a charge for a service provided.  There is no consent involved, there is no relationship whatsoever between taxes paid and services received.

So from my point of view, whatever steps anyone takes to not pay tax are moral, because it is an act of self-defence against the use of force against property.  Plenty of Greek citizens do this presumably because they can and because they don't believe the state spends their money wisely, and they'd be right.

Legally, there is a difference between tax evasion and tax avoidance.  Tax evasion is to take steps to conceal undertaking activities for which tax is due.  Tax avoidance is to structure your affairs to minimise your legal liability for tax, not through concealment or falsifying tax returns, but by any legal steps.

Buying duty free alcohol at the airport is tax avoidance.
Choosing investments that have low or zero tax liability over others, is tax avoidance.

Some instruments for tax avoidance are complex and require professional assistance, which effectively means only people with relatively high tax liabilities can see net savings from paying someone to help them minimise their tax bill.

That's what Jimmy Carr did.

Immoral?  No.  

In fact, if he was illegally evading tax I'd also argue that it is not immoral either.

It is not moral to surrender to the state more money than you have to.   The state, particularly when the bulk of what it spends the money on is to give preferences, privileges and unearned money to other people, is not a supreme moral actor.

Jamie Whyte in the Wall Street Journal explains why Carr acted morally (notwithstanding the mild hypocrisy over his past jokes about tax avoidance).  I'll paraphrase his article below.

The usual vague comment trotted out by statists (those who believe that more state spending is generally a good thing) is that it isn't "fair" and that people must pay a "fair share".  

Whyte makes the split between private and public goods.  

Private goods are those which are consumed personally, such as healthcare, education, pensions, subsidies and the like. To equate taxes for those on any ground of "fairness" is open to serious criticism.  Does Carr consume disproportionately more of these than others?  If not, why should he pay more?  Given his income appear to be many orders above that of the national average, it is fairly certain that he would pay much more than he is ever likely to consume.   The people paying little or no tax, who do consume private goods are the ones where there isn't much "fairness", but the left take it for granted that it's fair for such people to have access to goods and services that they can't afford.  However, that doesn't mean it is fair for Carr to be forced to pay for them.  Why is his existence and success an obligation to pay for others?  The only "fairness" argument is to pay for what you use.

For public goods, such as law and order and defence, the only "fair" approach is for everyone to pay the same.   An argument can be made that the wealthier you are, the more property you have so it is fair to bear a higher burden for the costs of the state to be available to protect it.  In which case, a low flat tax to cover such "public goods" would be "fair".  Income tax of 10% would carry little incentive to engage in tax avoidance or evasion.

Beyond that, Whyte makes the compelling argument that given Carr generates income from people paying for his performance, he must generate a "consumer surplus" (nobody pays to go to his shows to get less than the value of the ticket, but more).  So in fact he is already contributing as a producer.  The snobbish sneers from conservative right and socialist left that he is a mere comedian (the conservatives considering it to not be a proper job in a suit, the socialists thinking it isn't as important as a bureaucrat or a miner) can ignore that, despite his comedy not having universal appeal, he makes people laugh and their lives a little bit better.  They pay for it, so he "produces" (the alternative view is to embrace the wondrous delights of authoritarian regimes where comedy is suppressed).

Even adopting the Marxist view that we all have an obligation to those less fortunate which needs to be enforced by force (which I do not share), making Carr pay more in tax isn't really going to deliver that fairly at all.

The British Government does not redistribute wealth in a way that could be defended robustly as favouring the least advantaged, in actual fact it engages in masses of transfers to people on middle incomes and to people who, by global standards, are relatively well off.  Some of the transfers are:

-  Winter fuel allowance for everyone over 60 regardless of income (a subsidy for energy bills for the elderly.  The Queen would get it if she applied).
-  Child benefit, for every child in a household as long as no one in the household is on the second highest income tax rate (which hits at around £35,000 a year - hardly rich).
-   Housing benefit, which can pay rents for a person or family up to £400 a week (a cap introduced since it was found that one family was getting over £160,000 a year for one property).

Beyond that, if it really was about those most disadvantaged, it would not be most people in Britain.  It would be children in Niger or Haiti or elsewhere.  It would be those without schools, without nutrition, without homes.   However, it isn't.  The claim that it is morally justified by helping the most needy is fatuous because it blatantly isn't true (nor could it be, as neither voters nor politicians would stomach it).

Winding back from all that, taxation exists because people vote for governments who impose them.  Indeed the majority are docile about forcing the minority to pay for what governments bribe them with.  Beyond the core functions of the state, little else that it does contributes to wealth creation, the services it does provide are unlikely to be of a standard or nature that people would choose themselves, and it engages in vast numbers of transfers that are little more than bribes to rent seekers who lobby politicians to get them to loot on their behalf.

Jimmy Carr is both legally and ethically correct to arrange his financial affairs to minimise his liability to this monstrosity.  The budget deficit and public debt are not his fault, it is the fault of politicians and their second-handers who have demanded more and more be spent on them and their pet projects and activities, without being willing to force the public to pay for them (let alone ask).

Tax avoidance is legal, it is moral, and indeed I believe people have a moral duty to themselves and their loved ones to maximise the ways they can avoid tax - for tax takes from YOUR wealth so someone else can spend it, as they see fit. Why would anyone voluntarily, and legally, prefer politicians spending his own money to himself spending it, unless he himself was engulfed in self-hate or believed in his own ineptitude relative to politicians and bureaucrats? 


Mark Hubbard said...

Good piece, Scott. You're right on all counts. Though I'll add to it. It's possibly worse than what you imagine, because, talking in the NZ context, Gramsci has worked his evil through the state school system and our judiciary have now completely bought into the ideal that individual taxpayers must be sacrificed to the common good. For over ten years now IRD have won every avoidance case that matters, and so it is, frankly, imprudent to take a risky position - you will get done. This is especially so now IRD have been granted the full powers of a police state for tax enforcement and administration: they don't even need a warrant to raid businesses premises. I certainly don't take such positions, and note Carr has been forced pretty quickly to cave in under the tyranny of the majority vigilantism - the state has won, and the best that can be done is fight the battle on the level of philosophy where it was lost.

My entire blog is about just these issues; the top byline sets out the powers the IR's have. And you might be interested in the example of the compliance meetings IRD give, which I've stopped attending for the reasons given in the following post:

Mark Hubbard said...

Sorry, missed my main point in that last post. What the case of Penny and Hooper has shown in NZ is that IRD consider simply not paying the most tax you can, is avoidance, and they won. The classical liberal Westminster rule of 1936 has been turned over by NZ's judges. And that is shameful.

Will leave you alone now ;)

ZenTiger said...

Just to take another view - I think the State is acting immorally in creating and allowing some loopholes that can only be exploited by the wealthy, leaving the middle class to suffer to a greater degree, and creating a further injustice by the State in it's arbitrary robbing of one group at the expense of another.

I also think the state is a necessary evil - without them you couldn't have any form of democracy and the interests of "the people" would be only expressed through purchasing power. (Hmm, this was an off the cuff comment, might need to research and think on this further - can democracy exist without the State?)

I therefore don't begrudge a limited amount of tax, because if water was privatised (for example), I would still have to pay some-one for it to be delivered. I'm not convinced monopolies for such things can be avoided, and thus, a private monopoly versus a State monopoly would not actually add much to my freedom.

No disagreement though that the state tends to grow unfettered and beyond the bounds of its core business.

Julian said...

Hear hear Scott, you nailed it.

libertyscott said...

Mark, yes quite right, you can be guilty if deemed to have legally arranged your affairs to minimise tax. Not one party in Parliament is the slightest bit interested in confronting this.

Zen - a lower, simpler tax system would address your issues. Bear in mind I absolutely support the need for the state, how one funds it is a moot point, but for now taxation is an "interim evil". One argument made is the state could be funded through a lottery, but at the very least my attitude to taxation if widely shared would keep the state within reasonable confines.

KP said...

You can keep your State and your democracy, but I want voluntary tax! Let them send me an invoice with each Departments budget included, and give me the power to pay what I wish to whatever department I prefer.

That is the only way to show what people REALLY want, be it Police & Justice, Environment or Welfare or.. Then those Depts have to run with whatever they were given.

If a falloff in education is seen as detrimental then more people will allocate money to it the following year. It would only take a few years to bring the parasites to heel.

ZenTiger said...

LS - re a lower, simpler tax system - hear hear.

Low = not worth the cost of avoidance, and people more inclined to pay it.

Simpler = universally applied with no exceptions or loopholes to be exploited (morally or not).

Unknown said...

You describe those who are against tax-loopholes as economically illiterate. I am as left wing as the next University of Chicago Economics Phd. However, this post is complete nonsense. You are clearly an economic illiterate yourself. It has been shown, both theoretically and empirically, that well run government is the key to economic success and well-being. There is no evidence suggesting that government spending is bad for growth. There is lots of evidence that non-transparent legal systems, whether tax law or criminal law, are bad for growth. A huge proportion of government spending goes towards the most disadvantaged in the UK. Obviously some of it goes towards people who are not disadvantaged: Given nearly everyone in the country uses the NHS. Yes government can be corrupt and bureaucracies can get hi-jacked by special interest groups and big business. But for some reason libertarians spend nearly all their time going after unions and public services rather than handouts to wealthy elites and the influence that they exert over government. Libertarians are useful to the wealthy who don't want government to bend to their own interests. Libertarians might claim they against all forms of government spending but the reality is that you emphasize the pro-rich part of the libertarian agenda. You are useful fools. No wonder libertarian think tanks receive so much money from billionaires.

libertyscott said...

"Unknown": You put forward a straw man, I have not denied the need for well run government.

There is evidence that excess government spending is bad for growth. There is a general correlation between government as a proportion of GDP and GDP growth. One need only look at Hong Kong vs mainland China until the 1990s, the two Koreas, the (former) two Germanys. Government spending, after all, is taking money from people who would otherwise choose to invest or consume for that which maximises their utility, so that government can do that which maximises the utility for the politicians who seek re-election. Beyond core public protection functions, government spending tends to go on supporting consumption.

You're right about non-transparent legal systems are bad for growth, and I've long advocated the simplest possible tax system, with low parallel flat tax rates. i.e. large income tax free threshold, with 15% flat tax on income (knock VAT down to 15% as well). The simpler and the lower the better, simple means avoidance becomes more difficult, lower means the incentives to do so erode.

So what if a lot of money goes to the most disadvantaged, there is a huge middle class welfare state that must go first. Besides if you want to help the disadvantaged, what is stopping you?

The NHS is an appalling system, it treats its users as cattle, is the most centrally planned state controlled health system in the developed, and I've avoided it where possible because I don't want to have to wait two days to see a doctor when I'm sick!

I've never wanted any elites to get handouts from government. I'm opposed to all subsidies, I'm more opposed to funding elite than the Labour Party (which handed everyone including the wealthy elderly a winter fuel allowance). Frankly if the state stuck to its core responsibilities, nobody would try to influence it anymore except those who want to grow it.

Find a libertarian think tank that wants to protect businesses from competition, that wants to maintain subsidies, that wants to maintain middle class welfare.

It's a strawman for socialists to claim libertarians want state privilege for the wealthy, because in fact it has been those on the left with their carefully selected businesses they protect, their massive state totem projects (e.g. Olympics, HS2) and the like who have transferred vasts amounts of wealth to companies and businesses so they can have show off "legacies".

All paid for with money borrowed from future generations.

And yes, the Conservatives are little better.