The language, or rather political language de jour, is for the canvassing potential members of the next parliament (Parliamentary candidates in the UK) to merge two very different concepts into one, in the public’s mind. Those words are tax evasion andtax avoidance. We (at the theMarketSoul) believe we potentially know why, but the consequences might not yet be clearly understood.
At a recent televised debate attended by potential next Business Secretary representatives (politicians who would be in charge of the Business, Innovation and Skills [BIS] department) from the three major political parties, one of the candidates challenged the audience thus:
“You (tax advisers) know the difference between aggressive tax avoidance on the the one hand and tax planning on the other.” No the question was actually this: “Please raise your hand in the audience if you donot know what aggressive tax avoidance is.” From the podium the verdict came that about half the audience raised their hands. And therein lies the problem: Are you making this a moral question now? Because until someone is able to clearly define and explain how morality and tax planning are linked; we at theMarketSoul cannot help but think: Where next in this one sided ‘supposed’ quasi debate?
It really depends on how you ask the question:
Is taxation moral? Is paying tax moral? What level of taxation is moral? Is being moral, paying your taxes? If you don’t pay taxes, are you immoral?
Let’s just pause for a moment: #Tax avoidance talk is all the rage at the moment…
In order to redress the balance of negative sentiment, combined with a political(ly) charged environment with electioneering by all major political UK parties posturing new populist policies (say that fast a few times); we thought it a good idea to put a little perspective on the matter of #Tax avoidance (tax planning we prefer to call it). Remember this is #Election2015 coming up on 7 May 2015.
So HSBC bank (more specifically the Swiss subsidiary of their Private Banking arm) got themselves into difficulty over the past couple of weeks with the BBC Panorama programme revelations as reported by Richard Bilton.
Accused of large scale collusion on tax avoidance or even evasion practices, the liberal and politically left leaning media in the UK have quite rightly got themselves embroiled in a multi-layered debate from both tax avoidance and the morals thereof to standards of editorial judgement, when corporate advertisers are the subject of negative headlines (the Daily Telegraph).
However, to grab a headline back for ourselves (and balance the debate):
“Britain, wake-up, you are a corporate TAX Haven” and to cap it off, you are not that popular with other higher taxing G8 jurisdictions.
The overall corporation tax environment in the UK has significantly improved if you are considering a Foreign Direct Investment (FDI) route into the UK over the life-time of this last Conservative-Liberal Democrat led parliament.
With corporate tax rates for both small and large enterprises almost aligned at 20% and 21% respectively from April 2014 onwards, for net profits assessable to corporation tax, the UK is one of the lowest corporate tax regimes in the G20 club.
What are the implications of this?
More FDI is attracted to the UK and therefore the potential to create more jobs and reduce the dependency on government handouts reduced.
What has not yet happened though, is that the tax receipts from corporations subjected to corporation tax in the UK increased significantly. This is partly due to timing issues; Capital and Investment allowances reducing the overall tax take and further aggressive tax avoidance activities by these Multi-National Corporations (MNC).
On the whole the average effective corporation tax rate actually paid in the UK is therefore less than the 21% head line rate for large businesses with profits over £300,000. This is due to the cash tax rate paid by corporations being reduced by capital allowances and research and development credits bringing down the effective rate paid as a percentage of the net profit assessable to corporation tax to well below 21%. These legitimate reductions are known as reliefs.
PwC put together a league table of effective (most attractive to least attractive jurisdictions on that is called “international tax competitiveness”. In 2014 the UK ranked 16th, with only Ireland and Denmark, (two fellow EU member states) beating the UK from the EU member state block.
We will continue to develop this theme over the next few weeks leading up to the general election in the UK.
The team at theMarketSoul have not been busy enough putting blog article out during January 2012; however, it has given us the opportunity to reflect on the goings on in the various regions around the globe.
The only great point of interest was the State of the Union address by President Barack Obama. Again as a liberal statist the theme of taxation and MORE taxation to come down the road for the ‘more’ well-off in society raised its ugly [spectre] head again.
Oh dear! Let us think very hard about something positive to reflect on this month during the kick-off to 2012…
Enough said. Unfortunately the Eurozone crises (yes, several on different fronts) are still dragging on.
We see yet again how difficult it is to undo a few decades worth of the nation state experiments in Europe and bring everyone together under the guide of collaboration, but with no formal overall governance framework in place. The Eurozone crisis, as well as being one of sovereign over indulgence, is also one of a twisted underground power struggle between the European traditional heavy weights.
But, alas, it is all politics in the end and with Standard and Poor and Fitch getting on the downgrade bandwagon during the month, angering politically challenged politicians like Monsieur Sarkozy (French presidential elections coming up in April and May 2012 [two rounds scheduled, if necessary]).
One matter of interest raised during a panel discussion on the BBC programme DateLine London on 28/01/2012 regarding the tension in the Straits of Hormuz, by Adbel Bari Atwan, is the fact that the entire Iranian issue around nuclear armament is a ‘manufactured’ threat by the USA and Europe. True, with Pakistan, India, Israel, China and Russia being nuclear enabled nations in the region, what difference will one more nation make to this perilous equation? Perception seems to be everything, both in the discourse and actions taken in reshaping the Geo-political order of the post ‘Arabian spring’ Middle East.
Please, just keep collaborating in OPEC; pumping the Black Gold and thus keeping prices lower and stable, for the sake of a stable Global Economy!
Let us explain the problem or rather challenge of choosing between Quantitative Easing (QE) and an Interest Rate reduction to stimulate economic activity, with reference to the Bell Curve diagramme above:
There are two major factors at play here:
With a bout of QE, the effect feeds into the margins of theBellcurve and it takes time for the distribution network (money supply chain) to filter the new enhanced supply into the economy at large. So there is both a distribution and time lag effect with QE.
On the other hand, with an immediate Interest Rate reduction, the effect is to cover the larger middle ground of the Bellc urve more instantly. Yes, it does depend on your wealth and debt holder structure too, but both borrowers and savers feel the effect more immediately.
But, with Interest Rates currently so low, this option is not really that feasible. With inflation running at between 2 – 5% depending on which side of the pond you are, effectively savers are paying an additional ‘tax contribution’ to the Treasury by this stealth means.
…continuing our conversation in the Economics of Taxation series (part 2)
A European Generation ‘E’ enquiry – (‘E’ for employment)
Referring to our previous article entitled ‘The Economics of Taxation’, today we elaborate and flesh out the basic ideas around taxation.
The basic idea is that any form of taxation becomes a drain on productive resources and at some point counter productive in attempts at balancing the government budget. For a fuller explanation of the effects of tax rate rises see the Laffer Curve analysis and the Cato Institute’s Dan Mitchell explain the Centre for Freedom and Prosperity’s view on Fiscal policy.
Source: Wikipedia – Laffer Curve
Two specific points are made by Dan Mitchell in his explanation, which bears thinking about:
We don’t necessarily want to be at the point on the curve where government revenue is maximised, due to other factors such as the disincentives of maximising tax declaration by tax payers or the cost of collecting that revenue in the first place (sub-optimisation effects)
Growth (in the economy) incentives fall well short on the upward side of the Laffer curve. In plain English this means that economic growth is maximised somewhere where people have the incentive to retain as much of their hard earned income and that point is somewhere well before we reach the Government Revenue maximising point. (The second Laffer Curve graph above captures this point in a more visual and understandable format). At point D on the curve economic growth will be maximised and note how it still falls well short of the Government Revenue maximising point B.
Today’s short opinion piece revolves around the recent rail fare increases announced in the UK.
It strikes us as a very cynical way of rewarding behaviour and policies implemented by previous governments and parliaments to now go and increase the ‘tax’ on rail commuters when the switching policy from road to rail has meant that more rail passenger miles are being racked up versus road miles and supposedly turning off the tax flows into the Treasury from fuel duties, because more rail journeys are being undertaken.
Yet again the pendulum has swung the other way and at the consumer end of the bargain, we are being sent a confusing message us to which behaviours the government wants to encourage us to take.
Within these two tax methodologies are hidden the minutiae of the tax regime system, but at a fundamental level, any tax raising authority has to look at these two options / methodologies available to them.
Now step back second and consider the tax take flows from these two options:
With Incomes and consumption generally on the wane, where else can the taxing authority turn for sustaining or growing their net tax take? Only on the stock of capital assets held by its citizens, so expect a sustained, possibly nuanced, yet blatant attack on your net wealth over the coming few years.
Another salvo was launched again from the Business Secretary, Vince Cable, yesterday and we expect a sustained rhetoric and action in the next budget cycle. Today, the main stream press are reporting rumour of lower the 50% rate to 45%, to encourage an inflow of entrepreneurial and highly skilled management talent, reversing the recent drain or threat of ‘brain drain’ from taxpayers in this tax rate band.