Tax loopholes

At the end of March, a number of people wrote to me about the so-called "Mayfair Loophole". Or rather they wrote to the current MP in South Norfolk who is Richard Bacon (Conservative), and copied me in to see what my view was. This is what they wrote:

The Mayfair loophole gives special treatment to private equity bosses. They shouldn’t be allowed to dodge up to £700m of tax a year. It’s money which should be going to our NHS, education and public services.
Will you vote to close the Mayfair loophole - by voting for amendment 3 in today’s Finance Bill? It's being tabled by Caroline Lucas MP. If the vote happens, please explain to me how you voted.
I'm sending this email to the other MP candidates for this area, to find out how they'd vote if they had the chance.
Here’s the report into the loophole, for more information:https://secure.38degrees.org.uk/closing-the-mayfair-loophole-report

The Link provided there (to a section of the 38Degrees site) gives more information about the loophole and the proposed amendment due to be tabled by Caroline Lucas.

In the event the proposed amendment by Caroline Lucas was not debated, due to time limitations. So no solution has been endorsed as yet. But the Green Party has committed itself to closing this loophole, which currently loses the country an estimated £700 million a year in tax revenues. You can find the Green Party position explained here.

Richard Bacon gave his constituents the following reply:

I have been concerned about this issue for many years and have been campaigning on it together with my colleagues on the Public Accounts Committee for many years.  Indeed, it is largely because of our committee’s campaigning work that the whole question of “tax and who pays it” is now much higher up the political agenda, where I think it needs to be. Tax is not a simple issue.  Having said that, there is a growing public sense that the tax system is “not fair”; that is – to put it crudely – that it offers one set of rules for ‘the rich’ (including rich individuals and big multi-national corporations) and another set of rules for everyone else (including normal people and small businesses); and I believe there is some truth to this general public view, even if it needs to be qualified here and there. Public anger found its most visible expression after Starbucks, Google and Amazon all gave evidence to our committee some while ago, when people started to boycott Starbucks and buy their coffee elsewhere. You can watch our Public Accounts Committee hearing with Starbucks here. I was highly critical of the use of personal service companies by over 2,000 senior civil servants in order to minimise their tax liability.  Top civil servants were paying corporation tax at 20—26 per cent, rather than income tax at higher rates.  I discussed this matter on the BBC’s Newsnight programme in an interview that you can watch here. I quizzed HMRC’s Tax Assurance Commissioner Edward Troup earlier this week, when we discussed the status of people who live here permanently but are non-domiciled in the UK for tax purposes, which you can watch here. The way in which the question of tax is sometimes presented in the media actually hinders rather than helps understanding.   For example, the very phrase ‘tax avoider’ can be deeply misleading.  If you go into a building society to invest in an ‘ISA’ – which is a tax-exempt savings account available to everyone – you are being a “tax avoider”.  That is to say, you are avoiding tax that you would otherwise pay.  There is nothing wrong with this.  Actually, the government wants you to be a tax avoider and has said so clearly.  Successive governments of all political parties have backed the idea that there should be tax-exempt savings accounts. Why?  Because all governments have reached the conclusion that our society needs people to save more – and that offering tax relief on the returns which people get from their savings is a good thing to do.  In the same way, if you take out a pension you are a tax avoider.  Why?  Because the government wants you to be a tax avoider – it wants you to have a pension and therefore offers substantial tax relief against the cost of taking out a pension. One person’s ‘tax avoiding’ is another person’s ‘sensible tax planning’. The phrase ‘tax avoider’ has become a ‘swear word’ which describes not only activity which is ‘normal and fair’ but which also describes activity which is ‘undesirable’. Years ago, it used to be widely understood that tax law broadly covered two kinds of activity: i) the avoiding of tax which you did not need to pay if you planned properly, which was perfectly legal – and, indeed, if you were the director of a company, your legal duty under company law to avoid; and, on the other hand, ii) the evading of tax, which is simply illegal and a criminal offence.  The distinction between these two activities – avoidance and evasion – used to be much clearer.  A very big ‘grey area’ has emerged in which taxpayers such as large companies ‘twist and turn’ to achieve outcomes which were certainly not intended by Parliament but which appears to be ‘legal’ and which would survive a legal challenge in the courts. This has happened for two related reasons. First, it is now much more common than 30 or 40 years ago for companies to become global, which means that they operate in many different tax jurisdictions.  Second, different governments around the world offer many tax reliefs for a wide range of different reasons.  This combination of i) worldwide economic activity and ii) huge numbers of tax reliefs provides almost limitless possibilities for creative accounting.  The obvious ways to eliminate these problems are i) to stop global trade and ii) to have the same tax everywhere in the world, but plainly neither solution is in the slightest realistic. The great enemy here is complexity.  The more complex the system, the easier it is for highly paid tax lawyers and tax accountants to dream up entirely new ways of achieving an outcome not intended by Parliament. Every attempt to create more rules to solve the problem actually makes the problem worse. The only way to make serious progress is to make the tax system much simpler and get rid of all tax reliefs, but the trouble is, of course, that for every person who would like to say ‘Get rid of the tax reliefs’, there are others who benefit from the tax reliefs. You will quickly see the point by imagining how you would feel if you had an ISA or a pension, and the government suddenly said ‘We are abolishing all the tax reliefs on ISAs and pensions’. I discussed these issues on BBC Radio 4's 'Today programme' which you can listen to here or here.  You can read more about my work in ensuring that our tax system applies to everybody equally on my website here, here and here.   Please do take the time to visit the links above and to listen to what I have said on this subject on behalf of my constituents and taxpayers generally.  I hope you will see that I have been active in defending the interests of the vast majority of people who pay their taxes on time and in full. Thank you again for taking the time to contact me. Yours sincerely 
 RICHARD BACON MP

Much of what Bacon says here is wise and clear in explaining in general terms what tax avoidance and tax dodging are. I am sure that Bacon cares about these things, and especially about ensuring that people don't muddle up tax avoidance that is deliberately encouraged (like ISA schemes), tax dodging that is exploiting unintended consequences of allowances designed for others, though still within the law, and illegal tax evasion. But for all that, it does not seem that Bacon has done anything to crack down on the illegal or unintended kind, or indeed has actually had any effect whatsoever.
Well, of course, we in the Green Party have not had any effect as yet, but then we are not in government yet, and are not the sitting MPs. We do have one sitting MP, and she has actually done something, by bringing the tabled amendment that was frustrated by the time rules.

So my answer to the question? Here is my response to those who wrote to me about it:

Dear ...... 

I’ve now seen the response that you’ve probably had from Mr Bacon, and I am impressed because his diagnosis of the problems and of the need for a solution seem to me very sound and wise. Nevertheless. I do wonder how much he can achieve, given his party’s record in this parliament. I find myself appalled at the blind eye that this government has been turning towards the loopholes and wriggle room built into the tax revenue system, and it seems suspicious that these practices serve to protect some of the wealthiest among Tory donors. 

Naturally I’m with Caroline Lucas in her attempt to address this. I would be really proud of the South Norfolk voters if they were willing to follow their wish for honesty and integrity, and elect an MP who’s prepared to stand up with Caroline Lucas on this and other matters. Let’s hope!

These things matter to me as a Green Party candidate because we need a society that works towards greater equality and a fairer distribution of resources. Tax avoidance schemes that favour the wealthy and lead to the wealthy paying a lower rate of tax than the poor are unjust and unfair, and prevent us from providing the public services that a civilised country needs, from health provision and care for the elderly to museums and libraries, schools, roads and railways.

Getting our heads round the economics of ANTI-Austerity.

Several recent media events have featured aggressive debates where some of the pro-austerity parties have tried to attack or rubbish the policies of the Green Party of England and Wales. This in itself is a good sign (because it is a sign that people are beginning to find the popularity of these policies alarming, and to see that they are winning support both here and in other parts of Europe, as most famously in Greece).

The scare tactics deployed by the aggressive interviewer typically include finding bogeys in the Green Party's policies on immigration, religious extremism and drug control. But the one that I want to consider today is the typical response to the anti-austerity policies, such as fully funding the NHS, raising the minimum wage, renationalising the railways, no tuition fees, and providing a welfare system that will enable everyone to live without fear of poverty or destitution.

The standard question is "But how will you fund this?", and the questioner then doesn't wait for an explanation of how the economics of a modern state works, but assumes that it works like a family budget in which there is a set income, and you decide what your priorities are for spending it. Responsible budgeting, they suppose (or they want their viewers to suppose), is like responsible budgeting at home. If you haven't got much money, and you've borrowed some money already, then you need to spend only that and no more. In fact, you should spend less, so as to repay some of your debts. This is the very muddled economic thinking that has encouraged people to vote for austerity, against their own interests and against the interests of the economy. This is what is now being questioned across Europe. And rightly so, because it is stupid.

That muddled economic thinking is what the politics of anti-austerity parties like the Greens is challenging. So the answer to the question "How will you fund this?" need not have an answer of the kind the aggressive interviewer is expecting (e.g. "we shall raise taxes", or "we shall abolish the armed forces", or even "we shall increase the national debt"). Because, actually it is austerity that leads to increased debt, and cuts to the armed forces, and ill-equipped armies, and a shortfall of income in relation to costs for health and welfare and housing. That is the problem, not the solution, so you should not expect an answer in that form to explain how the better welfare system and subsidised transport, and full public health service and education, will be paid for by the Green Party.

For sure, the Green Party does have a few ideas of things that are wasted expenditure, or immoral expenditure, but the reason for making savings there is not really because one must make cuts to cover the costs of the other good things that need money thrown at them. I mean, for sure, it will help not to be spending billions on out of date nuclear weaponry that is about as useful as the crown jewels but more expensive. But if we needed such things, we shouldn't do that instead of having a good railway infrastructure or accident and emergency treatment in hospitals. We should, in that case, have to do it as well.

So how are these things to be funded? How is the new government in Greece going to fund its new anti-austerity policies. How has it been able to restore free health care and give the cleaners a job again? The answer to this question requires you to stop thinking the way the austerity parties have taught you to think. They want you to think it is like a family with a fixed income to spend. But actually it is not like that. It is more like a business which makes an income by engaging in income generating activities, and inviting its citizens to invest their money in those activities and to make things happen. It's when things happen that money flows into the coffers of the state.

In fact there are two ways this happens. One is that when people (especially the poor) have some money they will spend it, often in local businesses such as the pub at the corner, or the betting shop or the hairdressers. The pub is less likely to go out of business, and instead will be paying rates, taxes and duty on the beer sold, and the people in the pub will be socialising and sharing ideas for things to do to, making connections for their businesses (You need a builder? I know one!) and looking after each other's mental health and welfare. The community is better off, there is less strain on the resources of the doctors and social workers, and the money gets back to the government in taxes to be sent out to the poor again. Similarly, if you give the students an income so that they don't have to work to live, they will spend the money they have on many things. The jobs they currently take will go to ordinary working families instead, who will need less support from the state and will pay income tax, council tax and all the rest. All this money goes round and round, because as business gets better (because there is money in the system) every business can afford to employ someone, or do renovations, or send out produce that employs delivery firms and other distribution methods. And every time the money is spent, tax comes in to the state coffers to be used in support of the welfare state. The system is like investing to get a return, not like spending a fixed income. The income is not fixed. It will go down if there is no productive activity going on. Which is what happens if you cut benefits and cut employment in public services, and cut wages and cut research budgets. You end up with nothing.

Where do you get the money to start this virtuous circle, if you have the situation that will be left by this government where the debt has gone up and no one has money to spend (except the very rich who have siphoned it off to tax havens or loopholes and are not spending it here)? Well, the answer is that you invite those who have some savings, and want to invest their savings in a secure scheme and for interest, to invest it in the government's own savings bonds. So the wealthy pop their money into your coffers, and you promise to pay them interest, or the money back when they need to withdraw it. That's fine. They need a place to keep their money, and you, the government, then put it to use on generating this active, healthy, well educated society. In due course, this will pay its dividends, in fuel duty, alcohol duty, income tax, council tax, business rates, VAT and so on. The private individuals' savings will have helped the state to get back onto the ladder of prosperity that can deliver a fully funded welfare state. And the fully funded welfare state is actually what prosperity depends on. Because you need educated healthy citizens, with an appetite for enterprise and a good environment in which they can expect their business to thrive, with a purchasing power sufficient to allow things to happen.

It is no good helping people to start a business by lending them money. Because if no one has any money to spend, the business will fail and you will never recover the investment. That's the wrong way round. Start with the people who need the services, give them money to spend, and then others will be able to start the businesses they need and make a living from them. Then you will get back all the money that went out to them, because it comes back in taxes and profits and increased spending power at every level of society.

The answer then? It should not really be "We plan to make savings here and here to fund this proposal" but rather "You don't understand: we are talking about making money, not spending it. This is the way you make money. Don't believe what they've told you in the past. That was a way of screwing money out of you to give to the rich. We don't do that. We give it to you so that it will come back to us, seven times over for every pound we spend on the poor and the sick and the aged and the disabled and the unemployed."