Paradise Falls

We work, we pay taxes, and the rest of our disposable income is spent on bills, groceries and other normal goods. This is how we see society working, but nothing is ever that simple. Let’s change the story, to one where it is possible to retain most of the income you earn by paying less taxes – if any at all. Would you consider it, if I told you most of these schemes are legal? Would you still consider it if I told you that the UK loses approximately £16bn a year in tax avoidance – may be if I put it on a bus and mentioned the NHS you might!

Recently, a document known as the ‘Paradise Papers’ was leaked, and contained information regarding the vast complexity that is the offshore empire. Globalisation has helped to enable these schemes in which companies, and individuals, are able to create artificial structures to avoid tax – most taking place in small islands in the Caribbean, where regulation is weak enough to enable ‘shell’ companies to be created. It was only last year we saw a similar leak with the ‘Panama Papers.’ Again, similar tax avoidance schemes were being implemented, with many famous faces being condemned for their involvement.  Similarly, in 2012, comedian Jimmy Carr was involved in a K2 scheme that permitted members to pay an income tax rate as low as 1%. But Jimmy Carr is still on our television screens, and now other familiar faces like Bono, the Queen, President Donald Trump and Lewis Hamilton have also been linked to tax avoidance through the ‘Paradise Papers.’

When the people involved in these scandals include prime ministers or individuals with significant power, how do we stop elites from manipulating a system they’ve put in place?

These names will cause outrage for now; but, as time passes, we will have moved onto another scandal. Jimmy Carr will once again be remembered for his outrageous laugh, rather than being a man who avoided paying £3.3 million a year in taxes! From the Panama Papers, investigations are still being carried out, but as of yet no charges have been made. Most cases, whilst morally ambiguous, are carried out in manners that don’t infringe on the law; and, so the issue becomes one of morality rather than legality.

tex-evasion-cartoon

Considering the moral perspective, let’s focus on the ‘slippery slope’ framework. Here, we focus on the trust between power structures in society; where individuals are incentivised to pay their taxes, if they believed that the money would be used to further public service – and thus eliminate the issues of free loading. During the 2010 financial  crisis in Greece trust between authorities was at an all-time low.  Through this period a study of 320 economic students from the University of Athens was conducted. Following a deterioration in the framework, the results – though not statistically significant – showed that the risk of being caught was a stronger factor in preventing tax avoidance. But, based on the idea that we are rational consumers, if there is a low risk (i.e. that if carried out correctly most tax schemes are legal) it makes logical sense for individuals to consider tax havens. It may not be morally correct, but technically it is not morally wrong either – unless you consider the implications for society. Developing countries that are used as these tax havens, often lose out on large revenue due to profit shifting by large multinationals – which leads to disparities in income equality, particularly when according to a report by Oxfam 8 billionaires own the same wealth as half the world’s poorest population! The stark difference in the figures emphasises a growing issue, and tax avoidance is only one of the many reasons for it.

But, projects like base erosion and profit shifting (BEPS) provide a starting point for regulation protecting against tax avoidance. The project was signed by 82 countries, and necessitates the right for the G20 to sanction any countries believed to be used as ‘tax havens.’ Despite BEPS being launched in 2012, we still have tax scandals; and, the main reason is the plethora of loopholes that exist in an already over complicated tax system. A remodel is required to eliminate this, but it will take time. The unfortunate truth is that it is more likely to see Donald Trump’s tax returns, than it is likely to  see a change in legislation anytime soon! However, the release of both the Panama and Paradise papers indicate that we are exposing tax avoiders, and the BEPS project indicates us heading in the right direction – we have a long way to go, but at least it is the right way!

Simron Gill

N.B. This article reflects the author’s opinions only.

References:

Inequality.org. 2017. Global Inequality – Inequality.org. [ONLINE] Available at: https://inequality.org/facts/global-inequality/. [Accessed 8th November 2017].

Omair Ahmad. 2017. Whatever Happened to the Panama Papers? – The Wire. [ONLINE] Available at: https://thewire.in/58933/whatever-happened-to-the-panama-papers/. [Accessed 8 November 2017].

Guardian. 2017. Britain criticised by MEPs for failing to take action on tax havens. [ONLINE] Available at: https://www.theguardian.com/news/2017/nov/10/britain-criticised-meps-action-tax-havens-paradise-papers. [Accessed 8 November 2017].

Kaplanoglou, G, 2017. Why do people evade taxes? New experimental evidence from Greece. Science Direct, [Online]. 56, 21-32. Available at: http://www.sciencedirect.com/science/article/pii/S2214804315000233 [Accessed 9 November 2017].

Oxfam. 2017. Just 8 men own same wealth as half the world. [ONLINE] Available at: https://www.oxfam.org/en/pressroom/pressreleases/2017-01-16/just-8-men-own-same-wealth-half-world. [Accessed 9 November 2017].

The Guardian. 2017. UK tax fraud costs government £16bn a year, audit report says. [ONLINE] Available at: https://www.theguardian.com/politics/2015/dec/17/uk-tax-costs-government-16bn-each-year-audit-report-says. [Accessed 9 November 2017].

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