Labour’s John McDonnell on Google and tax avoidance

I wrote this post yesterday about the recent news about a tax deal reached between HMRC and Google. In the comments a reader alerted me to an interview on Channel 4 News with Labour’s Shadow Chancellor John McDonnell. He’s almost very good in it. As seems usual these days, no Government Minister was willing to be interviewed about Google (no empty chair though again), so Cathy Newman stepped in. She tried her best to trivialise the issue, but McDonnell didn’t do too badly under her line of questioning. He did a reasonable job of linking the issue of tax avoidance with the concept of ‘fairness’. This is the correct way to address the issue in my view, but he went about it the wrong way in one sense, and dropped a clanger in another.

A couple of times he implores companies to “pay your taxes”. The trouble is though, they are paying their taxes according to the law. What he should actually be doing is targeting the anger at George Osborne to “change the tax system”, preferably with a few concrete ideas about how to do that. By focusing on the companies themselves, he lets the Government off in a big way and makes it purely an administrative issue on the part of HMRC, saying they are not doing their job right or are underfunded.

McDonnell’s clanger came when he talked about taxes paying for things he thinks should be funded. By doing this, he sets himself up to fail later on because whenever he suggests a policy, the Tories will either say there is a funding black hole or that taxes will have to go up on ‘hardworking families’ to pay for it. A smarter play would have been to just hype the fairness aspect. Every individual and SME can relate to having to pay a more ‘standard’ rate of tax, so the unfairness of tax avoidance should be an easy sell.

Here’s the video. See what you think.

The blind alley that is tax avoidance

In the last few days, HMRC reached a deal with Google who agreed to pay £130m in corporation tax to cover the last 10 years. George Osborne called announced this on Twitter, saying:

Many people think Google has been unfairly avoiding tax and so are less than happy with George Osborne’s celebratory tone. There have been questions in Parliament today about this deal. Labour have been making a lot of noise about it, and the story could run for a bit longer. The thing is though, this payment from Google is actually an over-payment. They paid all their taxes due under the law. I don’t think anyone is saying Google have broken the law, but they have gone to the limits of what the law allows. Criticisms of this deal focus both on Google and on HMRC’s treatment of Google, but I think both are unfounded. Google is paying all the tax it is required to (or even more) and HMRC is trying to maximise the revenue it collects within the law. If it has extracted this voluntary payment from Google, it’s actually not done too bad.

So is tax avoidance OK then? No it’s not OK. It’s not fair that ordinary people and businesses have to pay more than those who can afford to pay accountants to minimise their tax bills in inventive ways. We need to be clear though. If Google paid £2 billion extra in tax rather than £130m, what would this mean for public services? Could the government then afford to spend more? No, absolutely not. The government can afford to provide public services at any level (within the constraints of inflation) whether it receives tax payments from Google or not.

Should people be able to feel the tax system is fair though? Yes, I think that is a reasonable wish. The best way to achieve this though would be to change the tax laws though, not to try to shame amoral companies into paying more voluntarily. This is why I think the issue is a blind alley for Labour (as it was in the last Parliament). It can generate some headlines, but to make a difference, you need to come up with specific changes to the tax system that would make a real difference.

This is not about how much tax is received in total, it’s about who pays that which is collected and whether that distribution is perceived to be fair. While you link cuts to tax avoidance, you will always be on the wrong side of the argument, because if you accept the link between taxation and spending you are exposed to the retort “how are you going to pay for it?” if you suggest any new spending initiative. It’s not a good strategy.

Spot the difference between the two main parties on tax avoidance

Noam Chomsky once wrote “The smart way to keep people passive and obedient is to strictly limit the spectrum of acceptable opinion, but allow very lively debate within that spectrum….”. There’s been a very lively debate recently about tax avoidance, following revelations from Switzerland about HSBC. Labour and Tory Ministers and Shadow Ministers have been chucking accusations around with abandon, but I can’t really see what the difference is between them. Here’s two examples.

1) Ed Miliband calls out Tory donors for tax avoidance. Ed Miliband avoided inheritance tax after the death of his father (kind of). George Osborne talks of cracking down on tax avoidance, but in a former life as a backbench MP, felt comfortable handing out advice on how to avoid tax. There are different types of tax avoidance. All are legal though. How can we trust MPs from either party to actually do something radical to ensure all pay their fair share of tax, when they are all hypocrites when it comes to tax?

2) A stupid row broke out after Ed Balls suggested people should always get a receipt – even for odd jobs they are paying in cash for, as to do otherwise would be facilitating tax avoidance. Iain Duncan Smith called this “absurd”, saying this demonstrated “Labour’s complete lack of understanding of how business works and how people get by”. It does seem a bit daft to expect people to do as Ed Balls wants, but he is saying nothing different than Tory Treasury Minister David Gauke did, when he said in 2012:

“Getting a discount with your plumber by paying cash in hand is something that is a big cost to the Revenue and means others have to pay more in tax.

“I think it is morally wrong. It is illegal for the plumber but it is pretty implicit in those circumstances that there is a reason why there is a discount for cash.”

Ed Miliband at the time refused to agree cash in hand payments were morally wrong, saying instead:

“What I say is that the job of government is to pass the right laws to clamp down on tax avoidance – that’s the most important thing of all.

So Tory makes a statement, Labour criticises. Labour makes identical statement, Tories criticise. Lively debate then within an incredibly narrow spectrum. Or two cheeks of the same backside as a certain Bradford MP loves to say.

Unhelpful things lefties shouldn’t say part 3

Part 3 of this 3 part series. Here are parts 1 and 2. This part is about probably the most common thing my fellow lefties get irate about, but in a way I think is unhelpful. What is it? Tax avoidance. Here is the line I often hear:

3. If [INSERT COMPANY NAMES] paid their taxes austerity wouldn’t be necessary. In parts 1 and 2 I used pieces by two journalists I quite like as examples, but for this one, I’ve chosen one I have less time for, Polly Toynbee. I wouldn’t say she’s a lefty, more all over the place, but a lot of left-wingers seem to like her work. This piece is a general rant about Amazon, Starbucks etc, but it contains this sentence:

The culture of getting away with what you can has to give way to a popular understanding that one man’s tax dodge is his own community’s lost children’s centres, libraries and swimming pools.

This is the idea I find unhelpful. That tax avoidance means we can’t afford things like children’s centres. libraries and swimming pools. It just isn’t true.

That’s not to say we shouldn’t get annoyed about tax avoidance (although I don’t think shaming companies into paying more tax a la UK Uncut is particularly effective). It’s about fairness rather than needing the money to pay for public services. Government needs to collect tax, but if tax is seen as optional for one section of the economy, why should any of us pay what the government says we owe? So that’s the issue, and one which is more something the government needs to sort out through its tax laws rather than the companies doing the avoidance (which is legal and a perfectly rational thing for them to do).

So why doesn’t tax avoidance mean less money for public services? Most people think that the government must first tax us before it has any money to spend. You often hear it said that it’s “your money” the government are spending. In reality though, money goes round the economy in a big circle. Just as we could start with tax providing the money for government spending, we could equally start the circle with the government spending some money into the economy which then comes back to it in the form of tax. I think Peter Martin explains this idea quite well in this post when he writes:

“When sovereign governments spend they simply credit bank accounts as we know from MMT. Much of their spending is on wages and salaries. Straightaway about 30% or so comes back in tax and other Government deductions, like National insurance in the UK. The remainder gets spent and respent. After a few respendings there’s not much left after the government has taken its cut at each stage. 20% VAT, fuel duty, corporation tax etc etc and yet more income tax… Eventually nearly all spending goes back to government as taxes regardless of the level at which they are set, providing they are finite.  It just takes longer if taxes are lower.

Peter goes on to say:

There are two exceptions to the rule that issued money always comes back to government. Money which is saved by individuals and private companies, and money which is net spent on imports. The taxman can’t get that back.

So you get a deficit when individuals save and/or when we import more goods and services than we export. The impact of tax avoidance in this story will depend on what happens to the potential tax that is avoided. If it is taken out in profits by shareholders and spent into the economy, it will be taxed at at later stage and returned to the tax man. This won’t impact on the deficit, but it meant some people unfairly had their spending power increased because they were able to avoid a portion of tax that would otherwise have been due.

What if the additional money gained from tax avoidance was just saved though? If this was the case that would cause a government deficit larger than would have resulted if the tax hadn’t been avoided. In this instance would that mean public services would have to be cut to make up the difference? Again no. There are a number of reasons why governments need to tax, but paying for government spending isn’t one of them. As most transactions in the economy are taxed, as Peter Martin shows us for every £1 the government spends, it will get back £1 in tax, only not in the same time period. Individuals saving and imports exceeding exports extends the time it takes for that £1 to come back to government, but the delay doesn’t prevent it from funding the programmes it wants to fund.

Lefties should be aware of this because once understood, each possible spending programme can be argued for on its merits rather that whether it can be afforded. “Affordability” is measured in real resources – people and stuff – rather than pounds sterling. If we use (for example) building materials and labour (which is finite) to build more council houses, that might mean less private houses can be built, if it results in a shortage of those things. If we spent (say) £10bn on housebuilding though, that doesn’t mean we have £10bn less to spend on other things (unless those other things were other construction projects). Again, the trade off is over the use of real stuff, and the government can always create enough money to use those resources any way it sees fit.

In part 2 I objected to Zoe Williams writing that free school meals shouldn’t be extended because the money could be better spend on other stuff. The cost of providing those meals is the probably next to zero, because presumably those kids were going to eat something at lunchtime anyway, it’s just someone else is paying for the food. The amount of food consumed will probably be unchanged. The government providing free schools meals doesn’t reduce the government’s ability to spend in other areas by a single £1, and equally, Amazon avoiding tax also doesn’t reduce its spending power.

Hopefully that all makes sense, but the short version would be: by all means campaign for government to simplify the tax system, to close loopholes and make tax avoidance more difficult, but don’t link it to the provision (or lack of provision) of public services. The two are not linked, but by trying to link them it perpetuates the myth that for every £1 the government wants to spend, it must first raise £1 in tax from all of us. We hear this from politicians all the time. It is really annoying! 

 

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.