27 June, 2012
Following up on my recent comments on
piracy, recent news reports have forced me to learn the subtle
difference between "tax evasion" and "tax avoidance". Apparently
"evasion" is when you don't pay the taxes you're required by law.
"Avoidance" is when you don't pay the taxes you're required by law,
but structure your property or income in such a way that you don't
pay (much) tax. It sounds like a pretty clear distinction, but the
application can be dubious.
The Times recently reported on a widely used scheme that is so
banal, so transparent, that one can hardly see it as representing
anything other than a fig leaf to cover the authorities' wish not to
to tax the wealthy and powerful. The way it works is, extremely
wealthy individual X doesn't like his salary from company Y being
taxed by government G, as though he were just an ordinary citizen.
So he comes to an agreement with Y that they will stop paying him a
salary, and instead pay an offshore shell company K2 for his
services. So far so good. Y now pays no tax, because he has no
income, but for obvious reasons this is not entirely satisfactory.
Poor Y, who is now starving in a garret with no visible means of
support, appeals to the good will of K2 (which has made such a great
profit from Y's tax aversion) for a loan. They're a soft touch, and
they loan him essentially all the money they've earned on his case,
telling him, "Pay us back when you can." He never pays it back, but
they never lose hope. Loans are not taxable, of course, unless they
are written off.
Of course, one key part of this scheme is that the shell company is
based in Jersey, confirming the fundamentally corrosive effect of these tax havens.
But then, this only underlines the point I made above: these fake
sovereign entities exist merely to hide governments' reluctance to
tax the wealthy and powerful behind a veil of secrecy impenetrable
to irritating democratic institutions.
The prime minister has attacked
a popular comedian who has benefited from this scheme, but only as
"morally wrong" suggesting that it was legal albeit unsavoury.
Nearly all of the news reports I have seen describe this scheme as
legal. This is a ridiculous advance capitulation in the propaganda
war. Of course this scheme isn't legal. It's not legal to take
salary and pretend that it's a loan. Even if you can structure it to
make it look like a loan, there is still mens rea. As an analogy, I could announce my
willingness to forgo a £50,000 salary from my employer, and my
employer could choose to express its gratitude for my generosity by
giving me a cash gift of £50,000. Gifts are not taxable, so I've
benefited there. Lucky me! Of course, this is so easy that there are
rules in place determining who is deemed to be a reasonable
recipient of a gift. But even if there were no rule, because no one
had yet thought of this dodge, my action would not be legal. A gift is
defined by the intention of the giver, and my employer did not have
that intention. Many crimes are defined by the state of mind of the
When they say these schemes are legal, what people really mean is
that demonstrating that they are illegal in any individual case would
be difficult or impossible. That makes it sound like the proverbial
"perfect murder" of detective fiction. (Imagine a detective novel for
accountants where the crime is tax evasion rather than murder. The
novel could be written entirely in the form of spreadsheets.) Poisoning
someone doesn't become legal just because you are able to stage it to
look like an accident or suicide; and nonpayment of income tax doesn't
become legal because you've staged your salary to look like a loan.
The Guardian quotes
a salesman of the K2 scheme saying "he believed it would take tax
inspectors years before they put a rule in place to block the
scheme, according to the Times. "We expect the process to take at
least three years to get a proper ... rule in place. We say 'make
hay while the sun shines'." Again, it's not clear why a rule needs
to be in place.
In part, this is just pointing out how the game is rigged by
constraining the resources of the tax authorities. Clearly hiring more
(and cleverer) tax inspectors would bring in more money than they would
cost. The current staffing levels are determined in part by the wish to
preserve the impunity of the very wealthy, but also made politically
palatable by perverse notions of fair play. I've noticed this as well
in people's discussions of traffic law enforcement: It strikes people
as unfair for the police to apply clever tactics to catch and fine
speeders, and doubly unfair if the local government seems to be
profiting from the enforcement.
This being Britain, there is a party political side to it.
Apparently, Cameron came
under pressure to also condemn a popular singer who
participated in a similar tax (avoidance/evasion) scheme, but
happens to be a staunch Tory supporter (recently awarded an OBE). According
to the Guardian, "Privately, senior Tories are concerned that
Cameron's comments on Carr were a tactical mistake because they gave
journalists a green light to investigate the tax affairs of
Conservative ministers, MPs and donors." (Why do journalists need to
be given a green light? Surely they're capable of acting on their
own initiative...) And then there's the embarrassing fact that Cameron père (aka Ian) earned his substantial fortune designing tax avoidance schemes.