What is ‘aggressive tax planning’, aka ‘aggressive tax avoidance’? Essentially, it occurs when governments grant preferential tax treatment to selected economic activities, thus creating opportunities for companies and individuals to reduce their tax liability provided they structure their finances in particular ways. Those opportunities are then often used to a greater extent than the government intended, or by people for whom they were not intended, which is when governments start to rail against ‘aggressive tax avoidance’.
But why do governments create such opportunities in the first place, especially when they inevitably lead to ever-greater bureaucratic complexity? The answer is that governments cannot help trying to micromanage the economy, for which the tax code is a powerful tool. Do this, and you get a tax relief. Do that, and you can offset something against something. Invest in this, and you can spread a liability over a longer period. And so on. In an economy with such a heavy public sector presence – total tax revenue has long stood at about 40 per cent of GDP – such provisions cannot fail to influence the way people behave. A simple tax code would also be a neutral tax code: It would have no purpose other than to raise a given amount of revenue in the least economically damaging way.
Osborne announced clampdowns on current tax avoidance strategies. But by promising all kinds of special treatments, he has also prepared the ground for even greater complexities in the tax code, and therefore new avoidance strategies. On their own, each of those announcements sounds superficially appealing. Research and development? That sounds good, the government should support that. Small businesses? Sounds good, the government should support that. The high street? Sounds good, the government should support that. High-tech industries? Sounds good, the government should support that. Cathedrals? Sounds good, the government should support that. Manufacturing? Sounds good, the government should support that. Theatres and operas? Sounds good, the government should support that. Children’s TV programmes? Sounds good, the government should support that. And before you know it, you end up with a horrendously complex tax code, and some people will make use of those complexities in other ways than the government intended.
Complexities also impose enormous economic costs, as businesses and individuals (or at least wealthy individuals) begin to structure their affairs around the tax code rather than around what makes economic sense. Osborne should have moved at least a few steps towards a simple tax code with fewer types of taxes, fewer rates and fewer exceptions. The economic efficiency improvements could then be recycled into tax cuts across the board.
This article was originally published by the Huffington Post UK.