The Moral Law

The aftermath of the Paradise Papers affair continues to fill the airwaves and fuel ongoing discussion on tax, as seen in the Chancellor’s asides in the Budget Speech last Wednesday.

Unfortunately, however, the overwhelming bulk of commentary struggles to reflect any serious understanding of the issues raised. The mishmash of stories and comments on the affair in the media represent a stew of jumbled and diverse tax issues: tax evasion by individuals; aggressive and highly complex international tax structuring by MNCs; the position of tax havens and higher tax countries; the alleged improper use of offshore funds; and the effectiveness (or lack of effectiveness) of the recent output of institutions like the OECD and the EU. In trying to identify what is wrong and what should be done, this jumble is pretty unhelpful. The most obvious problem is in the lack of distinction between what is legal (avoidance) and what is not (evasion) because the problems, issues, and required responses raised by avoidance are generally very different to those posed by evasion.  Whether they know what they are doing or not, those talking about “tax-dodging” in this undifferentiating manner are adding to the fog.

It is true that some journalists acknowledge in relation to avoidance schemes that “of course there is no question of any illegality”. But then what is the point to these stories beyond the soap-opera value of stories about apparent dirty tricks of celebrities?

The implicit message in these stories seems to be one of replacing a requirement of legality with one of morality. Those profiled in these stories have not broken the law, but they have done something (it is not always obvious what) that is in some way unacceptable. It seems to be taken for granted that the dictates of morality would represent the obvious and complete answer if only everyone (which here seems to include all individuals, corporates and states, everywhere in the world) followed them.

But morality in the context of international tax law is a very difficult issue. Questions on the legal boundary can sometimes be difficult but the existence of any moral line is appreciably harder to draw. Take an example on the taxation of savings. The UK gives favourable treatment to UK pension funds by not taxing the accrued return to their directly-held investments. But if those investments are held via an intermediate fund, then tax may well be due on the accrued return in the fund. Is it immoral if a pension fund investing in a variety of different global markets does so via a fund in a tax haven, thereby preserving the tax-free treatment of the underlying investment income?

It could be argued that the naming and shaming of particular aggressive tax avoiders serves a public benefit. Those that are named and shamed – and those that may fear being named and shamed in the future - may be less likely to use aggressive tax avoidance schemes in the future. But that depends on how far they care about maintaining a good reputation with the general public. And the naming and shaming process seems random – does it matter if there are many other aggressive tax avoiders who have not been named? At the margin, this sort of naming and shaming may even have the effect of reducing public confidence in the tax system and induce people to avoid or evade tax on the grounds that everyone else seems to be doing so.

 There is of course also a more fundamental problem. The public discussion largely ignores any mention of the most important issue – the rules themselves. As a result, it does not engage with questions relating to the state of the existing tax system and rules. Yet an understanding of the rules and their impact – the UK’s domestic tax rules and the global international tax system – is essential if we are to address the real issues raised.

That is difficult because of the enormous complexity of those rules. The domestic UK tax rules are several thousand pages in length and even simple questions about how income is taxed or whether expenses are deductible can give rise to very complex answers. The international tax system was designed almost a hundred years ago and has become ossified, raising real questions on its viability for the 21st century.

The mishmash of soap-opera styled morality tales on half-understood and quite different tax issues in itself provides little or no public benefit. The hope that problems could be solved by taxpayers’ “morality” runs into the sand. The real problems relating to the tax system are of course complex, and provide little in the way of shock/horror. But if we are interested in improving the position, this is the ground that is badly in need of serious public debate. We will not make progress until we leave the soap opera and start discussing the nature and effect of the rules themselves. The starting point for improving the system is a better understanding of the system we actually have.