Free markets require fair taxation

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It's a fact that we cannot do without taxes. That's because we cannot do without government. And we cannot do without markets either, at least in the world as we know it. The relationship is symbiotic: governments provide the structure in which markets can work: markets need government as their insurer of last resort: populations need governments to protect them from the excesses and failings of the market. Those who argue for one as opposed to the other will always be on a losing ticket: they ignore the obvious fact that as we have structured our society this is an indivisible relationship, not a matter of choice.

But relationship carries obligations. One is that each plays an appropriate part. The other is that outsiders are held at bay and not allowed to interfere to the point that they harm the process which ensures a continuation of the productive benefit that flows from reasonable harmony.

What's the relevance of this? Simply that unfair taxation harms the relationship between a government and markets. Take the example of Setanta's relocation of its subscription TV service from Ireland to Luxembourg. It has saved £17 million in VAT as a result as Luxembourg has a 3% VAT rate on such supplies, apparently. Ireland charges more. But what is absurd is that this is happening within the single market of the European Union where such anomalies are meant to be eliminated and the free movement of capital is not meant to be either encouraged or hindered by taxation.

It's clear that Luxembourg's VAT abuse needs to be tackled.

But there's more to it than that. Setanta is a substantially Irish company. Half of its staff are there. That's likely to make it the core of its activities. They're not in Luxembourg. So this is an artificial move. As such it contravenes section 1b of the TJN / AABA Code of Conduct for Taxation which says:

1b. No incentives are offered to encourage the artificial relocation of international or interstate transactions;

Luxembourg is not honouring its international obligations to other states.

Setanta is also in breach of sections 3b and 3c of the Code:

3b. Tax planning seeks to reflect the economic substance of the transactions undertaken;

3c. No steps are put into a transaction solely or mainly to secure a tax advantage.

I also think they're in breach of 4c and 5b:

4c. Taxation reporting will reflect the whole economic substance and not just the form of transactions.

5b. All parties shall act in good faith at all times with regard to the management of taxation liabilities;

There's a great deal of unacceptable conduct taking place here. Relationships rarely survive such behaviour. That's why we're worried when this sort of abuse takes place. It's bad for the economies that suffer, it's long term unsustainable for the compnaies involved, eventually consumers usually lose as a result, but worst of all, it's bad for the whole effectiveness of the market which is best sustained when each party accepts their duties and obligations to each other and to those they relate to outside the immediate relationship.

This isn't pie in the sky stuff: this is about creating well-being. And that, at its core, is what economics is meant to be about.

It's accountants who think economics is about market abuse.

NB: Hat tip to Dennis Howlett.