On tax avoidance and the purpose of taxation

A large section of the public get very worked up (rightly) about tax avoidance. Huge companies like Google or Vodafone seem to be getting away with paying very little tax despite turning over billions. At the same time, the Government are pursuing cuts to discretionary public spending. People often make a connection between the two and argue that if rich companies and individuals paid all the tax due, there would be no need for any cuts, so a ‘left’ solution to the economic crisis is to go after the tax avoiders/evaders in a big way, and all will be OK. I think this view is misguided. Here’s why.

Firstly, there is an implicit assumption that we need those taxes that have been avoided/evaded to pay for government spending, and if we don’t go after that money, then austerity is unavoidable as the Government doesn’t have enough money. As the UK has its own currency though, this cannot be true. It can create new currency at will and can never run out. There is a risk of inflation of course, as with any type of spending (public or private), but if you don’t think repatriating and taxing a sizeable chunk of money stashed offshore would be inflationary, how could creating a similar amount to spend into the economy be inflationary? The money sitting offshore is largely inert, sitting as excess savings. Money can only be inflationary if it is circulating.

This leads on to the other point I want to make which is about the reason we tax at all. If you ask most people why we have taxes, they will say “to pay for government spending on public services”, but as someone who finds myself in agreement with Modern Monetary Theory (MMT), I don’t think that is really the purpose of taxation at all.

So what is the real purpose of taxation? There are a number of, none of which are to pay for government spending (although confusingly, for a government to spend, it does need to tax):

1. A ‘Chartalist’ view of money (which MMT incorporates) argues that the imposition of a tax by a sovereign government creates a demand for a currency. So because people are required to pay tax in pounds, a minimum level of demand for pounds is assured and people will be willing to do business in pounds so they can obtain enough to pay their tax liabilities. Because pounds have value to those with a tax liability in pounds, they also have value to those who are not taxed in pounds, so it’s not necessary that all users of pounds are taxed.

2. While the government doesn’t need to collect tax before it spends, if it spends without taxing, this will almost certainly cause inflation. We can think of government spending as ‘printing’ money and taxation as ‘unprinting’ money. The tax ‘makes room’ for the government to spend without causing inflation.

3. To correct for ‘externalities’ and discourage ‘harmful’ behaviour. Externalities are costs or benefits generated by an activity which affects non-users of that activity. Examples could be pollution or second-hand smoking. So we might want to heavily tax polluting activities to the point the activity becomes unprofitable or the tax collected is equal to the cost of the clean-up. We might want to tax smoking heavily because it imposes a cost on the health services or gambling because it can lead to crime and contribute to social breakdown.

4. For redistributive purposes. This reason would be why we might wish to take on tax avoidance. Our economy is working as a giant hoover at the moment, sucking up money from the bottom to the top, increasing inequality and leading to more and more people becoming marginalised and stuck in unemployment or low-paid work. Tax is one way of trying to correct for this damaging process.

To sum up then, I am not saying we shouldn’t go after tax avoidance. We absolutely should (although overhauling and simplifying the whole tax system would be more effective in the long run). It’s just that I don’t think it’s an answer to our sluggish economy. Those who avoid/evade tax undermine the tax system by offending people’s sense of fair play. If some are seen to be ‘getting away with it’, it makes maintaining the legitimacy of tax more difficult, and a strong tax base with efficient collection is vital for a functioning mixed economy.

While we need to do something about tax avoidance (preferably through regulation rather than appealing to amoral companies’ morals), we should not oppose austerity by saying “tax the rich more” or “tackle tax avoidance”. Austerity should be opposed on it’s own terms i.e. the government is not running out of money; the markets can’t hold us to ransom, and cutting spending in a recession is a really, really stupid thing to do.

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12 thoughts on “On tax avoidance and the purpose of taxation

  1. I don’t really understand MMT but I would like to add market failure as a reason for taxation. When markets fail, governments need to intervene, perhaps to directly provide a service the market is unable or unwilling to provide. Heath care provision is a case in point.

    1. Yes absolutely, but the government doesn’t need to collect sufficient tax to pay for it before it provides that service. It needs to tax only as much is sufficient that its spending (on health care provision for example) does not cause inflation.

  2. Remember that tax avoidance is legal. Tax avoidance is nature’s way of telling you that you have too complex a tax code and need to simplify it.

    What has annoyed me more than anything else about the Vodafone/Banks/Google debacle is that the people doing the complaining – politicians – are the ones with the power to change the tax code. If they stopped whining and did their job then there would be no unacceptable tax avoidance.

    1. Mr. Neil, they are doing their job – and that very well. for you see, they NO LONGER work for you and the people…they now work for the Big Corporations and Banks that finance this lie. but take heart Amigo…this foolishness will soon be ending!!

      -Mr Gold

  3. “Money can only be inflationary if it is circulating.”

    This should be printed on every US dollar bill. Great article.

  4. This argument is techncally correct, in the short term, for countries with sovereign currencies. It is not a valid argument for countries of the Eurozone though. For countries like Greece, Portugal and Ireland who need to find money to balance their budget, to stay within EU rules, stores of ‘cold’ money held by wealthy individuals and companies in bank accounts offer the only possibiity of achieving that.

    Cutting spending usually means cutting hot money in the economy, the kind of money that will be spent and respent. This creates a downward spiral as everyone , apart seemingly from right wing politicians, will well know. I am sure we all agree on that.

    I don’t believe the argument is technically correct in the long term even for countries with sovereign currencies. Sure , the ill gotten gains of the tax evaders/avoiders, may be cold money now. But that could well change in the future. Better it is taxed now than later, when that may not even be possible.

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