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First the Panama Papers, now the Paradise Papers. A steady slew of revelations about the wealthiest squirrel away their cash in tax havens has confirmed three things. The first is the industrial scale of offshore abuse. The second is the ease with which this abuse has been undertaken. And the third is the susceptibility of so many, mostly already wealthy beyond any possible claim to have need, to the appeal of this abuse and the free-riding upon their fellow citizens that it represents.
The important question now is: what can be done about it?
As I have argued in my book The Joy of Tax, in theory no state with its own currency needs to tax. It can, in principle, always print money to cover the cost of the goods and services it wishes to acquire. It will, however, always want to tax in practice because by doing so it achieves a number of other vital goals.
First, and crucially, it controls inflation. Second, it can shape the macro-economy of the place it governs through fiscal policy. Third, by demanding that it be paid in its own domestic currency it ensures that the currency it issues must be used in that place and so it takes control of monetary policy. Fourth, it can redistribute income and wealth. Fifth, it can reduce market failure and also offer subsidies through relative tax deductions. And last, it can encourage the democratic process because people who pay income taxes vote.
Tax does then play a fundamental economic and social purpose within a society. Without it a place would be economically ungoverned and very likely socially unjust. The chance that democracy would flourish would be limited. Things that underpin the society in which we live are, therefore, dependent upon the existence of an appropriate tax system. This is why I say that tax has a greater influence on the society we live in than any other mechanism for achieving change available to us: this is what I call the Joy of Tax.
That process, however, is dependent on all being willing to partake in it, or it becomes inherently unjust. My argument is that a majority of people in most states voluntarily pay the taxes demanded of them because they believe it socially appropriate to do so. Of the rest, a majority can be persuaded without obvious coercion to do so. The penal element of the tax code is then targeted at those whose behaviour is aberrant (in contrast to that of the majority) in any society. This is, of course, similar to any criminal law.
Tax, then, is not imposed. Nor is it a legalised extortion, as the current chair of HM Revenue & Customs in his previous life as a City lawyer called it. It is instead a price most willingly pay but which some wish to abuse.
It is possible to prevent that abuse but a number of things are required. The first is that the tax system must appear to be comprehensive. In other words, all income of similar type should be taxed at similar rates or there is perceived injustice. Second, taxes must be progressive, or it is clear that those with greatest capacity to pay – as indicated by their marginal cost of making settlement – are making a smaller effective contribution than those on lower incomes. And third, it must be apparent that the resources to achieve these goals are being provided by the state.
These three conditions suggest what can be done about the type of activity that the Papers reveal. First, and most importantly, any state, if it is to have real control of its tax system, has to invest in the process of doing so. It has to be seen to be fair in its approach, and this means its tax authority must be present in the communities that it governs. Tax must be seen to be collected accountably by people who live in the communities that benefit from the process. That tax collection process must also be readily accessible to people so they can resolve issues with it when necessary. The current policy of closing tax offices and treating the whole tax collection process as a mere technical issue capable of being addressed anonymously from call centres is anathema to this goal. Democracy, accountability and trust in taxation are all undermined as result. We have to invest in tax.
Second, we have to be able to find what is to be taxed. This has been the real focus of much of the technical work of the tax justice movement, in which I have been involved, for well over a decade. So we argued, for example, for the obligation to be imposed on tax havens that they must not only identify the real (or beneficial) owners of the property that they have been helping to hide from the view of tax authorities but that they must also report this beneficial ownership and the income arising from it to the state where the person who has that beneficial ownership really lives. This then provides that state with the chance to tax the income or wealth hidden outside its domain.
We have won this argument, in part. Information exchange begins in 2017 in many cases, and in 2018 for may others. But, the process is incomplete. There is no guarantee that the information will be accurate as yet, or in sufficient quantity (monetary limits for its supply are set too high in many cases), or that it will be used, because of the denial to tax authorities of the resources that they need to use it. This part of the battle, then, has only just begun, but the sheer fact that the processes now to be undertaken ensure that a person undertaking offshore abuse is at least more at risk of being identified is likely to promote serious behavioural change. That was always the aim.
The same behavioural aim is also inherent in the demand for public country-by-country reporting by multinational companies, which would require them to publish an account for each and every place where they operate, so that we can see who uses tax havens and to what extent. This process, which I designed in 2003, has now been adopted by the OECD for tax authority reporting purposes – but the fight for public access to it remains a real one, which must be won if the visibility that ensures that there is confidence in the tax system is to be secured.
Of course, all this must be backed by a fair tax system making appropriate demands of all in a country: it is hard to see a corporation tax rate as low as 17 per cent having a part in any such system. But the point is that if the appropriate political will and understanding of tax exists, matched by some extension of the measures we have already pursued, then an appropriate tax system might follow. And what that means is that a more equitable society in which each participant can flourish better than now – while the rule of law, democratically established, might be upheld.
That is the aim. That is what tax can deliver. That is the joy inherent within it.