During these Recessionary times we often hear how immoral it is that when the Governments of Europe need more money, individuals and multi-national companies are engaging in Legal Tax Avoidance. The aim of this article is to look at the moral issue that tax avoidance raises and whether this will add to the financial problems within the UK and Europe.
A heading that appeared recently in the UK was “Is Tax Avoidance the new Tax Evasion?” A statement like this reveals the ignorance of the writer but also perhaps the sentiment of the uninformed public. Tax Avoidance is legal, which is why it is not illegal tax evasion, where income is effectively hidden so that tax is not levied on it. Tax Avoidance uses those same laws to best effect in order to reduce and in some cases even eliminate tax.
The sentiment that is revealed in the headline above is also one of blame and a perception of injustice of large “Big Brother” type institutions and wealthy people who are jointly responsible for the economic woes besetting Europe by not paying their “fair share” of tax. It is true that some of these people who engage in tax avoidance have become wealthy in the first place through legal tax avoidance and tax planning. Tax avoidance may have also been a significant factor that enabled the multi-national company to grow to the size it is now, however, is this the reason why the UK and Europe are experiencing economic difficulties?
The economics of a country can easily be understood when compared the economics of an individual. For some reason many people believe that the financial rules governing countries are completely different to those that govern ones’ personal finances. However, the basic tenets are no different from country to individual.
The basics are: save 10% of your income for the future, do not spend more than you earn. If you borrow, do so for an investment that makes money rather than for something which doesn’t. Create plans to pay back those loans over a period of time. Only borrow within the magnitude of 3 to 4 times your income and make sure that the repayments are no more than 25% to 33% of your working income. Only take out the loan if you know that you can definitely pay it back.
It is plainly obvious that not a single country in Europe all has followed these simple rules, even though they are all lead by very intelligent and qualified people. In fact these intelligent and qualified people have broken EVERY rule shown above. Now to fix a problem that was created through too much borrowing, they aim to fix the problem with unbelievable, more borrowing! An alcoholic has developed his or her condition through too much drinking of alcohol. In order to cure that ailment doctors never recommend increasing the daily intake for these people. However our politicians believe a lot more borrowed money will fix all our financial problems.
Leading on from this and in conjunction with the basic tenets of financial management above, is it not so much, how much money you have, but what you actually do with the money you do have? I would argue “yes”, it is. This takes us back to the original moot point about tax avoidance being immoral and being a contributing factor to our current economic woes. The logic being followed above would mean that the UK would never have spent more money than what it earned regardless of tax avoidance and not be in the current economic crisis. More money to an organisation that has already proved incapable of handling that money in a responsible manner is not the answer.
The issue of tax avoidance itself will now be addressed. Tax avoidance is generally practiced by those who are better off in our society because there is an inherent cost associated with tax planning and tax avoidance. The knowledge of this fact brings to life those old childhood beliefs that somehow the rich and wealthy are evil and have made their money through exploiting others. This is an argument that is easily fed to those who are less well off in society and usually used by politicians even though they know this argument to be untrue.
Tax avoidance still sends the same amount of money out into the economy to be used by all, but just bypasses the Government in the process. Even money sitting in the bank, is not stationery but flows into businesses in the form of loans, which stimulate growth and prosperity. Those who partake in tax avoidance or tax planning are still using their cash as before but in larger amounts and it is still finding its’ way back into the economy and every purchase in the UK incurs sales tax. The greatest threat to the economy is not tax avoidance but the banks not lending their cash, which is currently happening.
Government spending at the best of times is wasteful and huge amounts of tax payers’ cash is spent in building an unwieldy organisation that consumes cash, but does not in many instances assist the public in building the economy. Tax avoidance gives those who participate in it the option of avoiding this waste, but they are still contributing to the economy through their own spending, business activities and the indirect tax that we all pay.
From the arguments above, the issue is not so much how much tax Governments receipt into their treasuries, but it is more about what they do with the tax that they do actually bring in. Those who participate in tax avoidance are usually the greatest financial contributors to society through their businesses. More money going into the hands of Governments with a proven track record of irresponsible spending is not the answer to Europe’s financial problems. The wealthy create wealth for all in their pursuit of riches and tax avoidance just bypasses wasteful Government spending, which has created the current economic crisis. Tax avoidance is not to blame, wasteful and irresponsible governance is.
The author, Jason Russell is a consultant from The Tax Experts, a UK company that deals primarily in UK tax avoidance schemes and tax planning. The Tax Experts prove to clients on a daily basis that tax in the UK is truly optional. For more information about how you can create and preserve your wealth, please visit The Tax Experts at http://www.thetaxexperts.co.uk