UK Uncut is wrong about tax avoidance

UK Uncut is a pressure group which has achieved prominence recently by publicising allegations of tax avoidance by firms such as Topshop, Vodafone, Tesco and Boots. Its visibility has been enhanced by social-network-arranged demonstrations at high street branches of these companies. This is a minor though embarrassing inconvenience to firms and a source of bemusement to unsuspecting customers. In the video clips and photos the demonstrators look to be having a great deal of fun, and they have not been particularly violent. But do they have a point?

The group claims that public sector cuts would be unnecessary if our corporate giants abandoned – perfectly legal – arrangements by which taxes are paid in offshore jurisdictions with low rates. It is claimed that as much as £100 billion is lost annually to the Exchequer by such devices. If this could all be recovered it would be unnecessary to make public spending cuts which will amount over the next few years to around £80 billion.

It does sound appealing to those who think that all public spending, wherever and whatever, is fully justified. Such people are probably a fairly small minority, but of course every possible cut has its vociferous opponents who make common cause against any government attempting to keep a grip on public spending.

However, UK Uncut is not very realistic. For one thing corporation tax is not a major contributor to our tax base. This year it is scheduled to bring in £40 billion or so, a sum which is dwarfed by Income Tax (£150 billion), National Insurance (£100 billion) or VAT (£80 billion). Even if it suddenly doubled – a very optimistic assumption indeed – spending cuts or increases in other taxes would still be necessary.

I have no idea where UK Uncut gets this figure of £100 billion. It resembles those estimates of the size of the shadow economy (cash in hand for builders, cleaners etc) which could probably bring in £50 billion a year if everybody paid their taxes and nothing else changed. In fact it wouldn’t of course: fully taxed, much shadow economy work wouldn’t be worth doing or paying for. The same goes for corporation tax. Economic activity would just switch abroad where most manufacturing and many service industries could easily service the UK market.

Many of the predominantly young protestors see paying maximum tax as some sort of moral responsibility. In a very small closed economy where we were all able to vote on tax levels and public spending they might have a stronger case. In reality tax is arbitrary (look at this week’s announcement about the bank levy), difficult to predict and adopted for blatantly political rather than economic reasons. We are offered no choice of policies before elections. Rates are in many cases probably set above the revenue-maximising level (for instance the 50% income tax band) out of prejudice, spite or plain ignorance. And of course in many cases tax avoidance schemes are made necessary because of potential double taxation where national jurisdictions overlap.

We all avoid tax, often quite unconsciously. If tax on petrol goes up, people drive less. If the duty on a packet of fags goes up, the IEA’s Director General probably cuts down on his wicked habit. Should they public-spiritedly decide to keep on driving and smoking as much as before in order to boost government revenue?

So why should firms pay higher taxes than they need to do? It isn’t company boards’ money to give away, after all. They are custodians of the assets of the shareholders, which will be worth less if, in a fit of misguided generosity, excessive tax is paid. This means that pension funds and other financial intermediaries will be able to return less to millions of ordinary people who have not been consulted about their munificence. My 90-year-old parents oop north would suffer to keep open Arts Centres in Islington or support Diversity Officers in Hackney.

We need to reform the tax system urgently. Part of this would be a fundamental rethink on corporate taxation which would obviate the need for some of the admittedly bizarre arrangements which UK Uncut are highlighting. But we would still need to have a downsizing of the role of state spending which the coalition, to its credit, has at least made a start on.

Len Shackleton is an Editorial and Research Fellow at the IEA and Professor of Economics at the University of Buckingham. He was previously Dean of the Royal Docks Business School at the University of East London and prior to that was Dean of the Westminster Business School. He has also taught at Queen Mary, University of London and worked as an economist in the Civil Service. His research interests are primarily in the economics of labour markets. He has worked with many think tanks, most closely with the Institute of Economic Affairs, where he is an Economics Fellow. He edits the journal Economic Affairs, which is co-published by the IEA and the University of Buckingham.

4 thoughts on “UK Uncut is wrong about tax avoidance”

  1. Posted 11/02/2011 at 12:26 | Permalink

    We have to stop thinking about “corporations” when we think about tax and think about “owners”. Are the beneficiaries of life insurance and pension funds “under-taxed” when it comes to their ownership of company shares? In the case of pension funds they cannot be because they are supposed to be tax exempt – so any corporation tax is a leakage to them. Individual rich owners of companies (ie private as opposed to public companies) should be dealt with on their own merits and not thought about through the prism of the corporate tax system. If the tax rules that apply to Mrs. Green are wrong (which, as it happens, I don’t think they are) then the tax rules relating to non-doms and non-residents should be changed. Most tax avoidance is the avoidance of double tax or tax that is not justified by the tax status of the end-owners of the relevant corporations.

  2. Posted 10/03/2011 at 12:39 | Permalink

    Taxing businesses is pointless. All profit should be paid as dividend or re-invested. Shareholders should then pay income tax on the dividends they receive. One less tax – Lawson would approve.

  3. Posted 02/08/2011 at 13:41 | Permalink

    I do feel many of the British public are easily caught up in rhetoric and media and make something so complex too simplistic in their minds, Usually when it comes to politics I’m at the end of my teather with the British Public seeing as they seem so ill-informed, although I am British myself. I think many will defend UK Uncut without questioning. I’m not completely agaisnt UK Uncut, but they can definitely be improved. Also they decided to proest outside Fortnum and Mason, eventhough the more likely place to protest would be Primark, they are connected but Primark have made profit, and F&M made losses. Why not primark? They are more “direct” “culprit” even thought it’s not illegal. I also heard cases of tourists being scared by the crowds of protesters whether they were violent or not. Yes, just what we need. We don’t need to lose tourism. I can tell you what it’s like losing tourism, I live in a town which gets most of its revenue from tourists. We’re nearly dead with jobs and all shops going to discount or closing. No, private sectors can’t hold up by themselves. So go away UK uncut. If you come to Weston you’ll see they’re losing like students and regular employees. All our cuts are affecting our private sector shops. (Of course they may do well elsewhere, perhaps, if they have anything outside the UK). But, yes, sort out the tax system. We need someone who understands it, the differences and similarities between public and private sectors.

    Unfortunately, against UK uncut if your last phrase, giving credit to the Coalition, UK uncut are all fit to blame the coalition and only the coalition in the majority. I’m a modern mature-minded liberal so I think that parties should be able to get on, I don’t think it’s the end of the world when Centre-Right meets Centre-Left – they have something in common. But it looks all one-sided Clegg is ready, but the Cons aren’t, they seem childish as ever. And that also goes for my local candidates. Labour and Lib Dem were fair, Con was a childish arse. Not saying all are. I like some Cons. Ken Clarke (you know why) for one.

    If UK Uncut are fit to complain and think they know enough, I’d like to see them come up with a workable plan. I’ll give them plenty of time.

  4. Posted 21/10/2012 at 21:03 | Permalink

    How lucky the Institute of Economic Affairs people are to live in a world where £40 billion is a negligible amount of money because it is less than £150 billion. Of course we can do without a Defence Budget or an Education budget. They are both around the £40 billion mark. What are these people on?

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