2011 September » Tax Research UK

This is one view of the world’s top financial centres – but a better one is coming soon

Financial Secrecy Index, Tax Justice Network, Uncategorized 1 Response »

Sep 262011

Today the Z/Yen Group publishesdthe tenth Global Financial Centres Index (GFCI 10) covering 75 financial centres. The GFCI Top 10 were:

Centre	GFCI 10 Rank	GFCI 10 Rating	GFCI 9 Rank	GFCI 9 Rating	Change in Rank	Change in Rating
London	1	774	1	775	0	-1
New York	2	773	2	769	0	4
Hong Kong	3	770	3	759	0	11
Singapore	4	735	4	722	0	13
Shanghai	5	724	5	694	0	30
Tokyo	6	695	5	694	-1	1
Chicago	7	692	7	673	0	19
Zurich	8	686	8	665	0	21
San Francisco	9	681	13	655	4	26
Toronto	10	680	10	658	0	22

GFCI 10 uses 28,604 financial centre assessments completed by 1,887 financial services professionals.

Interesting stuff.

But next week the new Financial Secrecy Index from the Tax Justice Network is out and that will be much more telling.

Look for the overlaps I suggest!

The UK Swiss tax deal – not so fast the EU begins to say

EU STD, Europe, Switzerland, Tax evasion 9 Responses »

Sep 262011

I hear rumours from the EU Commission on the UK Swiss tax deal.

First rumour is forget the Swiss German deal – it won’t get through the parliament so the UK is going to be in the Swiss dodgy deal market all on its own.

Second, forget the 26% tax rate being less than the EU savings tax rate, although that’ obviously unacceptable

The reality is that the official policy of the EU Commission is automatic exchange of information, nothing less. This is a principle they have not wavered from one iota with the EU savings tax amendments and even set in concrete with the Administrative Cooperation and Mutual Assistance on Tax Matters Directive adopted unanimously by ECOFIN in February this year.

The German and UK agreements with Switzerland apparently state that “withholding tax is equivalent to automatic exchange of information in the long-run”. Well, so they might. But that’s in conflict with the EU policy. In that case the EU will “intervene” i.e. block the entire agreement by saying it is illegal within the EU.

Why will they do that? Simply because the EU Commission doesn’t believe the PR that withholding tax is equivalent to exchange of information, besides which the EU Commission believes the withholding tax agreement has loopholes in which case an ineffective agreement with the Swiss certainly doesn’t match automatic exchange of information.

So Dave Hartnett may have signed a deal.

But there’s a good chance he may not actually see it come about.

Back to the much better European Union Savings Tax Directive then.

Ed Balls – 5 points to capture the imagination

Economics, Labour, Uncategorized 2 Responses »

Sep 262011

Did Ed Balls do well enough?

Yes: he apologised, enough

Yes, he stayed Keynesian thinking

Yes, he talked of hope for ordinary people.

The 5 point plan was good, politically (although not ambitious enough – but good politically for now). It was:

a) Reinstate the bank bonus tax and build 25,000 homes to create 100,000 jobs

b) Build infrastructure now

c) Cut VAT on housing repairs to 5% to boost activity

4) Cancel VAt increase to boost economy

5) Give NIC boost to all small employers creating any new jobs

They’re headlines, but they indicate a correct direction of travel and that’s good.

And he made clear that he does blame Tories for their very big mistakes – not least for following the herd and Balls makes clear he’ll make his own decisions.

And he made clear he’ll hold banks to account and business too – the mantra private is good is not accepted.

Is that good enough? This is politics of course – he can’t deliver any of this – but it was good politics bar his comments on strikes on pensions.

What was missing? The tax gap. An explanation as to how the national investment bank he was calling for would be funded. But that’s to follow. This was good politics at present.

The FT acknowledges tax avoidance is real, deliberate and extensive

Banking, Barclays, Tax avoidance, Tax gap 14 Responses »

Sep 262011

The FT has reported this morning that:

US tax authorities are targeting cross-border finance deals worth billions of dollars between leading US and UK banks as they step up efforts to clamp down on abusive tax avoidance, a joint investigation by the Financial Times and ProPublica, the not-for-profit news organisation, has found.

Four US banks – BB&T, Bank of New York Mellon, Sovereign (now part of Santander of Spain), and Wells Fargo – are in turn suing the US government over more than $1bn in tax credits that the Internal Revenue Service has disallowed over the past decade. Washington Mutual has settled a similar dispute and Wachovia is pursuing an administrative complaint over a deal.

The UK’s Barclays emerges as a pivotal promoter of the complex cross-border deals, which the IRS claims were designed to generate artificial foreign tax credits.

The cases have become a crucial early battleground between the US and multinational banks and companies in the wider debate over so-called tax arbitrage, and whether companies exploit gaps between international tax systems to benefit their bottom lines.

The best link to their analysis is here.

The deals were complex, deliberately structured, are claimed to be legal (which I don’t doubt) but arte being challenged because legal they may be, but tax credit loss generating they are not according to the IRS. Clearly I can’t decide that, but I have strong inkling they’re right.

I’m interested to note that not only were Barclays purveyors, at considerable cost to HMRC (so please don’t tell me there’s no tax gap now, or that it’s not much bigger then the paltry sums HMRC say it is when these deals alone are meant to have cost $800 million to HMRC – and that’s just one set of deals in one bank) but that KPMG are named as designers alongside them.

The analysis is all in the linked article. I won’t repeat it.

But what this does prove is three things:

a) The FT things tax avoidance is real

b) It thinks it is abusive

c) It thinks it is extraordinarily costly

d) It thinks it is deliberate

e) It thinks it can be stopped

I think all are important.

I rest my case.

IRS, U.S. Banks at Odds Over $1 Billion in Tax Credits from Barclays Deals

Banking, Barclays, Tax avoidance Comments Off

Sep 262011

The following story is in the FT today but has also been published under a Creative Commons licence by Propublica who co-authored it so I republish it with reference to their site, as allowed by them:

By Vanessa Houlder and Megan Murphy, Financial Times, and Jeff Gerth, ProPublica Sep. 25, 2011, 4:40 p.m.
This story was co-published with The Financial Times.

U.S. District Judge Patrick J. Schiltz of Minnesota is an educated man. He earned his law degree from Harvard, won a coveted clerkship for Supreme Court Justice Antonin Scalia and taught the law for more than a decade before joining the bench in 2006.

But when Wells Fargo, the retail banking giant, and the U.S. Justice Department squared off in his courtroom last year over the legality of a fiendishly complicated tax scheme known as “STARS,’’ even Schiltz quickly realized he was not equipped to parse the facts.

“I fear I may finally have met my match,” the judge told the court. “We may need a translator in this case, someone who can help us to understand these complex transactions and understand the complex tax laws to put this into English for us.”

He is not alone. The growth of an arcane, intellectually demanding area of high finance that generated hundreds of millions of dollars for banks and multinational companies is being dissected from Minnesota to Washington, D.C., as the U.S. government pursues what it calls tax avoidance fueled by the use of artificial foreign-tax credits.

STARS – short for “structured trust advantaged repackaged securities” – were deals between U.S. banks and Barclays, one of the U.K.’s premier banks in London, that have come under particular scrutiny in bankruptcy, tax, district and claims courts.

At issue in the cases is whether the transactions had a legitimate business purpose or were designed specifically to generate improper U.S. tax credits.

Barclays emerged as a key player in creating strategies that worked asymmetries in tax systems. In the STARS deals in question, Barclays realized at least $800 million in tax savings from the U.K. government — benefits it shared with other parties in the deals, according to an analysis of U.S. court and Internal Revenue Service documents by the Financial Times and ProPublica.

Six U.S. banks — BB&T, Bank of New York Mellon, Sovereign (now a unit of Banco Santander), Washington Mutual, Wells Fargo and Wachovia (now a Wells Fargo subsidiary) — have been battling the government over tax credits they claimed through STARS. In one instance, government lawyers said STARS permitted BB&T to claim $1 in foreign tax credits for every 50 cents in tax, “grossly exploiting the tax laws.’’

BB&T, based in North Carolina, responded in court that it participated “to maximize profits’’ and not “to avoid or evade’’ taxes.

The U.S. banks all contend their deals had economic substance because Barclays provided them with billions in financing at below-market costs. But each arrangement involved a complex set of transactions, including creation of a trust and multiple subsidiaries, which also provided significant tax breaks.

The U.S. government, in recent court filings, contends that STARS was a highly complex tax-shelter transaction used by the U.S. banks to generate foreign tax credits. In court filings, government lawyers allege that the BB&T and Wells Fargo deals were a “sham.’’ In Wells Fargo’s case, they assert that STARS was designed so the U.S. bank’s “entire economic profit would be totally and exclusively sourced from U.S. foreign tax credits.’’

Wells Fargo says in court papers that its deal with Barclays was a lawful way to obtain reduced-cost financing for its ordinary business.

The U.S. banks involved in pending cases declined to comment. Washington Mutual has settled, agreeing in bankruptcy court last year to forgo $160 million in claimed tax credits. The other U.S. banks are seeking repayment for disallowed tax credits totaling more than $1 billion.

Barclays is not a party to the cases and declined to discuss client matters or comment on its U.K. tax savings. “Barclays complies with taxation laws in the U.K. and all the countries where we do business,” the bank said in a statement Sunday.

U.S. and U.K. tax officials also declined to discuss individual cases, saying it is forbidden by law. There is no sign that the U.K. authorities are challenging Stars deals, and the U.K. appears to have had a net tax benefit from them. One court filing by Bank of New York Mellon says: “Barclays’ transaction structure was reviewed by the U.K. taxing authority.”

Revelations about the deals arise amid a broader political debate about corporate taxes and the ability of U.S. companies to compete globally.

As the 2012 election year looms, President Barack Obama is facing direct challenges from Republicans about how best to reduce the U.S. corporate tax rate — at 35 percent one of the highest in the world — and why U.S. businesses hold an estimated $1.8 trillion in profits overseas.

The law allows U.S. corporations to defer paying taxes on profits earned elsewhere until they are brought home.

The STARS cases are a high-stakes battle for the IRS, particularly because the tax agency and the Treasury Department gave notice in 1997 that they would issue more regulations on foreign tax credits to curb “abusive tax-motivated transactions.’’ But the IRS and Treasury Department never issued new regulations and in 2004 withdrew the earlier notice.

Participants in the market say they believed the government was signaling then that it would not challenge such deals. So when the Treasury Department and IRS proposed new regulations in 2007 and the IRS began turning down tax credits, companies were caught unawares.

The STARS disputes have produced a vast number of court documents that offer rarely seen details about the world of tax arbitrage – deals that look to maximize profits by exploiting differences in countries’ tax systems.

More than three-dozen bankers, lawyers and accountants interviewed by the Financial Times and ProPublica would not speak publicly about transactions involving foreign tax credits, saying that to do so could jeopardize their jobs. But all characterized their work on such deals as legitimate and a sort of “cat-and-mouse’’ exercise: Revenue authorities would close a loophole, and financiers would look for another.

“Bankers looked on it as something to make money with. Young lawyers and accountants looked on it as a game,” one British lawyer directly involved in such deals said. “It is not hard to fool the parliamentary draftsmen.”

How the STARS deals worked

Foreign tax credits are designed in U.S. law to prevent double taxation of companies that do business overseas. Because U.S. companies are taxed on their worldwide income, they are allowed to claim a credit for taxes paid to foreign jurisdictions to keep their tax bills neutral.

But foreign tax credits have long been open to abuse.
In STARS cases, for example, the government contends that U.S. companies pursued “foreign tax-credit generator’’ schemes to take reap credits even when there was no double-taxation. The tax agency is also pursuing cases involving non-STARS transactions in which companies indirectly borrowed funds from a foreign bank and received tax credits.

Such deals have wound down because of investigations and enhanced regulation, and because the global credit crisis changed attitudes toward risk. But a look back at Stars reveals how the deals were born and the zeal of those financiers who have been – and continue to be – eager to push the boundaries of structured finance.

The U.K.-U.S. transactions were crafted with a certain degree of confidence and ease during the heady days of the mid-1990s, when financial firms on both sides of the Atlantic saw the potential for savings, said one participant.

“The U.K. equivalent of a foreign tax-credit generator scheme was a partnership deal,’’ he said. “What the U.S. calls foreign tax credit, we call double tax relief. What made the U.S.-U.K. deals so attractive were the English language, a foreign tax-credit system and the rules-based legal system.’’

Court documents and a IRS legal analysis of one transaction reviewed by the Financial Times and ProPublica show STARS deals generally work like this:

A U.S. bank transfers several billion dollars in income-producing assets to a trust and sets up a subsidiary as trustee in Britain. The bank sells shares in the trust to Barclays, but promises to buy them back after a set number of years.

Barclays agrees to provide financing to the U.S. bank for less than the bank’s normal cost of credit, and it routes the money through the trust.

The banks say this structure at its core is simply a low-cost, secured loan. But the IRS says STARS went too far, creating a circular set of transactions that are principally designed to generate artificial tax benefits.

The U.S. bank’s trustee pays British tax on the trust earnings and claims a corresponding U.S. tax credit. Barclays pays some tax as well, but the arrangement also allows the U.K. bank an even larger tax benefit.

That’s because Barclays shares give it rights to nearly all the trust income, which it is required to immediately reinvest in the trust. Barclays can deduct this reinvestment as an expense, reducing its U.K. taxes.

Barclays used part of the tax savings to discount the U.S. banks’ borrowing costs and kept the rest. In court filings, BB&T calls this discount an “offset,’’ while government lawyers call it a “kickback’’ from Barclays. When the deal expires, Barclays is repaid in exchange for the trust shares.

The STARS deals varied, but Barclays’ financing was always attractive. Sovereign says Barclays offered a loan as much as 3.35 percentage points below normal cost in 2003. BB&T received $1.5 billion at 2.9 percentage points below normal cost in a five-year deal that began in 2002.

Wells Fargo, which received $1.25 billion at 2.50 percentage points below normal cost in 2002, told Judge Schiltz that the Barclays deal saved it “millions of dollars in interest expense each year.’’

Other financial firms also participated in structured finance deals. Barclays is presented in court files as the pivotal marketer of STARS to U.S. banks.

Court documents show Barclays worked at times with the global auditing firm KPMG; in one case, KPMG, the accounting firm Ernst & Young and the law firm Sidley Austin are described as having been involved in the design, development and marketing of the transaction. None of the three firms is the focus of an IRS challenge, and all declined to comment.

In the past decade, Barclays was known for a bold approach to tax arbitrage. The British bank’s structured-finance team was considered among the most aggressive of international moneymakers.

Its Structured Capital Markets unit was led in the 1990s by Roger Jenkins, whose focus on corporate tax planning reportedly made him one of London’s highest-paid bankers. Iain Abrahams, who joined the investing arm of the bank in 1995, was considered the wizard behind the deals, according to a half-dozen people who worked or did business with him.

Abrahams remains a senior executive at Barclays Capital; Jenkins left in 2009. The government is seeking depositions from at least seven Barclays employees, court files show. The bank would make no employee available for an interview. Jenkins also declined to comment.

‘It became a cozy world’

The IRS – and some of its counterparts elsewhere – was unaware for years that banks and other financial firms were relying so heavily on foreign tax credits, bankers and officials said in interviews.

American International Group, better known as AIG, is characterized as a pioneer in structuring transactions with foreign tax credits, arranging deals as early as 1993, according to court documents.

At the helm of its development unit was a young Joseph Cassano, the same financier who headed the AIG finance unit that imploded in 2008. Companies such as Hewlett-Packard, the global technology giant, also engaged in the transactions. Banks were the most frequent partners.

His lawyer, Joseph Warin, said in an email that Cassano would not be interviewed.

A turning point came in the late 1990s when banks realized they could do deals with each other. Knowledgeable senior bankers said they were eager to move away from corporate customers, who were less adept at structuring complex deals.

“It became a cozy world,’’ said one. “You are dealing with your friends. You chat together, play golf together and move around each other’s institutions.”

Over time, the sharp reduction in interest rates encouraged much bigger deals to create the same tax benefits. In the early 1990s, the deals were totaling $150 million to $200 million; by 2003, they were 10- to 20-fold bigger, said two experienced bankers who were active in the market.

Banks also copied each others’ deals. “It was just like the credit boom,” said one prominent financier. Accountancy and law firms were involved, according to marketing documents and court papers reviewed by the Financial Times and ProPublica.

The authorities tried to catch up. In 2004, the U.K., U.S., Canada and Australia formed a Joint International Tax Shelter Information Centre to curb abusive tax transactions. Soon after, the IRS was alerted to questionable transactions by its British counterparts within Her Majesty’s Revenue & Customs Office.

The U.K. later passed measures that caused a “large portfolio’’ of AIG transactions in Britain to be terminated, according to public filings. The U.S. began its own investigations and was helped by the international effort.

The joint tax center uncovered multiple cases that might have affected the U.S. tax base. The IRS was told about “things we would never have picked up or would have been picked up years down the road,” IRS Commissioner Mark Everson told the Financial Times in 2005.

By May 2006, he informed the Senate Finance Committee that the IRS was “aware of 11 structured financing transactions with an estimated $3.5 billion at issue.’’ Not long after that, the IRS began denying STARS tax credits. In 2008, the IRS noted in a memorandum that foreign tax-credit deals had caused a “significant drain on the U.S. Treasury.’’

Bankers and advisers say that tax-driven structured finance is now a fringe activity. Bill Dodwell, head of tax policy at the auditing firm Deloitte, said that in the current financial climate, “I don’t think aggressive planning will come back seriously for years and years.’’

Dave Hartnett, permanent secretary for tax for Her Majesty’s Revenue & Customs in Britain, sees closer cooperation among tax authorities as helping to quell the deals. But they also recognize the market forces at play, he said.

“There has been increased tax transparency from many banks,’’ Hartnett said. “But have foreign tax-credit generators been closed down completely? No, I don’t think so.’’

The international task force, he says, is still “busy exchanging information.’’

–

Related story: Government Claims AIG ‘Gamed the Tax System’
Vanessa Houlder covers taxation and Megan Murphy covers investment banking for the Financial Times in London. Senior reporter Jeff Gerth is in Washington, D.C.

Inform our investigations: Do you have information or expertise relevant to this story? Help us and journalists around the country by sharing your stories and experiences.

If you’re so inclined you might want to vote for the Left Wing Thinker of the Year

Blogging, Uncategorized 2 Responses »

Sep 262011

Left Foot Forward runs an annual poll for the Left Wing Thinker of the Year. I have been nominated this year by someone who, as far as I know, I have never met.

If you’re so inclined you could vote for me by following this link.

The nomination reads as follows:

James Leppard is public relations officer of the Labour Left think tank, Prospect trade union representative and environmentalist

Richard Murphy is a chartered accountant, the director of Tax Research, UK, the founder of the Tax Justice Network, adviser to the TUC on taxation and economic issues, a columnist for The Guardianand Forbes.com and a regular blogger on tax reform.

Richard has written more than 350 articles in the last year. He has given speeches at parliament and private advice to countless numbers of Labour MPs. He has worked on various projects with Demos and the PCS Union and was appointed as an advisor to the Scottish government.

His latest book “The Courageous State” is near completion and he is writing for Labour Left’s Red Book on tax evasion and its links to the deficit. Thus, Richard has clearly been dedicated throughout the year and has shown an ethic unmatched.

Richard has made the case (pdf) for country by country reporting, this is an approach, which if adopted, would dramatically alter the nature of Multi-National Corporations and shine a light on tax havens and tax avoidance schemes. Transparency is key to avoiding a further financial crash, and Richard’s plan would help restore confidence to the markets.

Richard has fought hard to expose tax fraud in the UK. By the government’s own figures there is c.£288bn of fraud per parliament but Richard has shown the various ways that the figure is even higher than that. He has outlined specific proposals that would help solve this problem (pdf).

Richard has led the way in opposing government cuts, this was especially the case when the Labour Party had a void in economic leadership before Ed Balls was appointed the Shadow Chancellor. Cuts are not necessary, and investment promotes growth. Richard has articulated better than anyone the importance of the state as the number one customer stepping up to stimulate economic growth.

Richard has worked with environmentalist Colin Hines to show that government cuts are unhelpful and unnecessary. The reform of tax and pensions rules have the capability to release funding for green investment in the UK to provide the sustainable economy necessary to deliver aGreen New Deal, with the kind of sustainable development that will be necessary to weather the triple crisis of global warming, peak oil, and economic collapse.

Through his work on the Finance for the Future project, Richard has brought forwards proposals for a new round of “Green” Quantitative Easing (pdf) to stimulate the whole economy rather than just the financial service sector working through a national investment bank to create new jobs, infrastructure, products and services throughout the whole economy including government, local government, the private sector and our homes.

This would end the costly mistakes of previous governments with schemes no longer being financed through costly PFI projects. There is the potential for Green QE2 to be used to buy back existing PFI debt to liberate £200 billion in savings for future generations, capable of paying for green growth for decades to come.

Writing for the Guardian, Richard presented in easily understood terms, how we are headed for a second global financial crisis unless the deregulated financial markets can be brought back under control. Recently, in September, Richard expanded on this theme in a presentation to the campaign launch of Labour Left’s Plan B for the Economy.

“Keynes and neo-liberalism have had their moment, and we cannot go back to either. It is time for a paradigm shift in economic policy. The economic crisis that we are in now is not like 1936, but more serious, and we don’t want to have a war to get out of the situation.

“Bold solutions are required to tackle tax evasion and rebuild hope, including big investment through a Green New Deal, a percentage of the £80 billion pension funds to be used in wealth creation and markets to take part in a more mixed economy with a level playing field.”

It is for these reasons that I commend him for the award.

PS There are some other good nominees too – and you have five votes

The economic policy we need is based on freedom from fear

Economics, Labour, Uncategorized 7 Responses »

Sep 262011

Ed Balls is delivering his keynote economic speech today.

I have no real idea what he will say but note the reports this morning that he will stress long term credibility. This, of course, is meaningless – he was hardly going to espouse long term irresponsibility, was he?

So what should he be saying? First that without growth neither we nor any other economy will get out of recession.

Second, growth must come from investment right now.

Third, since the private sector is not going to invest the state has to – and it is responsible to take advantage of low interest rates to do so. A whole raft of options are available.

Fourth, this investment pays. First it cuts benefits. Second it raises tax. Third, if focused heavily on UK based infrastructure a great deal of the benefit stays here in the UK. And this means that investment can actually pay for itself.

Fifth, as Samuel Brittan said last week, the aim for Lloyds, RBS and Northern Rock should not be sale as if continuation of the existing banking structure were enough when it clearly has failed completely and utterly. That would be a big mistake. These banks must become the core of regeneration of our economy right now by being the agents for injecting money – the money created by quantitative easing – into the economy – and if that means buying out residual private stakes for the time being, so be it.

Sixth, international measures are needed in which the UK must be an active participant to regulate the banks, ensure an orderly right off of debt, expose risk in tax havens and elsewhere through greater accountability and transparency and to demand that banks fully cooperate on issues such as tax collection as part of the grand bargain the world’s governments are making with them to stay in business.

Seventh, domestically the tax burden must be shifted onto those best able to pay it.

Eighth, the tax gap must be aggressively tackled.

And at all times the focus must be ensuring people can live without fear – fear of unemployment, fear of homelessness, fear of poverty in old age, fear of young lives blighted by their being no prospect of them working.

The first eight are important.

The last issue is vital – Labour has to remember, always it’s job is to deliver freedom from fear – the very fear the market wants to create and maintain to ensure people are forced to work on unacceptable terms: a fear deliberately reinforced by unemployment that suits large companies oh so well.

Why the tax gap matters – or why I appeared in court for UK Uncut

Tax avoidance, Tax compliance, Tax evasion, Tax gap, UK Uncut, Uncategorized 13 Responses »

Sep 252011

I wrote the following at the request of the Brighton Evening Argus for publication after the close of the UK Uncut trial in that city, in which I appeared as an expert witness to explain the links between tax avoidance and the cuts agenda of this government.

I regret that the judge, sitting as a magistrate, did not accept that the link was close enough to justify the actions taken during peaceful protest by UK Uncut supporters: equally I am pleased he appeared to accept the link existed but was simply not sufficiently immediate in his view on this occasion (which does of course beg the question when it might be, but let’s leave that aside) and as such five of the nine charged were found guilty of criminal damage. That he gave them conditional discharges for six months does also suggest how trifling he thought the absurd case brought against them to be.

But, back to the Argus article:

Nine people from UK Uncut have been on trial in the last fortnight in Brighton for allegedly causing criminal damage during a protest in Brighton’s Top Shop last December. The damage they’re alleged to have caused was trivial and they admit they stuck themselves to the window of the store. The much more interesting issue is why they did it.

As a chartered accountant I appeared in court when asked to do so by their defence lawyer to explain just what the issues they were protesting about were. These are both complex in detail and relatively simple at the same time to explain.

Everyone knows that the UK is facing cuts at present and we are told they are inevitable. So benefits and pensions are being cut, school funding is down, hospitals are having budgets frozen, the arts and leisure are seeing cuts all over the place and the armed forces are having their numbers slashed. What I argue and what UK Uncut argue is that this is not as inevitable as it seems. There is, in fact, an alternative and it is one that the government is refusing to pursue.

That alternative is called ‘closing the tax gap’. The tax gap is the difference between the amount of tax which the law suggests should be paid in the UK and the amount actually paid. There are three parts to the tax gap. The first is the tax that tax payers have admitted they owe but which they then do not settle on time or at all. This amounts, according to H M Revenue & Customs to about £25 billion at present. If we got this money in the country would not have to borrow so much so it’s a big deal.

The second part of the tax gap is tax that’s evaded. Tax evasion is a criminal activity. It’s what happens when people don’t declare their income to H M Revenue & Customs or when they claim expenses to offset against their income to which they are not entitled. Of the two the first is the most important. Estimates of the total sum evaded each year vary. H M Revenue & Customs estimate the sum to be approximately £35 billion a year but there’s good reason to think that’s a serious underestimate. I think it’s £70 billion a year.

The third component of the tax gap is tax avoidance. This is the element that most people find hardest to understand. Tax avoidance is not the act of claiming the allowances that you are entitled to in law. So, for example, claiming your personal allowances is not tax avoidance. Nor is paying money into a pension fund, or saving in an ISA. Tax avoidance is instead seeking to get around the law so that less tax is paid than Parliament intended on the economic activity that a person undertakes.

This “getting round” the law can be done in a number of ways but the most common is to find loopholes in UK law or between UK law and the law of other countries. These can be complicated; a lot of it involves offshore tax havens, and because it’s expensive to set up it’s largely done by the wealthy and multinational corporations. I estimate it costs the UK £25bn a year, split between individuals and companies.

So the tax gap is, I estimate, up to £120 billion. In fairness I should note H M Revenue & Customs do not agree, but because of my work they have published their own estimates, which come to £60 billion at present – exactly half of what I suggest. It’s curious to note in this context that ‘benefit fraud’ is just over £1 billion a year – but is the issue to which all attention is given.

Either way, and whoever’s figure for the tax gap is closer, it’s an enormous amount of money. My figure would pay for most of the NHS. The point is collecting even some of this money – again whoever’s estimate is closer – would eliminate the need for a lot of cuts – hence the name of UK Uncut. They are saying, and I have said for a long time that if only we collected the money due from tax cheats and crooks then we would either need many fewer cuts or we would not need tax increases. And what I have shown, sometimes working with politicians like Caroline Lucas, is that the measures needed to collect some of this tax are relatively simple, are quick to enact and would work.

Nothing though would work better than having more people on the job of collecting the tax owed to H M Revenue & Customs and yet extraordinarily at a time when the government needs every penny it can get in tax it is sacking tax staff as fast as it can. There were almost 100,000 HMRC staff in 2005: there will be 50,000 in 2015. Rarely has a policy designed to offer ‘savings’ been so misguided. It’s like a company facing a cash flow problem deciding to sack all its debt collectors. But the important point is this: that the government has not only decided to continue with this plan conceived when the economy as booking and it might have made sense, it is accelerating it.

As a result it is clear that the Coalition is choosing to leave money with the tax crooks and cheats instead of collecting it to pay pensions, educate children, fund the NHS, keep our armed forces armed and so much more. It’s that choice that UK Uncut were highlighting – picking on Top Shop because Sir Philip Green’s family are widely reported to have actively avoided £285 million of tax in one year in the mid noughties. He’s just an example, nothing more. But the example is important: there’s cash out there; this government needs it and UK Uncut and others expect them to collect it, now, for the sake of us all. And by demonstrating UK Uncut have made clear that this option is available, which is why I supported them by giving evidence during their trial.

To all those who talk about the politics of envy

Conservatives, Economics, Ethics, Uncategorized 14 Responses »

Sep 252011

My re-posting of Church Action on Poverty’s poster on inequality on Friday gave rise to comment. Seemingly talking about inequality and the need to end it offends some, and discussion of the politics of envy arose.

I always find this extraordinary. I have worked on tax justice and related issues for coming on for a decade now and not once, not ever, have I been motivated by envy. I have no reason to be. Nor have I seen any sign that others working on the issue and related themes concerning poverty have done so either. But I have witnessed enormous courage in the face of adversity from them and I have certainly met the most extraordinarily empathic people. And I encounter genuine concern for others daily.

These characteristics are of course alien to that ultimate straw man – that rational, self interested, self indulgent person whose desire to profit at the expense of all others and without concern for their well being drives capitalism in the wholly mistaken view of those who failed to read Adam Smith’s Theory of Moral Sentiments. The characteristics possessed by those I know and work with are condemned by those who are true believers in that straw man. It is my believe that they describe compassion for others as the ‘politics of envy’.

I think this says much about them, and remarkably little about the left, or campaigns for economic justice. The envy is I think all theirs: envy of the freedom concern for others brings from pure self interest; envy of being freed from the need to beat others on all occasion; envy of the freedom to act on the basis of true human interest in well being brings.

But let me re-post a comment from Andrew Dickie on this issue that does, I think deal with it rather well, and with some considerable insight, made in response to someone using the avatar Mactheknife (telling in itself):

I suggest Macthekinfe has a look at this video on the “class warfare” and “I made it alone” topic. http://www.businessinsider.com/the-viral-video-of-elizabeth-warren-going-after-gop-on-class-warfare-2011-9

Then he should take a look at this Paul Krugman piecehttp://www.nytimes.com/2011/09/23/opinion/krugman-the-social-contract.html?_r=2&src=ISMR_HP_LO_MST_FB

Most (all?) of the class war in the last 30 years has been waged by the rich (the “new Barons”) against everyone else (the new serfs”) in what I, and several other posts on this blog have characterised as the “Neo-feudal” or New Feudal state.

The exact title doesn’t matter; what DOES matter is that the powerful are not only bringing in policies to protect their privileges, they are also stitching up the constitution on both sides of the Atlantic to ensure a permanent Tory hegemony in the UK
* reducing the number of MP’s
* gerrymandering the constituencies
* making it near impossible for the government to lose a “No Confidence vote, as a 66% vote is now necessary to dissolve Parliament, instead of a mere loss of a No Confidence vote by 1, as in the case of Jim Callaghan
* bringing electoral registration changes that may drive as many as 10 million voters – mainly Labour – off the Register, and
* packing the House of Lords with 147 new Lords in just over 12 months, 75% of them ConDem)

and a permanent Republican hegemony in the US, by

*bringing in new versions of “Jim Crow” voter registration, designed to drive the blacks, young, students, dissidents, and mobile workers – all of whom will probably vote Democrat (see http://www.thenorthstarnews.com/issue.aspx?id=2011-09-15#African-Americans-Face-Challenges-Voting-In-Wisconsin-Because-Of-Restrictive-Photo-ID-Law for an example)
* seeking the manipulate the scandal of the ludicrous Electoral College system, by aiming to give Republicans a majority of Electoral College votes (seehttp://motherjones.com/politics/2011/09/gop-electoral-college-plan-beat-obama-2012 for this)

I really DO advise Mactheknife to stop sitting on his complacent rear-end and get out there campaigning against the most malevolent (a word I use advisedly) administration since that of Lord Liverpool in the early 19th century – a sort of “Thatcherism on smack” administration. Lord Liverpool’s administration was content to see a loaf of bread go up to 1/-, when a labourer was lucky to earn that in a month, and to turn guns and cavalry on protesters with lethal effect at Peterloo.

This Con-Dem administration is not so blatant (though look at the astonishingly savage response to the rioters, and even to the UK Uncut people at Fortnum’s), but if we’re not vigilant, we will wake up to find our schools, hospitals, universities and probably our art galleries and libraries all sold off to philistine “Gradgrinds” and modern day Rachmans, interested only in profit, with everything costing. As Abraham Lincoln said – for evil to triumph, it is enough that good people do nothing. The price of liberty is eternal vigilance. I really DO fear the corrosive impact of this government on our social choesion, well-being and everything that constitutes real civilsation, by which I mean “the good life” of compassion, concern for one another and also true respect and consideration. We are on a bumpy slope into the beginnings of a “Blade Runner” society.