Panama, ethics and the law

Discussing the Panama Papers with the BBC's Moneybox presenter Paul Lewis, I said I thought it odious that politicians were deliberately conflating (illegal) tax evasion with (legal) tax avoidance – such that innocent people who simply park their money offshore because it would be taxed to death at home are lumped in with Russian mafia bosses and scumbag dictators concealing the proceeds of their thefts. Lewis was having none of it: there is a big difference, he claimed, between simple folk putting a few bob in an ISA, as Parliament fully intended they should, and smart advisers setting up short-lived paper companies in Panama just to get round the tax rules.

For some years, UK Chancellor George Osborne have been on the same bandwagon, criticising "aggressive tax avoidance" – such as companies shifting cash round subsidiaries in other jurisdictions in order to get the best tax treatment, celebrities billing the BBC from purpose-made companies so that they don't pay 40% income tax, people paying themselves in ways that are not liable to national insurance contributions, wheezes to avoid capital gains tax – and all that sort of thing. And Prime Minister David Cameron has fully signed up to that line.

Now he is being hoist by his own petard. As his father, a financial adviser, put clients' funds in Panama, people naturally wondered whether the Prime Minister benefited from Panamanian tax avoidance. He yielded to pressure to publish his tax returns. These showed that (among other things that will be pored over by the papers) he stood to save £80,000 in inheritance tax by using the 'lifetime gift' mechanism. 

Millions of middle-class families do the same, of course. But when you have been so strident in denouncing 'tax avoidance', it looks – and is – hypocritical. The Prime Minister could, of course, do the Paul Lewis thing and say that 'lifetime gift' tax-avoidance is allowed by Parliament and is OK, but 'aggressive' tax-avoidance is shady and unpatriotic. But the distinction is lost on most people – who don't know what a 'lifetime gift' is and certainly would not have enough money to benefit from it.

The pressure is now on all politicians to reveal their tax affairs. The claim, by critics such as the Shadow Chancellor John McDonnell, is that this will expose tax-avoidance, self-interest and corruption. Some chance: smart accountants would have no problem concealing the affairs of their career-politician clients. What it would do, however, is to discourage talented people, such as those who have had a successful career in some other sector, from going into politics in the first place. You might be a model citizen, but would you want your finances, and those of your family, exposed in the national newspapers?

As the journalist Janet Daley says, this is the sort of mess you get into when politicians wander away from legislating and start moralising instead. The trouble with morals is that everyone has a different view on them. If you break the law, it is a matter of fact; whether your actions are moral or not is a matter of debate. Moralisers open themselves up to constant criticism.

The solution to this mess is quite obvious. Taxes on businesses and individuals should be so low that it is not worth evading (or even avoiding) them. And much simpler – the more complicated your tax code is, the more places there are to hide in it: and the UK tax code is one of the most complicated in the world. Indeed, George Osborne has made it even more complicated with all kinds of new reliefs, subsidies, schemes, limits and whatever else. If you are worried about money drifting off to Panama, you really need to start at home. 

Brexit and Britain reborn

Among the pro-EU misconceptions is the idea that Europe somehow represents "the wider world." The reverse is true. The EU is a self-seeking regional block of diminishing significance in the world.  It is inward looking and self-regarding, often seeking to exclude, or at least delay, modern developments. By leaving the EU, the UK could step into that global movement and face its own future with confidence as it has done before.  

I wrote some thoughts on this for CapX:  

I have witnessed occasions on which the UK has undergone a break with the past and moved with confidence into an uncharted future determined to do things differently and to become better in consequence.
One was in the early 1950s.  Exhausted by war and the privations of the post-war government with its continued shortages and rationing, the future seemed drab and bleak.  In a short space of time three things happened to renew the nation’s faith in itself and its confidence for the future.
The 1951 Festival of Britain showcased the nation’s technical expertise in a reprise of the 1851 Great Exhibition a century earlier.  It captured the imagination and boosted the country’s self-esteem.  Winton Churchill was returned to office, and his government began the deregulation and the end of rationing that closed the chapter on World War II.  King George VI, beloved and esteemed for inspiring Britain through the dark days of war, died and was succeeded by a young Queen Elizabeth, aged 25, who represented the passing of a torch to a new generation.  These three events renewed the nation and lifted its spirits.

You can find the full blog post here.

What tax dodging?

It's somewhat unlike us to come to the aid of any politician at all but we do think that this David and Ian Cameron story has got just a tad out of hand. As far as anyone can tell from the information we've got the allegation seems to be that Ian Cameron checked with lawyers to see that he was obeying the law. And David Cameron has, as his father did, obeyed every jot and tittle of said law.

That we live in a country where the powerful do indeed obey the law is something that we should all be rather happy about we feel.

As to the details of the arrangements Jerry Hayes tells us this:

Today I can tell you the truth about Blairmore Holdings. Not from any contact in Number 10 nor any friend of Cameron, but an old friend who is one of the leading tax specialists in London. This is not his opinion, it is a set of facts. This is what he texted me. I put it in direct quotes to show that I am not putting a personal spin on it.
“Blairmore Holdings was a perfectly legitimate offshore investment fund. It’s underlying investments were very largely if not exclusively non UK. The fund was registered with the UK revenue as a ‘distributer fund’ which meant that it had to pay out to investors at least 85% of its income each year. The investors would be liable to UK income tax on those payments if UK resident. Equally, if they sold their investment they would be liable to capital gains tax”

So we know that the fund was legitimate. Question one. Was Ian Cameron a UK resident? Yes. Was David Cameron a UK resident? Yes. This really is a no brainer. Their can be nor could have been any possible tax be benefit under this fund for the Camerons. End of story.

That "men pay taxes due" becomes a film at 10 story makes us concerned for the metal health of society as a whole. 

FCA in Wonderland

The Financial Conduct Authority’s latest attempt to justify its own existence should be datelined 1st, not 5th, April. Their 2016/17 Business Plan is primarily addressed to risk. For example, the Chancellor’s decision to allow pensioners to spend their own money carries the risk that they will not do so as the FCA would like them to do. This is clearly intolerable. Fortunately “Our intelligence-led [sic] approach allows us to bring together information both externally derived and from across the FCA to develop a cohesive view of the risks, issues, challenges and opportunities in a particular sector, viewed through a number of different lenses.” (p.12) Not a lot of pensioners can do that.

These lenses do not seem to include the problem the FCA itself has created by driving so many Independent Financial Advisers out of business and thereby depriving future pensioners of the advice they need. They do, however, recognise that their hounding of banks and others, e.g. for mis-selling, has led to larger financial institutions “de-risking” their products, thereby reducing consumer choice and competition.

“We know that de-risking by banks is causing problems for some groups of consumers. While we do not control this process, we are undertaking work to help address the issue. We will complete our de-risking impact assessment in Q1 2016, giving us a clearer picture of the nature, scale and drivers of de-risking. We will work with Government, firms and others to create a proportionate strategic response.” (p.27).

The word “strategic” in that does not accord with the FCA’s continuing efforts to micro-manage the sector. The strategy we need is to return the sector to being a normal competitive market with brands, variety, innovation and consumer choice. By all means let us have a Which?-type organisation to critique and compare offerings and of course the financial sector should be included within the remit of the Competition and Markets Authority (CMA) to ensure fair trade. What we do not need is non-stop fiddling with detailed rules no one understands.

The risk-averse FCA 2016/17 plan contrasts with the speech of 6th April by Alex Chisholm, CEO of the CMA. The latter is broad in concept, technologically up to date and welcoming of innovation.

UK financial services are less at risk from Brexit, or remaining in the EU, than from the FCA’s preoccupation with risk, much of it created by the FCA itself. The only strategy it needs is self-immolation.   

Legally Bonged: Why The Psychoactive Substances Act should go up in smoke

Cannabis is the biggest player in the EU drugs market, outstripping cocaine and heroin to snatch up 38% of the estimated 24 billion euro industry, and yet the UK police force have this week revealed under a Freedom of Information request that their officers are making half the arrests for possession they did five years ago.

Despite arrests dropping from 35,367 in 2010 to 9,115 arrests in 2015, consumption has stayed stable at around 7% of the population during that period.

Numerous studies have shown, including one from the Home Office back in 2014, that it is not clear that decriminalisation has an impact on levels of drug use and that decriminalisation can significantly reduce the burden on criminal justice systems. With Durham police admitting that they are no longer targeting or investigating cannabis users “so as to free up staff to deal with things that are more important” you should rightfully question why yet another restrictive drug law was planned to come into force today.

The Psychoactive Substances Act, whose debut was scheduled for today, would make it an offence to produce, supply or offer to supply any psychoactive substance if it is likely to be used for its psychoactive effects and regardless of its potential for harm.

However, the legislation has been delayed as the European Monitoring Centre for Drugs and Drug Addiction (EMCDDA) warned that it was unlikely the Act would go any way towards stemming the flow of designer drugs onto the market, partnered with continuing confusion about what the term ‘psychoactive substances’ actually covers and a worry that under the current definition of a psychoactive substance, or lack of, the Act is not enforceable by the police. 

We urgently need an honest discussion of the law’s limitations. Our ABC classification system is far too simplistic, failing to differentiate between drugs in terms of overall harm or addictiveness, with extremely harmful drugs like heroin grouped together with ecstasy, which is statistically less dangerous to users than horse riding.

Beyond the limitations of imposing our drug laws, drug prohibition hands criminals an underground market worth over £200bn annually worldwide, and is responsible for deaths of thousands of people every year.

Just as incredibly destructive drugs like crystal meth and crack cocaine emerged from a clampdown on less risky drugs, so legal highs fill a void for the recreational drug user. A 'blanket ban' on psychoactive substances may eliminate high street 'head shops', but will push trade underground and encourage a slew of new, even more dangerous alternatives.

The fact that everyday substances like caffeine, alcohol and tobacco will be covered by such a ban (and have to be exempted) just shows how all-encompassing and heavy-handed such an approach is. To reduce harm from drug use the government should instead legalise recreational drugs like cannabis, ecstasy and cocaine so they are available with rigorous safety controls. This unworkable new Act will merely push the industry further into the dark, and frankly they’d be wise to put it in their pipe and smoke it.

Haven Is A Place On Earth

The BBC is making (not reporting) the news again, to the delight of high-taxing politicians. The fact that some chum of Putin has parked (presumably) ill-gotten millions in Panama provides a convenient excuse to close down low-tax jurisdictions. And the idea that rich folks like David Cameron’s dad save tax by sending their cash abroad stimulates enough public envy to provide the support.

The two are different, of course. Theft, fraud, tax evasion and money-laundering are rightly illegal: any firm or country that helps mafia bosses or dictators conceal stolen millions should be exposed and punished. But if you work within the rules and find ways to cut your tax bill, or invest your money in some place where it won’t be taxed within an inch of its life, that is legal and should remain so. Indeed, low-tax jurisdictions act as a safety valve that makes it harder for politicians to oppress their citizens with crippling taxes. 

But it is too easy for those politicians to lump together the illegal evasion with the legal avoidance and say that both should be swept away. 

In fact, criminals generally launder money at home, because it's far riskier to move it across borders; tackling that problem should start at home. The stock in trade of the low tax jurisdictions is actually ordinary people who put their modest lifetime savings into a respected insurance company based in Jersey, or the Isle of Man, or Luxembourg, or Switzerland. Then their savings can grow without being constantly eroded by the tax authorities.

That is why politicians hate them. They know that if other places have lower taxes, people will move their money (or their businesses, or even themselves) abroad – so their citizens can no longer be taxed with impunity. It’s pure tax protectionism: governments don’t produce widgets, so they are all in favour of free trade in widgets; but they do produce taxes, so they want to keep out the competition.

Low taxes encourage enterprise, investment, growth and freedom. So low-tax jurisdictions don’t need to flout the rules, and it is insulting to suggest that they do: in fact, many have financial sectors that are better regulated than ours. Rather than try to bully them out of existence, the big countries should ditch their tax protectionism, square up to the competition, lower and simplify their own taxes.