The Tax Man Goes All Russian

LONDON -- Last week, David Gauke, a junior treasury minister, stirred up a hornet's nest when he said that it was "morally wrong" to pay tradesmen in cash, as this encouraged tax avoidance.

Gauke deliberately tried to equate tax avoidance, actions that legally reduce your tax liability, with illegal tax evasion by assuming that the tradesmen won't declare the cash on their tax returns. This is par for the course nowadays, as politicians and the tax man try to increase the tax take by demonizing tax avoidance.

Shortly afterward, it emerged that HM Revenue & Customs had issued a series of educational pamphlets for schools in which children are encouraged to become spies for the state by reporting people who do not pay their "fair share" of tax to their teachers. This is a tactic that was used in Stalin's Russia and George Orwell's 1984.

Denounce your parents
The Revenue's pamphlets reminded me of the story where Pavlik Morozov showed his loyalty to the Soviet Union by denouncing his father to the authorities for the "crime" of hoarding grain during the famine of 1932. Morozov was then murdered by his family, who were executed by the secret police a few months later.

In death he was lauded as a hero of the Soviet Union and portrayed as a great role model; statues were erected in his honor in many towns and cities. The story, just like the tractor production statistics, turned out on closer inspection to be nothing more than a piece of propaganda.

I find it worrying that the British state is encouraging children to denounce people for engaging in legal activities. But that's the way things are done nowadays, where increasingly people are put on "trial" by government agencies and given on-the-spot fines by the police instead of being judged by the courts as the Bill of Rights of 1689 requires.

There's a lot of it going on
Tax avoidance hit the headlines in June when the comedian Jimmy Carr was named and shamed for using a tax avoidance scheme to reduce his income tax rate to as little as 1%.

This got a lot of attention because Carr is a public figure, but the amount he was saving was trivial when compared to the amount that companies in the FTSE 100 index are saving through tax avoidance. Here are four examples out of a packed field of contenders:

  1. Barclays (ISE: BARC.L) was specifically targeted by retrospective legislation in February to reclaim 500 million pounds of tax that it had legally avoided.

  2. GlaxoSmithKline (ISE: GSK.L) saved itself up to 34 million pounds, according to a recent BBC report, by using a loan scheme that was run through a subsidiary in Luxembourg.

  3. Vodafone (ISE: VOD.L) paid 2.3 billion pounds in corporation tax last year, none of which went to the British Treasury.

  4. WPP (ISE: WPP.L) moved its headquarters to Dublin in 2008 to reduce its tax bill by taking advantage of Ireland's lower tax rates.

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Complexity increases avoidance
If the British Government wants to stop companies from avoiding taxes, it can do so by getting parliament to pass laws that do just that. The problem is that our tax system has become so complex that every change to the existing tax law seems to create several new loopholes. Whatever happened to the idea that taxes should be simple and compulsory?

Governments are going to have to come to terms with an increasingly globalized world, where companies take advantage of laws that allow them to legally reduce their taxes and also have the option of relocating to countries with more favorable taxation policies.

One way in which they could do this is to increase the taxes levied upon consumption and land because these are much harder to avoid. Also spending a bit less would help.

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Tony owns shares in GlaxoSmithKline but he doesn't own shares in any of the other companies mentioned in this article. The Motley Fool has adisclosure policy.
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