I was on the Jeremy Vine show on BBC Radio Two at lunchtime today, discussing what the impact of the Panama Papers might be on most people living in the UK. I argued that there are numerous impacts.
First, some are glaringly obvious. For example, we now believe that at least 94,000 properties in the UK (some of which are large parcels of land) are owned by offshore companies. Many of these are in London and the south-east of England and the consequence is that there has been a wholly inappropriate house price boom in these areas where large numbers of properties are now hold for investment purposes, or almost as a form of reserve currency. The net effect is that very large numbers of people are unable to buy properties near where they work, where they were brought up and so have their relatives and friends, and where they wish to live as result. Alternatively, those who can buy properties are paying far too much for them, and a disproportionate part of their income is absorbed in mortgage interest payments as a result. This over inflates the banking sector, massively reduces the disposable income of large numbers of people in the UK, and so suppresses economic activity, whilst disrupting the social life of millions. That should be good enough reason, in itself, to justify action.
Second, I am aware that the people of this country are empathic, and many have considerable concern for developing countries. We also, as a nation, are one of the few who have committed to pay 0.7% of our GDP in international aid. What I can say with confidence is that if only we tackled tax haven abuse and stopped very large quantities of money flowing illicitly out of many of the world's developing countries, which flows are evidenced by the Panama Papers, then we could not only reduce the amount of aid we have to spend (which some would welcome) but we could do something much more important still. We could ensure that those developing could keep their own money over which they could then make democratic decisions as to how it might be used to support healthcare, education, investment in infrastructure and the development of their economies in accordance with their own choices, which would really fuel the well-being of all the people live in those places, which is the at present enormously harmed by the corruption and loss of funding which results from tax haven activity. What is more, the self esteem of these places would be so much higher because they would not be aid dependent, and I believe that is, in itself also a matter of priority.
Third, inequality in the UK would be reduced if we were to stop tax haven abuse. It is glaringly obvious that if some in society are able to accumulate wealth untaxed then their wealth will grow at a faster rate than the wealth of those who can save out of their taxed income. This is a mathematical certainty. Therefore, tax havens and the opportunities that they provide to the wealthiest to save untaxed simply exacerbate the overall level of inequality in the UK, and what we know from the book The Spirit Level, by professors Richard Wilkinson and Kate Pickett, is that inequality is harmful to everyone in society. Tax havens undoubtedly increase inequality: they cause direct harm as a result.
Fourth, there is the problem of moral hazard. If it is obvious that some in society are cheating on their taxes, whether legally or illegally (and cheating can be both) then the willingness of others to comply with the requirements of the tax system is eroded. That is inevitable. The consequence is also obvious: less tax will be paid, whilst more illegal trading will take place. Both are deeply dangerous. Less tax paid means a lower level of government services, which impacts upon education, health, pensions, social security and the social safety net, defence, basic services such as fire and the police, and so on. Very few in the UK want to see such cuts, whatever they feel about the need for a balanced budget (or not). In that case, the direct and indirect impacts of tax havens is very obvious: we are all worse off because we have poorer services.
But, perhaps even this is not as important as the illicit trading that is encouraged. What we know is that if markets are to work well then there must be a level playing field on which they operate. Tax cheating undermines that level playing field. It provides some, who are willing to cheat, with an advantage over those who are honest. The honest are disadvantaged, the cheats are advantaged. But the cheats will show a number of characteristics which are also deeply antisocial, and contrary to the best interest of society. They are highly likely to have a short-term view. They are unlikely to invest for the long-term benefit of their businesses or society, or the country as a whole. They are the least likely to train people. They are unlikely to recruit apprentices. These businesses are, therefore, those of least worth, and yet the failure to tackle tax havens provides a bias towards them that is deeply prejudicial to the interests of all those businesses that we would want to encourage in the UK. It is very hard to work out why we would want to do that. As I have said on air to today: tax havens do more harm to free markets than communism could ever achieve.
Finally, let me make a last point. I believe that we only continue with a pro-tax haven policy in this country because of the pressure brought to bear on the government by the City of London. Since the time of Magna Carta, at least, the City of London authorities have brought enormous pressure to bear upon the government to ensure that the interests of the banking and financial community are paramount in UK economic policy. At the same time though those same City authorities are so insecure about their ability to compete on the world stage that they demand the existence of a network of tax havens that will transmit untaxed money to London, and return it in the same form. They are not willing to compete on a level playing field, because they are not sure that they are able to do so. But, because they have this unfair competitive advantage over other financial markets the result is that we have a massively overinflated financial services sector in the UK.
This results in the UK suffering what the Tax Justice Network calls the 'Finance Curse'. This is the equivalent of the 'Resource Curse', which is suffered by many countries that have substantial raw material resources, whether they be oil, gas or another commodity. The overinflated importance of that one sector leads to it crushing most other economic activity in the state, whilst its impact on trade arises because of the over inflated value of the country's currency, meaning that the UK's productive businesses cannot compete on the world stage because their products are overpriced as a result of the overinflated exchange rate caused by the industry that has created the curse, which in the case of the UK is finance.
The consequence is that there is no prospect of there being what George Osborne called a 'march of the makers' because they quite simply cannot compete on the world stage and yet it is that very process of rebalancing the economy that is essential if most people in this country are to have the careers, incomes, and opportunities that they both desire and deserve. As a result, the UK's tax haven network is in fact undermining our economic competitiveness (the City of London excepted). Those tax havens are literally dragging us down, and we all suffer a loss of income as a result.
The net effects of all this are enormous. I suspect that with a lot of effort the costs could be estimated but anyone with an imagination can see that if we both harm our income, and what we have to spend out of it by increasing the cost of housing whilst reducing the sums available to spend on essential services, we are bound to be significantly worse off as a consequence of UK tax haven activity.
In that case have no doubt that the tax haven world really impacts on your well-being.
As a result, who should be demanding that something be done to stop it now. I will address that issue next.
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Start with removal of the remembrancer.
Quick tip: your sentences are very long. They average 25 words. If you chopped them up a bit, your argument would be easier to digest.
I agree
But I wrote in haste for the moment
This is a blog, not a book
Thank you for a fantastic insight into the implications of these leaks. The number of properties, and the knock on effects of those properties, is frightening.
There is one figure that I haven’t seen anywhere. Is it safe to assume that this isn’t the only third party organisation in Panama or similar states.
This leak is surely the tip of the iceberg. Just how big is the iceberg and what are those implications
This is one of many such companies around the world
Good to see some sensible discussion about the bigger picture of the effect on ordinary people of tax evasion Richard – pity about the clueless hereditary peer Christopher Monckton repeating the same old “tax competition and free markets” discredited nonsensical argument.
Eventually enough people will be able to join the dots of what is happening in our society and agree with Henry Ford!
“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”
The programme is on the BBC website now (starts about 10 mins for the tax discussion)
http://www.bbc.co.uk/programmes/b075fm0w#play
I’m a Scientist; not an economist and know Christopher Monckton’s contribution to climate change denial well. Like Lord Lawson he is either stupid or lying. I very mush suspect the latter and consider Monckton a totally discredited individual. I’m surprised anyone pays him any attention at all
I was a bit surprised : he even had to be cautioned by the House of Lords for claiming to be a member when he is not
And has been expelled by UKIP
Here’s a blood boiler for you Richard: http://www.telegraph.co.uk/news/2016/04/05/tax-avoidance-is-an-expression-of-basic-british-freedoms/
Lord Tomlin was overturned by the GAR
I helped write it
The man is an idiot
Maybe that’s why Blair used him
To the best of my knowledge you were part of a very broad panel writing only the interim guidance notes to the GAAR – which was already written.
Not sure you can actually claim to have written the GAAR.
Then maybe you have limited knowledge
The interim members of the new General Anti Abuse Rule (GAAR) advisory panel were confirmed by HMRC last week. The panel is going to oversee the development of the new GAAR guidance.
Graham Aaronson QC was asked to convene the group, which does not include any employees of HMRC. His recommendations for appointments comprised of a range of interests; including business, tax advisers and the wider taxpayer interest and following his recommendation the Commissioners for HMRC have appointed the following individuals:
Graham Aaronson QC (chair), John Barnett (Burges Salmon), John Bartlett (BP), Emma Chamberlain (Pump Court Tax Chambers), Robert Clayton (RSA), Bill Dodwell (Deloitte), Steve Edge (Slaughter and May), Francesca Lagerberg (Grant Thornton), David McNair (Christian Aid), Richard Murphy (Tax Research UK), Gary Richards (Berwin Leighton Paisner), and Tim Voak (Tesco).
The panel will be in place until 31 March 2013. The GAAR is being introduced in the Finance Bill 2013 and it is envisaged that it will apply from October 2013. The purpose of the GAAR is prevent the abuse of tax law by tax avoiders. Consultation is on-going on the creation of GAAR guidance.
Never confuse a press release with reality
To me the tax haven world is the biggest misallocation of financial capability in known times.
All that money sitting there when there is so much good it could do.
People will say – ‘You can’t just throw money at problems’.
To which I would say “For goodness sake look around you. What we have now is because we have been TAKING money away from solving problems for the last 40 odd years’.
Bloody Hell!!
There is no money sitting there. All the money is invested back somewhere else. None of that wealth is really idle, at the very least it’s deposited in some bank which is going to lend it to someone that wants to use it for some kind of investment…
Circular argument! As has been pointed out before increasing the property prices of South East England is certainly an investment but completely idle wealth in normal parlance.
Excellent blog by the way!
‘Invested elsewhere’?
Yeah right………..
As in:
1) Buying products/investments in other countries and therefore not benefiting the UK population or economy – the nation where it was made in the first place.
2) Used as investment for speculative funds for the latest bubble but that is OK because the banks who have messed it up will get bailed out and you’ll get your money back first.
3) Being used to launder money from criminal activities.
4) Being used to buy politicians/win favour and undermine democracy here and abroad – for example as donations to your favourite political party.
In the meantime you watch and complain that the country you reside in most of the year (the UK) seems to be going down the pan, its infrastructure is creaking and one of the reasons its steel industry is on the verge of going under is because a lack of investment from an austerity-mad Government.
Most of the juicer revelations so far seem to mostly involve private individuals. How would country by country accounting affect that in any way?
I mean you could achieve a similar effect by simply opening a company in Ireland (even if you do need to pay 12.5% tax there). Given recent changes in corporate taxation, the UK itself is not far behind. Are you arguing that should be illegal? Do you want to re-introduce capital controls? I mean capital controls are a legitimate policy, and they have some upside, but it does present significant trade-offs. I don’t think it would be that popular policy personally, but I might be wrong…
Personally I’d rather pierce the corporate veil entirely as far as taxation is concerned and tax the individual on the same basis as you would tax him if he was part of a limited liability partnership, but I know you don’t like that… It seems a much more simple solution…
Read the argument for heaven’s sake
Is that really beyond you?
I did read the argument. It seems focused on multinationals and not private individuals… Take for example the Cameron fund: it seems unlikely it would have any controlling stakes in any other company, it seemed a more straight-forward investment fund owning commodities, equities and so on… It’s not a multinational in the normal meaning of the term.
I mean would country by country accounting for example tax such companies for real-estate investments in other countries, shifting the income back to the country where the real estate is? I guess that might be doable. But what about equity or bond investment? I don’t see on what basis you’d shift the tax…
You have very clearly not read my arguments
Try again
If you were a student you’;d be on a fail right now
“I was on the Jeremy Vine show on BBC Radio Two at lunchtime today, discussing what the impact of the Panama Papers might be on most people living in the UK. I argued that there are numerous impacts.
First, some are glaringly obvious. For example, we now believe that at least 94,000 properties in the UK (some of which are large parcels of land) are owned by offshore companies. Many of these are in London and the south-east of England and the consequence is that there has been a wholly inappropriate house price boom in these areas where large numbers of properties are now hold for investment purposes, or almost as a form of reserve currency. The net effect is that very large numbers of people are unable to buy properties near where they work, where they were brought up and so have their relatives and friends, and where they wish to live as result. Alternatively, those who can buy properties are paying far too much for them, and a disproportionate part of their income is absorbed in mortgage interest payments as a result. This over inflates the banking sector, massively reduces the disposable income of large numbers of people in the UK, and so suppresses economic activity, whilst disrupting the social life of millions. That should be good enough reason, in itself, to justify action.”
To be fair, Richard, this is more an argument against Buy to Let in general.
I live in the Isle of Man, and I own a property in the UK through an Isle of Man company. The names of the directors together with their addresses, shareholdings etc are open to anyone who searches the Isle of Man Companies Registry online. The company pays tax on its rental income in the UK (in fact it is, as the law requires, deducted by the managing agent before being remitted to the Isle of Man). And the company is liable to UK capital gains tax on an eventual disposal. When the property was purchased, the licensed conveyancer had to supply proof of the names of the company directors to the Land Registry, together with certified copies of passports, and utility bills. So it’s hardly all secret and illegal tax evasion!
I’m not for one moment disagreeing that much mischief and tax evasion is being committed and being facilitated by some offshore jurisdictions, but don’t be blinded to the fact that much of what happens in tax havens is quite open, legitimate and above-board
Respectfully, not it is not an argument against buy to let in general and it takes a mighty perverted logic to think it is
I have never said we should not have rental property in the UK although I have discussed its tax treatment
So please tell me how I, living in a so called tax haven, can avoid paying UK tax on my UK property investment? I might add that under current legislation, brought in by the Tory government, I am now also liable to UK inheritance tax on the value of the property on my death. I really don’t see what you hope to achieve by the UK taking control of our laws and legislation. The UK legislation exists already, and we already pay UK tax on our profits.
This is not just about property
As you well know
So stop trying to diminish the issue
To get back to the bigger picture – the phrase about fish rotting from the head down springs to mind.
If you look at countries that have become deeply corrupt, there is a clear pattern of corruption by elites, hiding their wealth, avoiding taxes, diverting public funds and assets to the benefit of their friends and supporters, not to mention their use of tax havens and so on. I strongly recommend Michaela Wrong’s book on Zaire, In the Footsteps of Mr Kurtz, or her one on Kenya. How corruption starts at the top and then spreads throughout society as trust is destroyed, and how hard it is to build again. With public services being run down and destroyed, and decent businesses finding it impossible to operate successfully.
Read them and then ask whether we are heading in the same direction. And how we can justify criticising others when the UK is the major player in enabling that corruption, and is increasingly showing signs of the same behaviours amongst its own political and financial elites