There is a huge hole in public finances that needs to be filled and protestors are arguing that part of the deficit can be financed by companies that manage to avoid or indeed evade taxation. Sunday 30th January was marked by many as the day of action against this alleged tax avoidance by companies who choose to register in so-called tax havens. These countries offer much lower tax rates and hence provide an attractive environment for companies and savers.
However, protests by the campaign group Uncut have been targeting companies such as Boots, Vodafone and Top Shop, accusing them of depriving the UK economy of billions of pounds of tax revenue, which could be used to plug the hole in Britain’s finances and put the economy on the road to recovery. While these concerns have been around for a long time, they have been brought to the forefront by the government’s spending cuts in areas such as higher education, public sector pensions and the planned closures of libraries. There are numerous strikes planned by workers facing job losses, pay cuts and pension cuts. However, George Osborne has said:
“I regard these people as the forces of stagnation, when we are trying to get the British economy competitive again, moving forward again.”
With more and more spending cuts expected and households being squeezed could this tax avoidance really fill the gap? It is not known how much tax revenue is lost through tax avoidance and evasion, but HM Revenue and Customs estimated that the size of the tax gap could lie somewhere between £3.7 billion and £13 billion. The Commons Public Accounts Committee estimated a gap of £8.5 billion and the TUC at around £12 billion. A pretty wide divergence on estimates I grant you, but an indication of the sheer volume and value of tax avoidance that takes place. Clamping down on this may not plug the hole, but it would certainly help!
Analysis: UK Uncut- The true costs of tax avoidance Ethical Corporation 2009 (28/1/11)
Tax protestors stage Boots sit-in The Press Association (30/1/11)
Weekend of protests planned over tax cuts Guardian, Matthew Taylor and Jessica Shepherd (28/1/11)
Unions are “forces of stagnation”, says Osborne BBC News (28/1/11)
Day of action against tax avoiders The Press Association (28/1/11)
Firms’ secret tax avoidance schemes cost UK billions Guardian, Tax Gap Reporting Team (2/2/09)
Questions
- Why is the UK running such a large budget deficit?
- What is the point of tax avoidance?
- What are the arguments for companies such as Boots registering in other countries? Are these reasons ever in the interests of consumers?
- How are companies able to reduce their tax burdens by registering in countries like Switzerland?
- Why does George Osborne argue that trade unions and strike action are the ‘forces of stagnation’?
- What are the costs of striking to (a) workers, (b) consumers, (c) firms and (d) the economy?
- Would clamping down on tax avoidance be of benefit to the UK economy in the short and long run?
If you are lucky enough to have piles of money earning interest in a bank account, one thing you don’t want to be doing is facing the dreaded tax bill on the interest earned. It is for this reason that many wealthy people put their savings into bank accounts in Switzerland and other countries with strict secrecy laws. Countries, such as Liechtenstein, Switzerland, Andorra, Liberia and the Principality of Monaco have previously had laws in place to prevent the effective exchange of information. This had meant that you could keep your money in an account there and the UK authorities would be unable to obtain any information for their tax records.
However, as part of an ongoing OECD initiative against harmful tax practices, more and more countries have been opening up to the exchange of information. In recent developments, Switzerland and the UK have signed an agreement, which will see them begin to negotiate on improving information exchange. In particular, the UK will be looking at the possibility of the Swiss authorities imposing a tax on any interest earned in their accounts by UK residents. This tax would be on behalf of HM Revenue and Customs. One concern, however, with this attempted crack down on tax evasion is that ‘innocent’ taxpayers could be the ones to suffer.
The following articles consider this recent development. It is also a good idea to look at the following link, which takes you to the OECD to view some recent agreements between the UK and other countries with regard to tax policy and the exchange of information. (The OECD)
Articles
UK in talks over taxing Britons’ Swiss bank accounts BBC News (26/10/10)
Doubts on plans to tackle tax evasion Telegraph, Myra Butterworth (21/10/10)
HMRC letters target taxpayers with Swiss bank accounts BBC News (25/10/10)
Spending Review: Can the taxman fix the system? BBC News, Kevin Peachey (22/10/10)
Britain, Switzerland agree to begin tax talks AFP (26/10/10)
Treasury to get £1 billion windfall in Swiss deal over secret bank accounts Guardian, Phillip Inman (26/10/10)
Swiss to help UK tax secret accounts Reuters (25/10/10)
Reports
The OECD’s Project on Hamful Tax Practices, 2006 Update on Progress in Member Countries The OECD, Centre for Tax Policy and Administration 2006
A Progress Report on the Jurisdictions surveyed by the OECD global forum in implementing the internationally agreed tax standard The OECD, Centre for Tax Policy and Administration (19/10/10)
Questions
- Is there a difference between tax avoidance and tax evasion?
- If there is crack down on tax evasion, what might be the impact on higher earners? How could this potential policy change adversely affect the performance of the UK economy?
- If tax evasion is reduced, what are the likely positive effects on everyday households?
- Is clamping down on tax evasion cost effective?
- What might be the impact on people’s willingness to work, especially of those on higher wages, if there is no longer a ‘haven’ where they can save their money?
- How could tax reform help the UK reduce its budget deficit?
In these news blogs, we’ve considered a Tobin tax on a number of occasions: see A Tobin tax – to be or not to be? and Tobin’s nice little earner. On 10 December 2009, the Treasury published a discussion document, Risk, reward and responsibility: the financial sector and society. This, amongst other things, considers the case for a financial transactions tax – a form of Tobin tax. As Box 4.A on page 35 states:
“James Tobin’s original proposal for a transaction tax was to tax foreign exchange transactions. The purpose of the tax was to tackle excessive exchange rate fluctuation and speculation on currency flows, as Tobin felt that short-term movements in capital flows could severely limit the ability of governments and central banks to follow appropriate domestic policies for their economies.
However, the recent crisis has shown that there is considerable risk inherent in other financial markets. In some of these markets trading volumes have also grown enormously compared to the value of underlying assets. As set out above, instability may result from these markets due to the complex nature of counterparty networks and a lack of transparency, and the transmission of financial shocks through the system.
Recent attention has therefore focused on a broader tax on financial transactions – potentially, this would include trading in a wide range of instruments, currently traded both on and off-exchange.”
The goverment in the UK has recently taken one step in increasing taxes on the financial sector. In its 2009 pre-Budget report, delivered on 9 December (see Cutting the deficit and tackling the recession. Incompatible goals?), a new tax on bank bonuses was imposed. The rate is 50% on bonuses over £25,000. Since then a similar tax has been imposed in France and Germany’s Chancellor, Angela Merkel, said that she found it a ‘charming idea’, although probably not practical under German law. She did support, however, the use of a Tobin tax on financial transactions, similar to the one being considered in the UK. Such a tax, to be effective, would ideally have to be imposed worldwide, but at least by a large number of countries.
So is the case for a Tobin tax gathering momentum? The following video podcast considers the tax’s aims, effectiveness and practicality – as do the articles.
Video podcast
Radical Tobin Tax proposal could go mainstream BBC Newsnight, Paul Mason (10/12/09)
Articles
Now’s the time for a Tobin tax Guardian, George Irvin (11/12/09)
EU leaders urge IMF to consider Tobin tax Financial Times, Tony Barber and George Parker (11/12/09)
We can always get to Utopia – even from here Irish Times, Paul Gillespie (12/12/09)
HM Treasury makes case for Tobin tax City A.M., Julia Kollewe (11/12/09)
The Tobin Tax – a brief history Telegraph (8/11/09)
European Union presses IMF to consider Tobin tax Telegraph (11/12/09)
Questions
- How do current proposals for a Tobin tax differ from Tobin’s original proposals (see Sloman and Wride, Economics 7th edition, pages 756–8 or Sloman and Hinde, Economics for Business 4th edition, pages 743–5)?
- Explain how a Tobin tax could be used to reduce destabilising speculation without preventing markets moving to longer-term equilibria.
- How might the use of a Tobin tax on financial transactions help to curb some of the ‘excessive rewards’ made from financial dealing?
- Examine the advantages and disadvantages of using a Tobin tax on financial transactions. How might the disadvantages be reduced?
- What considerations would need to be taken into account in setting the rate for a Tobin tax on financial transactions?
Transfer pricing is a technique used by multinational companies to avoid tax liabilities in countries they regard as having high levels of taxation. The articles below from the Guardian give the results of an investigation by Guardian journalists into the elaborate structures that have been created by multinational companies in the banana industry to funnel their profits through tax havens like the Cayman Islands, Bermuda and the British Virgin Islands. In some cases they have paid an effective tax rate as low as 8% when the tax rate in their home country is 35%.
Revealed: how multinational companies avoid the taxman Guardian (6/11/07)
Bananas to UK via the Channel islands? It pays for tax reasons Guardian (6/11/07)
‘I get up at 4am, work to 6-7pm – it doesn’t feel like a life’ Guardian (6/11/07)
Questions
| 1. |
Define the term ‘transfer pricing’. |
| 2. |
Explain how multinational banana companies use transfer pricing to reduce their tax liabilities. |
| 3. |
“The trend in the last 30 years has been to shift the burden of tax away from companies on to the consumer and labour. Capital is increasingly going untaxed.” Discuss the advantages and disadvantages of this shift in the method of taxation. |