Why tax avoidance is like porn

I know it when I see it.

I know it when I see it.                                                                                                                                                        

Justice Potter Stewart of the US Supreme Court gave one of history's least fulfilling answers when he was asked to define "hard-core pornography"; but the grain of truth contained within is important.

The same temptation to throw one's hands up at the difficulty of defining complex phenomena is everywhere. The Economist's Daniel Knowles, for instance, suggests that it applies to poverty while the Sorites paradox – a close relative – attaches the problem to bald men and heaps of wheat.

It also applies, pretty much perfectly, to tax avoidance.

We all know it when we see it. Take, for example, Polly Toynbee's column from the Guardian today:

The big sell is trusts, special ones devised for this company's clients, guaranteed to protect almost all your wealth from inheritance tax. They are right, it can be done easily. Put all moveables and all cash and investments into a discretionary trust, and it passes to your heirs without tax as soon as you die, not even waiting for probate. It counts as a gift so the beneficiaries need pay no tax either. Called a "discretionary trust", as technically St James's are the legal trustees, the discretion in fact remains in all but name with you: the company will do whatever you ask, so you still control the fund and you can still take money from it. But for reasons that defy basic tax fairness, it avoids all inheritance tax. Why?

Or this example from the New Yorker back in March:

Since New York City tax laws don't apply to people who are deemed to be nonresidents, even if they own a residence in the city and work there, Robertson was allowed to spend no more than half a year – a hundred and eighty-three days – in New York City. This exile was self-imposed. If he had paid New York City tax, which in the top bracket reaches a rate of 3.6 per cent of taxable income, he could have spent as much time in the city as he wished...

Friday nights were particularly risky, since Robertson or his wife often had social events scheduled in the city. In order to "earn a tax day," as he put it, he usually left town on Friday before midnight, even if his wife stayed at the apartment. Robertson's driver had to be on alert: as long as they crossed the Queens border en route to Locust Valley by midnight, Robertson didn't have to "waste" a Saturday as a New York day. Even one minute of a day spent in the city counts as a day of residence. (Exceptions are made for people who are in transit from one destination outside the city to another – from Newark airport to Long Island, for example, or to LaGuardia for a flight.) Robertson said he never missed the midnight deadline, although when he couldn't get his driver or a limousine service in time he occasionally had to hail a cab. On one occasion, Robertson came back from a trip and found himself crossing into Manhattan at 11:45 P.M. That mistake cost him a full New York City day, which he could have avoided by whiling away fifteen minutes at the airport.

Or the three multinationals hauled up in front of the Public Accounts Committee, about whom Richard Murphy writes:

For Amazon things were much worse. Their rep could not justify how an order made in the UK for a product in a UK warehouse, shipped by UK staff through the UK post and with a bill enclosed printed in this country could somehow have anything to do with Luxembourg when so very obviously it hasn’t. Despite this he had the gall to claim tax must be paid where the economic substance of the deal is – even though Amazon does nothing of the sort…

Google tried harder but they had created one insurmountable obstacle for themselves. Their argument was profits should be taxed where they are earned and they said US technology drove their European profits. But for their admission that the payments made from Europe for that technology never reach the USA and instead get parked in tax-free Bermuda ended whatever shred of credibility they’d tried to create.

All of these things are as clearly tax avoidance as Reader's Wives is clearly pornography. The problem comes when you try to come up with a definition which encompasses all of these examples while not also covering whatever the taxation equivalent of Last Tango in Paris is.

You can try to define it as acting to deliberately minimise your tax take – but then, what is taking out an ISA? That is an action which is performed for no other reason than the tax benefits, but it's clearly not tax avoidance.

There must, then, be some definition of the spirit of the law. Loopholes in tax are put there for a reason, but sometimes that reason is tricky to specify completely. So, for example, the loophole that investment income in taxed less that earned income exists to encourage people to invest their money (which is good for growth) – but when hedge fund managers are payed through "carried interest", that gets classed as tax avoidance, because it is technically investment income, but hasn't actually required any investment from the people benefiting.

Unfortunately, that definition doesn't work either. The absence of VAT on books, for example, is to promote an educated, well-read population; but even though 1001 reasons Britain is shit doesn't do that, we don't call it tax avoidance.

The problem persists even if you just look at specific examples of avoidance. Multinational corporations, for instance, sometimes headquarter themselves in of tax havens. Other times, they leave their headquarters where they are, but manipulate their accounts so that it looks like all their profits come from tax havens. Tempting as it is, it's very tricky to come up with a catch-all definition of avoiding behaviour in this situation.

Is it "not paying tax where you are headquartered"? Or is it "not paying tax where the money is earned"? Or is it a third, "pretending money is earned in one place, when it's really earned in another one"? Or a fourth, "paying tax in a tax haven"? Or even just "operating out of a tax haven"?

Perhaps the real solution is to just stop trying. Call out egregious examples of tax avoidance, but resist the lure to dictate a full definition of the term. Make clear to those who set policy that building a tax code which is easily abused will result in protest, and that avoiding tax will result in bad press. But save definitions for the courts, because it's a fight which seems nearly impossible.

Photograph: Getty Images

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

Photo: Getty
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After Richmond Park, Labour MPs are haunted by a familiar ghost

Labour MPs in big cities fear the Liberal Democrats, while in the north, they fear Ukip. 

The Liberal Democrats’ victory in Richmond Park has Conservatives nervous, and rightly so. Not only did Sarah Olney take the votes of soft Conservatives who backed a Remain vote on 23 June, she also benefited from tactical voting from Labour voters.

Although Richmond Park is the fifth most pro-Remain constituency won by a Conservative at the 2015 election, the more significant number – for the Liberal Democrats at least – is 15: that’s the number of Tory-held seats they could win if they reduced the Labour vote by the same amount they managed in Richmond Park.

The Tories have two Brexit headaches, electorally speaking. The first is the direct loss of voters who backed David Cameron in 2015 and a Remain vote in 2016 to the Liberal Democrats. The second is that Brexit appears to have made Liberal Democrat candidates palatable to Labour voters who backed the party as the anti-Conservative option in seats where Labour is generally weak from 1992 to 2010, but stayed at home or voted Labour in 2015.

Although local council by-elections are not as dramatic as parliamentary ones, they offer clues as to how national elections may play out, and it’s worth noting that Richmond Park wasn’t the only place where the Liberal Democrats saw a dramatic surge in the party’s fortunes. They also made a dramatic gain in Chichester, which voted to leave.

(That’s the other factor to remember in the “Leave/Remain” divide. In Liberal-Conservative battlegrounds where the majority of voters opted to leave, the third-placed Labour and Green vote tends to be heavily pro-Remain.)

But it’s not just Conservatives with the Liberal Democrats in second who have cause to be nervous.  Labour MPs outside of England's big cities have long been nervous that Ukip will do to them what the SNP did to their Scottish colleagues in 2015. That Ukip is now in second place in many seats that Labour once considered safe only adds to the sense of unease.

In a lot of seats, the closeness of Ukip is overstated. As one MP, who has the Conservatives in second place observed, “All that’s happened is you used to have five or six no-hopers, and all of that vote has gone to Ukip, so colleagues are nervous”. That’s true, to an extent. But it’s worth noting that the same thing could be said for the Liberal Democrats in Conservative seats in 1992. All they had done was to coagulate most of the “anyone but the Conservative” vote under their banner. In 1997, they took Conservative votes – and with it, picked up 28 formerly Tory seats.

Also nervous are the party’s London MPs, albeit for different reasons. They fear that Remain voters will desert them for the Liberal Democrats. (It’s worth noting that Catherine West, who sits for the most pro-Remain seat in the country, has already told constituents that she will vote against Article 50, as has David Lammy, another North London MP.)

A particular cause for alarm is that most of the party’s high command – Jeremy Corbyn, Emily Thornberry, Diane Abbott, and Keir Starmer – all sit for seats that were heavily pro-Remain. Thornberry, in particular, has the particularly dangerous combination of a seat that voted Remain in June but has flirted with the Liberal Democrats in the past, with the shadow foreign secretary finishing just 484 votes ahead of Bridget Fox, the Liberal Democrat candidate, in 2005.

Are they right to be worried? That the referendum allowed the Liberal Democrats to reconfigure the politics of Richmond Park adds credence to a YouGov poll that showed a pro-Brexit Labour party finishing third behind a pro-second referendum Liberal Democrat party, should Labour go into the next election backing Brexit and the Liberal Democrats opt to oppose it.

The difficulty for Labour is the calculation for the Liberal Democrats is easy. They are an unabashedly pro-European party, from their activists to their MPs, and the 22 per cent of voters who back a referendum re-run are a significantly larger group than the eight per cent of the vote that Nick Clegg’s Liberal Democrats got in 2015.

The calculus is more fraught for Labour. In terms of the straight Conservative battle, their best hope is to put the referendum question to bed and focus on issues which don’t divide their coalition in two, as immigration does. But for separate reasons, neither Ukip nor the Liberal Democrats will be keen to let them.

At every point, the referendum question poses difficulties for Labour. Even when neither Ukip nor the Liberal Democrats take seats from them directly, they can hurt them badly, allowing the Conservatives to come through the middle.

The big problem is that the stance that makes sense in terms of maintaining party unity is to try to run on a ticket of moving past the referendum and focussing on the party’s core issues of social justice, better public services and redistribution.

But the trouble with that approach is that it’s alarmingly similar to the one favoured by Kezia Dugdale and Scottish Labour in 2016, who tried to make the election about public services, not the constitution. They came third, behind a Conservative party that ran on an explicitly pro-Union platform. The possibility of an English sequel should not be ruled out.  

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to British politics.