I was recently at a lunch where a young adult asked her family, if there was any problem with finding ways to legally avoid paying tax. The family, who were largely well educated, quickly reached a consensus that maximising one’s wealth by legal means was not only OK, but was to be expected. This left me a little confused as there seemed to be several questions unanswered, or rather unasked. Is there a difference between avoidance and evasion, as a society do we see them as bad, who is doing it, how are they doing it, what is the scale of it, what is the impact and is anyone in power doing anything about it and if not why not? The conversation had clearly left me reeling so I excused myself after dessert and immediately started looking for answers.
My first question was, is there a difference between avoidance and evasion? The dictionary tells us that the words ‘avoid’ and ‘evade’ are largely interchangeable. The OED uses evade to define avoid, and avoid to define evade. So the answer isn’t a question of semantics. However, when used in reference to taxation, things become clearer. Former UK Chancellor Denis Healy explained “the difference between tax avoidance and tax evasion” as “the thickness of a prison wall”. Former UK Prime Minister David Cameron many years later chose to be a little clearer explaining that “tax evasion is illegal, … you can go to prison”, before going on to say that “very aggressive tax avoidance schemes, they are wrong”. So in answer to my first question, the dictionary says no and the government says evasion is illegal while avoidance is naughty. Not a brilliant answer, but an answer nevertheless.
My second question was; whether as a society do we see tax avoidance as bad? And to my surprise, it turns out that there is a rich history of celebrity tax avoiders openly admitting to it. Richard Branson, knighted for services to entrepreneurship and head of a business empire that is owned through a maze of offshore mechanisms and is a resident of the British Virgin Islands tax haven said in 2002 that his company would be half its size if he hadn’t legally avoided tax. Then there is the celebrity philanthropist and campaigner against global poverty Bono, who with an estimated wealth of $600 million, a knighthood for services to music and humanitarian work, and who famously moved a share of the Bands income to the Netherlands tax haven, went as far as to defend it saying that the Irish government would ultimately appreciate the band’s decision. He later developed the argument telling students at Georgetown University that “entrepreneurial capitalism takes more people out of poverty than aid”. So in answer to my second question, it appears that as a society, or at least within the institutions of cultural power, we do both applaud and celebrate out tax avoiders, going as far as to ennoble some of them.
My third question was who avoids tax? Leona Helmsly, the famous New York millionaire probably put it best when she explained during her own tax evasion trial that “taxes are for the little people”. Helmsley, dubbed the “Queen of Mean” in that one statement unveiled a social counterpoint between the little people that pay tax and, one can conclude, the big people who don’t. In 2005 the Tax Justice Network estimated that wealthy individuals were holding in the region of “$11.3tn worth of wealth offshore”, going on to argue that “$250bn in taxes [is] lost on just the income the money earns each year”. In his brilliant ‘Treasure Islands’, Nicholas Shaxson explains that “the offshore world” is “the biggest force for shifting wealth and power from poor to rich in history”. Going on to explain that in addition to the super rich benefiting it turns out that “drug smugglers, terrorists and other criminals use exactly the same offshore mechanisms and subterfuges” as the corporations. So the answer to my third question turned out to be a simple one. Rich people, criminals and terrorists avoid taxes. Amazing.
So how are they doing it? In October 2013, David Cameron the ex-UK Prime Minister explained that “for too long a small minority have hidden their business dealings behind a complicated web of shell companies”. That is the same David Cameron who only a few years later found his own family’s “good” name being dragged through the same grubby offshore waters. And how is all this being achieved? Well one way is by individuals re-designating their wealth, and making it subject to corporation tax rather than income tax. This had been a developing process over time. In 1992 “the richest 400 Americans booked 26% of their income as salaries and wages and 36% as capital gains. By 2007 [this had changed to] only 6% as income and 66% as capital gains”. Compound this with the moving of the companies in to tax havens and then hiding them beneath layers of shell companies and trusts, then even the nominal corporation tax is effectively “avoided”. A Bloomberg investigation found that 15 publicly traded companies after reincorporating abroad had effectively performed this ‘legal’ sleight-of-hand, saying “most of their CEOs didn’t leave. Just the tax bills did”. So how do they do it? Simply, they pay accountants and lawyers to hide the money.
My fifth question was, what is the scale of this activity? In 2008 a GAO report stated that 83 of the top 100 US companies had subsidiaries in tax havens. In 2009 the Tax Justice Network reported that 99 of the top 100 European companies had subsidiaries in tax havens. Shaxson estimated that over 50% of world trade, on paper was passing through tax havens. And the amounts in real terms being hidden away from those nosey revenue services is truly eye-watering. As recently as 2014, and published in a report in 2015, Fortune 500 companies were shown to be holding more than $2.1 trillion in accumulated profits offshore. Just 30 of them accounting for 65% of it and 72% of all 500 operating subsidiaries in tax havens. In 2014, the four largest finance companies in the US alone collectively disclosed 1,858 subsidiaries to the SEC and 10,688 to the Federal Reserve. The list goes on. Morgan Stanley reported having 210 subsidiaries in tax havens and officially holding $7.4 billion offshore. Pfizer operated 151 subsidiaries in tax havens, officially holding $74 billion in profits offshore. Google increased the amount of cash they were reporting offshore from $7.7 billion to $47.4 billion between 2009 and 2010. Apple booked $181.1 billion offshore, which it has been estimated would have generated $59.2 billion in U.S. taxes. The UK’s National Audit Office reported in 2007 that a third of the UK’s biggest 700 businesses had paid no tax at all in the previous financial year. So in terms of the scale of the activity, it has been estimated that tax dodging by multinational corporations costs the US approximately $111 billion and the poorest countries in the world a further $100 billion every single year. In the UK, as recently as August 2016 the BBC’s Today programme was quoting figures of between £3bn and £10bn in UK tax avoidance every year.
Which leads nicely to my sixth question, what is the impact of this activity? Well firstly, rich people are getting richer. In 2016 Oxfam America said that “the richest 1% [had] accumulated more wealth than the rest of the world put together. Just 62 individuals [had] the same wealth as 3.6 billion people, … half of humanity”. But in the context of tax being part of a social contract that ensures a standard of living for the whole of society, the impact of avoiding tax could be argued to to be the withdrawal of the funds governments use for public sector spending. Oxfam addressed this issue in exactly this manner arguing that the $100 billion of tax being avoided, if paid and allocated accordingly could provide basic life-saving health services or safe water and sanitation to more than 2.2 billion people. This idea of taxes being spent on the public sector is an interesting one and can be further unpacked. It turns out that in the UK, the state of the art Queen Elizabeth Hospital in Birmingham was reported to have cost £545m to build in 2010, the Royal Liverpool Hospital £429m and the Northumbria Specialist Emergency Care Hospital £90m. That means, that conservatively speaking, by corporations, rich people, criminals and terrorists avoiding paying $211bn in tax, over three hundred new state of the art hospitals are not being built every year, across the United States and the poorest countries of the world. Apple alone could build over a hundred every year if they just paid tax like the rest of us. In the UK alone somewhere between 6 and 20 new state of the art hospitals could be built every year that currently aren’t. So in answer to my sixth question, and based on the some would argue far-fetched assumption that the tax revenues would be used to fund public services, a very stark contrast appears in the relative impacts on the beneficiaries and the victims of tax avoidance.
My penultimate question was, is anyone in power doing anything about it? Both the Congressional Joint Committee on Taxation and the U.S. Treasury Department have stated that stopping U.S. corporations from deferring taxes on their profits in foreign subsidiaries indefinitely could raise close to $900 billion over ten years. And of course it was a 2013 Senate investigation that reported that Apple had structured two Irish subsidiaries to be tax residents of neither the United States nor Ireland, effectively making sure that Apple had little if any tax liability to any government on a large part of their offshore profits. In the UK, the House of Commons Public Accounts Committee called representatives from Google, Starbucks and Amazon in to answer questions on tax. Although to be honest, the minutes in Hansard don’t leave one feeling particularly optimistic. On questioning Matt Brittin of Google, the Chair of the Committee stated “As I understand it, 92% of all sales outside the USA are billed in Ireland”. Matt Brittin claimed that they were paying all the taxes they were required to pay. The Chair responded, “We are not accusing you of being illegal; we are accusing you of being immoral”. Apparently the lawmakers don’t have the laws they require to to make the immoral illegal. So in answer to my seventh question, is anyone in power do anything about it, the answer appears to be no. Although in the defence they are use tax payers money to talk about it.
Which begs the final question, why is no one in power doing anything about it? In 1973 The Trilateral Commission comprising leading CEO’s, US Presidents and Harvard academics released a paper called ‘The crisis of democracy’. It argued that there was an “excess of democracy”, and the solution was “apathy and non-involvement” of a “governable” democracy, and a wider recognition of “the legitimacy of hierarchy, coercion, discipline, secrecy and deception”. In short democracy needed to be rolled back in order to avoid a crisis of representation. The idea that our understanding of democracy is in fact wrong and the reality is that it is rigged isn’t a new one. In the UK it has been effectively argued for many years.
But beyond the illusion of the involvement of the electorate, the very supremacy of government and the nation state is fast buckling under the onslaught. Over the last forty years we can see exactly these kinds of “solutions” being written in to global legislation time and time again. In Europe “Article 107 of the Maastricht Treaty states: ‘Neither the ECB (European Central Bank) nor any national bank shall seek or take instructions from community institutions or bodies from any government of a member state or any other body.” In 1993 the WTO and GATT’s Multilateral Agreement on Investment argued that no society could refuse any commodity across its borders on grounds of its ‘process’ of production or potential harm to social memberships.” The Transatlantic Trade and Investment Partnership (TTIP), a bi-lateral trade negotiation between the EU and the US, the aim of which is to reduce trade barriers by diminishing regulations that restrict business in the areas of food safety law, environmental legislation and banking regulations is being discussed now. One section of which calls for the introduction of Investor-State Dispute Settlements (ISDS) which will let companies sue governments if their policies negatively impact profits. I guess that this could mean things like closing tax loopholes or stopping them from cutting corners in the delivery of privatised public services.
All of which brings me back to the beginning. The question I was asked at the lunch was, is there any problem with finding ways to legally avoid paying tax? If I had been better informed I would have answered yes, there is a problem within the current model of society that we live in. But to understand why that is we must first answer a series of questions informing that answer. Is there a difference between evasion and avoidance? Our governments tell us that evasion is illegal while avoidance is simply immoral. Do we as a society have an issue with this immorality? Quite the opposite, our cultural institutions go as far as to applaud and celebrate tax avoiders. Who is it exactly we are talking about? It is rich people, criminals and terrorists. How are they doing it? They are getting lawyers and accountants to help them. What is the scale of it? Hundreds of billions of dollars every year. What is the impact? There is no social contract, so rich people are getting richer and poor people are being crushed. Is anyone in power doing anything about it? Nothing of note. Why not? Because the idea that companies are answerable to governments and that governments are answerable to the electorate is a fraud.
In some ways perhaps it was better I didn’t have the information to hand. Who wants indigestion on top of a family lunch. Although perhaps it is the shared silence that allows it to continue. Clearly our natural instinct is to notice something isn’t right. After all, a nineteen year old, having left school at seventeen, however briefly, and against all the advice being given her, questioned the nature of the global financial system. She clearly sensed that it was not as cut and dried as she had been led to believe. At least for that moment she felt confident enough to ask those that she trusted, her friends and family to explain to her the nagging feeling that something didn’t feel quite right. She was correct, something has gone wrong, badly wrong and I should have had the answer to hand. Next time.
Nicolas Lalaguna is the author of A Most Uncivil War.