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.