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6 April 2016

Leader: Tax and the social contract

It would be easy to respond to the Panama Papers leak with a shrug. But taxes underpin our position as citizens in a society - and allows us to believe in the fairness of Britain.

By New Statesman

A common theme underpins support for Jeremy Corbyn, Bernie Sanders, Podemos in Spain, Syriza in Greece and even Donald Trump: the idea that there is a world within our world, inaccessible to the ordinary citizen, where super-rich elites play by different rules. The so-called Panama Papers, the largest leak of financial documents in ­history, show that idea to be the ugly and humiliating truth. The march of globalisation has enabled aggressive international tax avoidance. At best, national governments are too enfeebled to prevent these dodges by themselves; at worst, they have cynically abetted them.

The leak of 11.5 million files from Mossack Fonseca, a law firm headquartered in Panama, is both enormous and small. The papers contain details of 214,000 offshore companies incorporated by the firm on behalf of more than 14,000 clients. But Mossack Fonseca is only the world’s fourth-biggest offshore law firm. This leak is the tip of a hulking iceberg.

Tax avoidance represents a steady corrosion of the intra­national solidarity on which states rely. The best way to understand tax is as a social contract: citizens of societies pay dues (respecting laws and paying taxes) in return for mutual benefits (the rule of law and a beneficent state). Or, as the US Supreme Court justice Oliver Wendell Holmes, Jr put it in 1904: “Taxes are what we pay for civilised society.”

It would be easy for Britain to respond to the leak with a shrug. Twelve national leaders are named in the documents – Iceland’s prime minister has resigned over his involvement – but the only figures from British politics who appear in the files are a smattering of peers and party donors, as well as David Cameron’s late father, Ian. It is no surprise that Russia and Saudi Arabia are havens for the corrupt and it is a relief to see that British politicians are (relatively) clean.

Yet our country cannot ignore its institutional role in allowing tax avoidance schemes to prosper. More than half of the companies in the papers were registered in British-administered tax havens. The UK is tainted, too: at least £122bn of British property is owned by offshore companies, sheltering their owners from liabilities and identification while distorting the housing market. It is difficult not to conclude that the UK and its remaining colonial outposts have become havens for dirty money smuggled from corrupt states.

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It is not sufficient merely to bemoan the ease with which the hyper-rich eschew standard tax arrangements. Only firm, effective action will rid the UK of dirty money. David Cameron has talked a good game on the subject. In 2012, he said that offshore tax avoidance schemes were “not morally acceptable” and, the following year, he placed tax transparency at the top of the G8’s agenda. Mr Cameron plans to host a summit in May to discuss offshore issues. Yet that summit, for which there is no confirmed date or guest list, shows the disconnect between the Prime Minister’s rhetoric and reality. It will also be hard for him to claim moral authority on the subject when his family wealth – courtesy of Blairmore Holdings, a fund run by his father – was held offshore. This is not an arrangement available to most ordinary Britons.

The awkward truth is that it is very hard to stamp out tax avoidance. Yet the government can and should do more to dismantle the perception that there is a twin-track system for the elites and the rest. Last month, the cuts to the corporation tax rate, already among the lowest in Europe, and to capital gains tax announced in the Budget sent the wrong message. Most businesses and their executives do not evade tax but the perception that corporations are taxed much less than people must not harden into received opinion. An argument often mounted against high tax rates is that low tax keeps money onshore. The Panama Papers expose that as a fallacy: no tax is always more “efficient” than low tax.

The government could make a symbolic declaration of intent by ensuring that British passports are available only to those who pay full tax in the UK, as is the case in the US. It is an indignity to ordinary taxpayers when the services, infrastructure and civil society they fund from their income are used by parasitical super-elites who feel no allegiance and no responsibility to any country. The government cannot eliminate multinational tax avoidance on its own but it can make a concerted attempt to expel foreign corruption from our shores. Every day that it does not, more of us lose faith in the fairness of Britain, its political system and its institutions.