Robert Searle asked an interesting question on the TJN email group recently. He asked:
If you were a super-rich businessman, or woman would you not want to keep as much of your profits from taxman as possible? Is this not a normal instinct?
I’ve taken time to muse on this and think that Robert’s question starts at the wrong place. It begs the question, how did the person become super-rich? If it was inheritance, is that reasonable, and should it have been taxed? If it was by chance e.g. by gambling, should society sanction such activities which are known to be destructive for many? If by business activity, how? Is this income, or has it been obtained by way of capital gain on sale of the enterprise? If the latter, has the sale prejudiced those who contributed to the well being of the owner but who shared no entitlement to participate in what we call ownership? These are all valid questions that might preface that asked.
But that still is not enough. From my own experience I would suggest there is not such thing as generic business of the type assumed to exist by economists, and implicit in the generality of Robert’s question. That type of business, in which profits are maximised for the benefit of shareholders at the expense of all other objectives is a wholly irrational enterprise for a great many reasons too lengthy to consider here. But it has a parody in the activity of those who seek to accumulate wealth (defined in a monetary form or related to the exercise of power) with little or no consideration of the business activity engaged in to create such accumulation. In contrast, there are businesses which seek to create what I consider to be ‘value’ which are the type I have always sought to work with.
By this I mean that these businesses are run on a basis that recognises that value is created in the process of exchange, and persistent value is created when the resources dedicated to the exchange are intended to increase the well-being of all involved in it. This is not idealistic thinking. Intention does not, for a start, guarantee success but the characteristic is best expressed by those who pursue a business activity because of the passion they have for that activity in itself. I have known countless business people who would undertake their trade if only they could without all the paraphernalia of business because they really do believe it is what they are meant to do. That passion used to be (but as far as I can see does now rarely) pervade our largest businesses. It is still extraordinarily widespread in the smaller business community. It is a trait ignored by economists: the term ‘social entrepreneur’ has been created for it to describe a similar motive when used in the not for profit sector.
By deliberately choosing to work for these businesses (whenever it has been possible) I have seen that they can work. They do not profit maximise. They seek to provide value to those they deal with. They do, of course, consider cash flow and might be very efficient managers of resources in this respect. That is because they wish to perpetuate their activities and know this will not happen if they do not carefully manage their working capital. They will focus reporting on issues of quality and service; they grow by recommendation. They create enormous value, and sometimes considerable riches for their owners (some of whom will seek to share it). But few will have actively sought those riches as their primary motive for engaging in the activity in which they are engaged.
I make that last point deliberately. My experience of those who have sought to create riches (as measured in cash) is that they were always best avoided. They either exploit everyone (including their accountant) ruthlessly and as a result are poor clients to deal with, or they simply go bust as their businesses lack meaning and focus. I saw rather a lot of this type of business before disengaging with that type of activity.
The point though is this. The source of the riches will seriously influence the choice made as to tax payment. The person who has exploited on the way to accumulating their cash will wish to retain it any cost. The person who has never anticipated riches may well manage their cash badly, and their taxes likewise. But the person who has accumulated wealth because of the supply of value will almost certainly (from my experience) pay their taxes, and will seek to do little to avoid them. There are two reasons why they will do that, and both are rational.
It is entirely rational for them to wish to pay tax. They recognise the value created in exchange and so place a value on the supply of services by government. Tax is an exchange of and for value. They accept that and do not seek to avoid it, whilst not seeking to pay more than is their due. Secondly they pay because they recognise that there is a greater return to be made on effort by participating in the positive activities with which they are engaged i.e. in advancing their business. Tax avoidance is very often the pursuit of the failed entrepreneur who actually has no clue about how to make money and can therefore only seek to save it.
So what would I do? I ran a quite large accountancy practice where we never sought to minimise client’s tax bills through anything that approached creative tax planning, whilst remaining quite well aware of what it was. We made clear that was our intent. We focused on helping clients create value (as I’ve defined it here) by undertaking worthwhile business activities as indicated by willing clients paying fees for goods and services supplied. It worked. My firm had 800 clients when my partners and I sold it 15 years after I first started the practice. And yes, we did seek to do our best for our staff at that time. I have paid tax on that basis myself.
My point? Simply this. Please do not assume homogeneity in business. Some will behave as so called rational economists suggests likely. In my experience most of these will fail in due course, or will at the least maintain ownership of their enterprise for only a limited period before selling it, exploitatively. I see little real value in that. But other models do exist. We should be looking at those as well, even if our society does not promote them as it should.