In the ongoing debate about taxation, I was curious to understand a comparison drawn by John Christensen. He said to me:
By happenstance I visited both San Francisco and Oslo last month. The contrast was too vivid for even the most narrow-minded to ignore. Excellent public housing provision vs thousands of people sleeping rough on the street. World call schools vs failed schools and bitter social demarcation around a post code lottery. Social equality vs massive rupture and class division. I’ll leave you to work out which is which, but what I can say is that the deputy finance minister in Oslo told me that he (a Conservative in the governing coalition) sees no appetite for tax cuts amongst the Norwegian population.
I know SF so I won’t quarrel about the housing issue and Tom Foremski often laments the state of Silicon Valley schooling. So I’m more than happy to take John’s word about Oslo. I’d add that Norway enjoys one of the best, if not the best, standard of living in the world. In the major direct and indirect taxes its citizens pay sharply more compared to the UK, although the overall rate has been steadily falling for more than 25 years.
I could spend a long time showing all sorts of theories about why Norway is in this state of apparent bliss and why therefore, the relatively simple arguments put forward by the Tax Justice Network are correct. But – solving the issue of tax avoidance/evasion isn’t a simple matter of taking brute force steps like a general avoidance law – as they have in Canada. Or increased transparency in all limited liability companies.
If we are to understand tax evasion and avoidance, then we need to understand why ordinary people as well as the wealthy continue in this societally unacceptable manner. So where better to turn than a study conducted by the University of Norway? I was interested in the factors built into the academic model. The researchers say:
Tax evasion is an illegal act and we therefore believe that the inclination of an individual to evade taxes is strengthened the more widespread tax evasion is in the population.
Anecdotally that makes sense. I can talk for the UK, Spain and France as I have lived in each country over a number of years. In the UK, I don’t see tax evasion or avoidance as a normal topic of conversation. The same is not true in France, where, outside of Paris, people regard the State as cynical and corrupt. Therefore, why should ‘we’ pay a corrupt government? In Spain, the situation is more complex.
Spain is a loose confederation of nation states that happens to have Madrid at the centre as a unifying hub. It is a gnat’s whisker away from breaking up into separate territories. That explains why Madrid v Barcelona soccer matches are seen as representative of the struggle between the centre and Catalonia. But the same could be easily said for Navarra, Valencia and Andalucia.
A similar argument to that offered by French citizens is applied but with a couple of twists. Bribery is rife – especially among elected officials. There is a significant and growing population of ex-pats from around EU who actively hide wealth through the acquisition of property, often through Gibraltarian or other offshore entities but just as likely to be in their own name. Tax evasion – because that is what it is – is rife in both countries.
The researchers add that tax evasion is socially acceptable:
…as revealed by the summary statistics, a majority of the non-evaders also think that tax evasion is socially accepted. It is worth noticing that the social acceptance of tax evasion measured this way seems to be in line with what the Norwegians think about making homemade liquor [which is also illegal.]
Despite that however, the researchers make a series of interesting observations:
…the fraction that chooses to be evaders has gone down from 20 percent to 13 percent from 1980 to 2001. During this period the tax rates have gone down and tax functions have become less progressive. Also, there has been an increase in real wages. Both these changes in economic incentives make it more profitable to be honest, relative to being an evader. Over the same period norms and opportunities for tax evasion at the work place have also changed. Tax evasion seems to be less socially acceptable in 2001 than in 1980. Growth in public sector employment and decline in informal employment relationships both reduce the opportunities for unregistered work. The estimated model is used to simulate the changes in tax rules and wages, and to compare the impact of changes in taxes and wages with the impact of changes in norms and opportunities for tax evasion.
Before reading this, I spoke with a Norwegian country finance manager for a very large employment and consulting agency who said:
The counterbalance to high relative taxation is high wages and a booming economy. Our shipbuilding and oil producing industries are making huge contributions. We have genuine labour shortages. Housing costs are still relatively low, except in certain centres (Oslo only has a population of 500,000).
He didn’t see tax evasion as an issue.
Comparing one economy to another is perilous. Attitudes to taxation are as much a cultural issue as they are representative of fiscal policy along with the social norms of that society. However, I see no fundamental difference in attitudes towards tax evasion across large and culturally different parts of Europe. It seems that where there is incentive and opportunity, taxpayers will evade/avoid.
The UKs spaghetti soup of tax legislation combined with the notion of stealth taxes and waste creates a great deal of resentment towards the State. That’s an incentive. Check how many blogs line up behind the TaxPayers’ Alliance? Contrary to what some might wish me to think, these are not all wealthy, privileged individuals or tax dodging companies. So the charge of being swayed by media hype doesn’t hold good. Not for this observer.
But is John Christensen right when he says:
The elephant in the living room of the corruption debate is the role played by the global infrastructure of banks, legal and accounting businesses, tax havens and related financial intermediaries in providing an offshore interface between the illicit and the licit economies.
Maybe so on the demand side of the equation. I believe the tone for avoidance/evasion on the supply side is set by those in power:
In a damning indictment of the Brussels institutions, the clear message of the EU’s very own Court of Auditors report is one of fraud, mismanagement and waste.
Which are the leading economies contributing to the EU pool? France, Germany and the UK.
The bottom line in this conundrum seems to be that the Nordic model, which plays to the social conscience of the nation, works. The same cannot be said for other nation states. I’d be more than willing to argue that in the UK, there is no demonstrable social conscience from the country’s leaders. Or if there is, then it is a highly confused message.
How can government seriously expect tax practitioners to be anything other than confused when faced with increased tax and bureaucratic burdens yet knowing government is effectively supporting the tax avoidance industry in the Crown Dependencies? It doesn’t make sense. It’s cynical government. Don’t therefore be surprised when tax practitioners shrug their shoulders when criticism is poured on them for aggressively marketing tax avoidance schemes.
There is a way out. Many of the most influential bloggers promote the notion of ‘community.’ They are gaining audiences in business. David Terrar for example looks at Management 2.0, referencing Edward de Bono and Robert Heller who talk about a new form of management that pivots on the concepts of community. JP Rangaswami, who until recently was CIO of Dresdner Kleinwort Wasserstein, takes a very similar tack. David Tebbutt advises the National Computing Centre on community. Stowe Boyd, advises a number of small, but fast growing companies. He wants to kill off evil. Jason Wood has a robust view of perceptions and realities of the investment banking community. Ask him about VC ethics and greed.
I have no idea whether these people are politically or socially aligned. But I do see a common thread. The notion that we should, in some way, be endeavouring to make the world a better place. Sorry if that sounds limp. I suspect most practitioners have some sympathy with that view. These bloggers are the people who will engage others. It’s the indirect route to a different culture. It is what is exciting the folk who are gung ho about blogging as a medium. But change won’t happen tomorrow. Or the day after. It will take years of patient prodding away. Discussing and persuading.
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