Tax avoidance? Or just tax competition?

Labour and the Greens have both given rousing speeches this week about how they are going to equalise society’s wealth stratifications by clamping down on tax avoidance. In declaring this, they’ve just set themselves a task that’s literally impossible to accomplish, because technically there is no such thing as tax avoidance that can be used to recoup losses.

In a society with tax laws, there are only two states: the state of paying tax and the state of evading tax. Taxpayers operate within the orbit of the law, and tax evaders break the law by not paying the taxes to which the law compels them. There is no third option called tax avoidance, because every action either places you in the category of a legal taxpayer or an illegal tax evader – you are either complying with the law or breaking it. 

What people call ‘tax avoidance’ is really only businesses being sensitive to tax competition – that is, the different tax rates set by each country and the ways in which competition helps drive down taxes elsewhere. Tax competition helps keep governments in check in not raising taxes too much, lest they lose business investments to other countries, which ultimately reduces the amount of tax they collect domestically.

People who are said to be guilty of ‘tax avoidance’ are simply people that look to invest and trade in more tax competitive countries. What they are doing is perfectly rational, and therefore politicians that wish to clamp down on tax avoidance are ostensibly trying to tax rationality – which is a bad thing, not just because if you tax something you generally get less of it, but also because tax competition is a benefit to everyone because it helps keeps our taxes lower and curbs politicians’ enthusiasm for making imprudent decisions centred on high taxes and excessive public spending.

Moreover, because this thing called ‘tax avoidance’ doesn’t exist in any meaningful definitional sense, there is no practical way to legislatively clamp down on it. Ironically, the best way to tackle the issue of untaxed income earned outside of the UK would be to lower UK taxes to a more competitive rate, whereby more investment and trade occurs in the UK, and more tax revenue is collected because of it.