A tax obsession with diminishing returns

Politicians fetishise tax avoidance because they have little clue how to generate wealth.

The recent news that Her Majesty’s Revenue and Customs may be failing to collect perhaps £20 billion in tax each year should not surprise. Taxation is a mess. Its intricacies go on forever, and bore the pants off most normal people.

Yet ‘tax justice’ campaigns, which take self-righteous direct action against tax avoiders such as posh people’s store Fortnum & Mason and coffee megacorp Starbucks, are fascinated by tax, and get very heated about it (1). So, too, does Labour. When banks, insurers and non-financial institutions recently deferred their salary bonuses to senior staff so as to take advantage of the lowering of the top rate of income tax from 50 to 45 per cent, Labour spokesmen denounced them – even though the loss to the Exchequer was a paltry £85million. Labour loves to contrast the law-abiding rectitude of honest, middle-class taxpayers with the venal tricks of upper-class bankers, American IT firms and the like. The debate reared its ugly head again yesterday with the announcement that Vodafone had sold its stake in US mobile network Verizon. Labour’s Margaret Hodge demanded that ‘HMRC must begin an absolutely thorough investigation to make sure that UK taxpayers receive the maximum to which they are entitled’.

It’s clear that the British state can’t get a grip on taxation, even if it is able to accrue monies more efficiently than the governments of, say, Italy or Indonesia. But that’s only one side of the issue. The other side of taxation is the spending done by the state. And here things are really out of control.

There’s the £38 billion black hole that Labour left in the finances of the Ministry of Defence. There’s the £7 billion Labour poured away on its mostly abortive introduction of electronic patient records in the NHS, complete with typically risk-averse, impregnable software to guarantee personal privacy.

Yet the Lib-Con coalition’s spending is equally chaotic. Work and pensions secretary Iain Duncan Smith’s ‘universal credit’ system was meant to replace benefits and welfare with simpler arrangements. In reality, it has became so complicated that, as Cabinet Office minister Francis Maude puts it, it is ‘not capable of being implemented sensibly’. The Department for International Development (DfID) has lost relatively small sums around its foreign-aid programmes, but those are still welcome amounts for those receiving them. For example, £480,000 ended up with al-Qaeda’s southern Somali offshoot, al-Shabaab, partly because DfID’s local partners there ‘had no prior warning of the confiscations being carried out’ (2). A further £1.2million from DfID went to aid ‘peacekeeping’ in Sierra Leone, but wound up being spent by the country’s defence minister and his pals. They bought 36 flat-screen tvs and, ironically, hunting rifles.

So why does ‘tax and spend’, the unspoken mantra of Labour since the profligate days of former prime ministers Harold Wilson and Jim Callaghan, command so much policy approval with Labour today, and such practical confusion with Tories and Lib Dems in the current coalition government?

The explanation for Labour’s enthusiasm can be found in the hollowing-out of British politics over the past 20-30 years, the replacement of vision and ideology with technocratic and managerial solutions, and a general indifference to innovation and economic growth. (These tendencies are shared by PM David Cameron, too.) These days, if you really want to become another Ed Miliband, you must first serve a prison-like apprenticeship at a pompous think tank acquainting yourself with – and, worse still, getting excited about – the minutiae of taxation. Just as big accounting firms such as Deloitte or Ernst & Young owe a great part of their existence to manipulating the tax system to the advantage of their clients, so young Labour hacks have to learn the same ropes.

As for the mishaps in collecting taxes and the spraying away of the proceeds on abortive projects, it would be too easy to blame this on an incompetent political class or an other-worldly civil service. No doubt a little more business experience, mathematical skill and economic realism in high places would not go amiss. However, the real point is that even those at the helm of the state are not in control of it.

Private firms can pull some wrinkles with tax, and they certainly benefit from state expenditure. For nearly 100 years, the revolving doors between civil-service posts and corporate sinecures have been the target of breathless, oh-so-radical criticism from Liberals and Labourites (3). Yet far from companies bending the state to their will – a phenomenon that whingers dignify with the scholarly term ‘producer capture [of the state]’ – neither companies, nor politicians, nor Whitehall mandarins are able to check the relentless growth in taxation and state expenditure.

Tax reform has already proved a fruitless quest. More laws against tax avoiders will only lead to more state intrusion into our personal lives. But this obsession with tax is rather missing the point. What counts for the vast majority of the British population is not tax, but take-home pay – the money you can spend, not the money you might have had.

It’s time to change the terms of reference of British politics. Let’s stop obsessing about taxes, and instead focus society’s gaze on the economic growth and technological innovation that form the indispensable starting-point for higher living standards.

Footnotes and references

(1) The chief ginger group on taxes is UK Uncut. Apart from Starbucks, its main targets are Boots, Vodafone, RBS, Natwest, Tesco and Barclays, HSBC and Lloyds/Halifax. The group’s stance is echoed by Action Aid, Christian Aid, the Public and Commercial Services Union, etc.

(2) Department for International Development, Annual report and accounts 2012-3, p208

(3) On the revolving doors in the British arms trade, a particularly inflammatory issue, see the G H Perris, The War Traders, Chancery Lane Press/National Peace Council, May 1914, p38. Perris noted the case of Edward James Reed. Having been chief constructor for the Royal Navy from 1863 to 1870, Reed went on to work for builders of ocean-going gun platforms who were privately owned.