Overdue: Tax Review Calls

What good news to hear that the Labour Party is proposing to review the complete tax system. It is one of the first sensible ideas I have heard in ages and long, long overdue.

Taxation is the primary means of funding government. It is also an integral part of both our financial and economic systems, and helps shape the running of our economy. It therefore seems logical that the financial crisis should have instigated a review of the taxation system. But alas that seems to be too much to have hoped for.

Unfortunately, all too often, efforts to fund government administration and drive policy invoke the law of unintended consequences, sometimes to disastrous effect. The 2008 financial crisis itself is likely an example. It was fueled in part by a complete contempt for government and governance. You need look no further than “Dieselgate” to see this in action. This shameful episode epitomizes the type of malicious myopia, even willful blindness, of large organisations. It certainly illustrates their attitude to government

Who's runningoff with all the money?

Who’s running off with all the money?

regulations.

And even though there may be no direct link, this same attitude applies to tax. Industrial scale tax avoidance unquestionably plays a significant role in our economy. The lack of taxes paid by corporations such as Starbucks and Amazon, (to name two that have recently been in the news) inevitably increases the strain on government, adding to the demand for more debt and/or making debt repayment more difficult and driving “austerity.” 

This is a natural and inevitable consequence of the fact that corporations are also required to pay tax. Efforts to reduce tax thus become a leading factor in business strategy and tactics. In turn this has played a massive part in tax advisory services and tax avoidance becoming an industry in its own right.

Recent events in Cyprus and Greece, where foreign bankers now effectively run the country, show that, at the end of the day it is always the man in the street who ends up paying the bill. Austerity is, alas, the inevitable outcome of failures to curb past excesses. It may be avoidable, but only if we fix the systems that allowed it to happen.

It is therefore imperative that any review of the tax system takes a wide view and goes beyond just the levying of tax and looks at the financial system as a whole. We must:

  • Move beyond adding further layers of complexity to an already over-complicated subject;
  • Look to principle rather than policy to form the basis of a new tax regime
  • Avoid perpetuating the ideological divides of the past (which hopefully a principle based approach will enable.)
  • Endeavour to separate commercial enterprise and tax planning
  • Cater better for global operations and make business domicile irrelevant.

Any review that fails to do this, will ultimately be a failure and let the people and the country down, badly.  It is a matter of national economic survival, not just party survival.