Crack down on avoidance – but don’t chase business away

Allister Heath
IS THERE something badly wrong with our absurdly complex and loophole-ridden tax system? Yes. Should it be reformed and simplified to minimise avoidance? Yes. Does that mean that MPs, whose job it is to design the country’s tax system, should demonise companies that are following the law of the land, or should parliamentarians actually do their job and change those tax rules to make them more sensible? No to the former, yes to the latter. Is the ugly lynch mob mindset we see in some quarters damaging Britain’s attractiveness to global business? Yes.

The current debate has spiralled out of control, egged on by those who find cheap moralising less intellectually challenging than actually thinking about tax and economics rigorously. It is sickening to see MPs describe Google as “doing evil”; in reality, it is a pioneering company that provides a great service for free to billions and has allowed tens of millions worldwide to make a living by using it as an advertising vehicle for their businesses, including numerous startups and small firms. A company’s worth to a society is not merely the tax it pays – it is the jobs it creates, the wealth it generates, the services it delivers, its impact on productivity, and so on.

In a free society, people’s primary purpose is to work for themselves and their families, not for the taxman – and people are only obliged to pay the tax that is demanded of them by the law, not more. I disagree with the collectivists who believe that the higher the tax rate, the greater the system’s morality – even though they don’t generally donate more than they have to to HMRC.

That said, I agree that the international and EU rules that mean that Google can operate and Amazon to sell through and yet legally allow the revenues to be classified as emanating from overseas businesses make no sense. They are arbitrary and unfair and should be changed: Google’s UK operations should be subject to UK company tax, as should Amazon’s, and that should be defined in a more sensible manner.

The present rules discriminate against UK headquartered businesses, big and small, in a nonsensical manner. Every company should pay the same tax rates; there should be equality of treatment.

There are, however, several caveats. The first is that the UK Treasury actually gains from similar arrangements that operate the other way around – in other words, UK-based firms that sell abroad through the internet but are legally able to define their revenues as originating from Britain. So abolishing the present system – a course of action I support – won’t be as good for HMRC as some believe.

The second is that not everybody who wants to get rid of tax avoidance wants higher taxes. My own position is that I want to cut the overall tax burden, and certainly not increase it.

At the very least, therefore, any extra tax revenues raised by getting rid of loopholes should be matched exactly by cuts to the overall rate of corporation tax.

Last but not least, those who want to hike corporation tax need to realise that companies don’t really exist apart from as a legal fiction: they are merely bundles of contracts, a framework which enables providers of capital and labour to work together. Taxing a “company”, therefore, really means taxing both those groups.

The research on the real economic incidence of corporation tax suggests that over time those who really pay it are employees – their wages don’t rise as much – and customers – prices are pushed up. There is no such thing as a free lunch.
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