Why we must avoid tax (and what to do about it)

With John McDonnell in Davos once again suggesting that business should “be ashamed[1]” of tax avoidance, it is perhaps time to reiterate why he is wrong.

We are all familiar with Friedman’s concept that the socially responsible thing for business to do is to maximise its profits[2], an idea which stems from the father of economics Adam Smith. However, this will not be the subject of this article.  John McDonnell couches his argument in moral terms, and it is on these terms that I shall reply.

I would contend that to not engage in tax avoidance is immoral and undemocratic and therefore must be avoided at all costs.

Managers of companies face a choice if there is an opportunity for tax avoidance: to pay the tax or not.  If they decide not to take the avoidance route and pay the tax, they are effectively taking the decision of what the socially responsible decision is. This is a problem, as these are not democratically elected positions. Furthermore, how are they to know what the socially optimal outcome is? It is possible, and highly likely, that a more socially optimal outcome is achievable in other ways, likely through a pursuit of shareholder value maximisation. In this case, we are effectively placing the allocation decision in the hands of a small number of unelected businessmen. How can it be just that “these public functions of taxation… be exercised by the people who happen at the moment to be in charge of particular enterprises?”[3]

The allocation decision must be placed in the hands of democratically elected officials who we can remove at the next election.  It is their job to set out the laws to define this decision.  There is no need for there to be a social responsibility question to be decided by managers. It is the government who have set the rules and the level of taxation that is payable. This is the democratic decision, for managers to do anything other than engage in all legal measures to reduce the tax bill, is to deprive parliament of its ability to decide on the agreed upon socially optimal outcome.

If we want the level of tax avoidance to fall, because for whatever reason, there has been a collective decision that the government requires more spending power, then it is the tax code that must change. It is not acceptable to expect managers to do so voluntarily as this would be undemocratic.

We currently have the longest tax code in the world and it has tripled in length since 1997.  If we want companies and individuals to pay more tax then it is this that must change.  This fact also exposes the rank hypocrisy of the Labour criticism of tax avoidance.  It was largely under their watch that we experienced this massive increase in tax regulation and so they can hardly be surprised when managers of companies and individuals take up the opportunities to minimise their tax bill.

We must, therefore, stop the endless criticism of those who engage in tax avoidance.  This practice provides us with more funds for investment, that will be invested more efficiently and reduces waste. Furthermore, it helps to preserve our democracy and helps to keep at bay the corporate state that threatens it.

 

[1] McDonnell, J. cited Miller, J (2018) ‘McDonnell takes aim at “big four” accountancy firms’ BBC News [online] Accessed: 26 January 2018. Available at: http://www.bbc.co.uk/news/business-42833048?ns_mchannel=social&ns_campaign=bbc_politics&ns_source=twitter&ns_linkname=news_central

[2] Friedman, M. (1970). The Social Responsibility of Business Is to Increase Its Profits. The New York Times Magazine, pp.173-178.

[3] Friedman, M (1962). Capitalism and Freedom Chicago: University of Chicago Press

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