There is no such thing as tax avoidance

You don’t have to go far through the public prints to find all sorts of blood curdling tales about how the Treasury is being ripped off by varied forms of tax avoidance and even aggressive tax avoidance. And yet the truth is that as a thing tax avoidance doesn’t actually exist. So it isn’t as we’re told in the Telegraph, that tax avoidance is actually a good thing, it’s that it just doesn’t happen:

Successive governments have left us with a tax regime so complex it verges on chaotic.

Which is exactly why we should be suspicious of politicians who talk imprecisely about “tax avoidance” and “tax evasion” – or who muddle the two terms, or use them interchangeably.

There is nothing wrong with tax avoidance.

Tax avoidance is what everyone does, not just the wealthy. It’s what we do when we save in Isas and pensions, or in Junior Isas for our children.

There’s no doubt at all that there are attempts to avoid tax. Sticking your money in an ISA or simply not declaring millions in income are both attempts to avoid tax. But we have a system which decides which of those plans is successful in doing so. That system being HMRC in the first line, the various tax tribunals in the second and then on and up to the European Court of Justice as both Vodafone and Cadbury found out. The end result of this system of adjudicating upon attempts is that there’s no room left for tax avoidance to actually happen in. For, obviously, once the courts have had their say either whatever is going on is obeying the law of the land or it isn’t. And when it is decided that it isn’t that’s tax evasion. And when it’s decided that it is according to said law that’s not actually avoiding anything, is it? It’s paying, in full, one’s dues as Parliament has decided you ought to.

There really isn’t anything called tax avoidance. There’s only obeying the law and not obeying it.

So, could the public health people please shut up?

Vaping, smoking, the great question is, is one a complement to the other (complement, meaning that more of one leads to more of the other) or a substitute (more of one leads to less of the other)?

Evidence:

Electronic cigarette use among U.S. middle and high school students tripled in 2014 while cigarette use fell to record lows, according to provocative new data that is likely to intensify debate over whether e-cigarettes are a boon or bane to public health.

No, that’s not provocative data, that’s conclusive data. A substitute not a complement.

Every public health advocate should now be pushing vaping. Anyone who claims to be such and is not is simply a Puritan.

By their actions shall ye know them.

Aren’t these free market things just great?

Two little stories that caught our eye:

Morrisons is trialling a halal pick and mix counter at 10 stores, offering gelatine-free sweets to Muslim customers.

The selection of 36 sweets includes liquorice sticks, cola bottles, jelly beans, gummy bears and sugared lips – all guaranteed to be free of non-halal animal products or alcohol-based colourings and flavourings.

The lust for profits to be made by satisfying consumer desires leads to ever more product differentiation, even to sweeties that those who take their religion seriously can have.

And:

On May 12 it will be 10 years since Malcolm Glazer completed his hostile takeover of Manchester United, loading the business as he did so with the biggest debt in football history. At that moment, a group of United supporters turned their backs on the club they had long followed and decided to establish one of their own. FC United of Manchester they called it, a name now written large across the front of the main stand at Broadhurst Park, the club’s new home. As gestures go, this could not be more substantive.

When the new stadium opens officially on May 29 with a friendly game against Benfica, the 5,000‑capacity stadium, with its enormous terrace, its myriad community spaces and the area earmarked for a microbrewery to produce the club’s own ale, will surely be directing a belligerent architectural two fingers at the Glazer regime.

Don’t like the capitalist plutocrats taking over “your” club? Great, start a new one, why not?

All without the intervention of a single bureaucrat.

We do not, by the way, insist that free markets solve each and every problem to perfection. Only that they work remarkably well across wide swathes of life. Which is why were so attached to them really, just because they do produce what people seem to want for the least effort.

Economic Nonsense: 50. Capitalism is unstable, subject to periodic crises, and should be replaced

Capitalism is not a fixed thing, but rather a process which develops and changes in response to changing conditions, and especially changing technology.  To say it is unstable is basically to say that it changes.  It is not by its nature stable.  The capitalism of the 21st century is very different from that which prevailed at the beginning of the 19th century.  It evolves as circumstances change, adapting itself to cope with the new realities that present themselves.

It is certainly subject to periodic crises.  The business cycle has long characterized it, with economists divided as to its ultimate causes.  Periods of growth are followed by periods of a sluggish or even contracting economy, with some observers suggesting that this is a good thing, helping to weed out underperforming businesses and redirect their capital to newer and more successful ones.

Over and above this cyclical behaviour, there are occasional crises that seem to threaten the whole basis of the capitalist economy.  The Great Depression was one such period, and the 2008 recession was another.  Critics look for some alternative that lacks these wild and damaging fluctuations.  No-one has yet produced a better system.  For all its flaws, capitalism is the best way humans have found to generate wealth and to allocate resources.  Even including its great crises, it has still produced steady average growth in developed economies for the best part of two centuries.  In less developed economies it has recently produced growth and wealth on an unprecedented scale.

Capitalism learns from these crises.  It adjusts itself.  Governments learn from the mistakes that led to them, and devise new rules to prevent the same happening again.  Capitalism develops and adjusts, renewing itself each time.

When the 2008 crisis came, critics prematurely celebrated capitalism’s decline and wondered what might follow it.  The answer was capitalism, modified to prevent countries repeating the mistakes of the past.  It is certainly imperfect.  Most institutions made by humans are subject to the frailty and imperfection of humanity.  But they can improve by learning from their mistakes and adapting, and this is what capitalism does and why it endures.

Multinational taxes: what do politicians know?

This election has ratcheted up the calls for Starbucks and other multinationals to pay more taxes on their British revenues.  Politicians give no indication of how they will achieve that; one suspects their silence is based on ignorance.

This blog is a brief explanation of why multinationals are fully entitled, under present laws, to push profits into lower tax regimes.  If the UK wants to change, it may need multinational legislation.

If a brand owner in one country sells to a distributor in another, they split the total profit between them.  If the companies are independent, the presumption is that the split is “arm’s length” and that is accepted by the tax authorities in both countries.  The game gets tricky when both companies are owned by the same group and the brand ownership is switched from one country to another.

The practice began with Bailey’s Irish Cream which was launched in 1972 to accept the Irish Finance Minister’s offer that any export profits for a new Irish agriculture-based brand would be free of tax for 10 years.  The brand became a huge global success and, come 1982, the ultimate brand owner, Grand Metropolitan, was about to be hit by a sharp jump in taxes.

By coincidence, the concept of “brand equity” as a marketing asset which could go on a balance sheet was also being developed in the 1980s.  Why not move the brand equity from Dublin to the Netherlands which was, then anyway, offering low taxes on Dutch earnings by foreign-owned assets? Why not indeed?

As you can imagine, the British and Irish tax authorities were less that thrilled with that and Grand Metropolitan had to justify that the Netherlands company really was marketing the brand globally.  In effect, the distributor company is renting the use of the brand equity asset from the brand owner and has to pay for that.  If the transfer price is “arm’s length” it is all perfectly legitimate so, for two companies both parts of the same group, what exactly is “arm’s length”?

The multinational can count on the support of the tax authorities in the brand owning country.  Their take decreases by the amount of profits switched to the distributor (or franchisee) country.  And if the brand owning company can show it sells, on the same terms, to (or franchises) companies which are not part of the same group, the case for “arm’s length” is strengthened.

HMRC has spent a huge amount of time and money on this issue.  Whilst it is possible they have not been tough enough, it is much more likely that the law is not on their side.  It is also likely that any unilateral action by the British government would lead to even more expensive legal costs on appeal.

With corporation tax down to 20% the UK is closing the low tax gap, but unless politicians can show they understand the game, and come up with a credible big stick, HMRC is going to have to settle for goodwill payments by the multinationals.