Why it's time to close these tax avoidance loopholes for the super rich

Prem Sikka
Professor of Accounting
University of Essex
(published in [London] Evening Standard, 27 April 2005, p. 39.)

With a general election drawing close, no political party is willing to end the biggest welfare programme that is run exclusively for the benefit of major corporations and rich elite. It is known as tax avoidance and has fundamentally shifted the tax burden from major corporations and rich individuals to ordinary taxpayers. They hire accountants, lawyers and bankers, use tax havens and place novel interpretations on law to escape taxes.

Under pressure from the rich the punitive income tax rates of 83% was reduced to 40% and corporation tax reduced from 52% to 30%, the lowest ever. But this has not curbed the rampant tax avoidance industry. Various economic models show that Britain may be losing more than £100 billion of tax revenues each year, which means that ordinary people are paying much higher taxes than they need to.

The Office for National Statistics routinely announces that the corporate sector is earning record rates of return of, averaging over 10% per annum since the 1990s, considerably above the rates of inflation. This means that the company profits are doubling roughly every eight years. Yet this growth in profits is not reflected in the taxes paid by corporations.

 The Inland Revenue’s official statistics show that the UK income tax take of £48.8 billion for 1989-90 increased to £123.7 billion for 2004-2005 whilst for the same period, after taking account of  record corporate profits,  the take from corporate taxes increased from £21.5 billion to only £32.4 billion, failing even to keep pace with rates of inflation. Corporate share of total UK tax take has dropped from 11.5 per cent in 1997/98 to 7.7 per cent in 2003/2004 and amounts to less than 2.5% of the British GDP, the lowest ever. Much of the money collected through corporate taxes is given back to the corporate sector as sweeteners, subsidies, loans, rent/rates free accommodation and export guarantees, with the result that the corporate sector is making little contribution to the financing of education, healthcare, transport and other essentials. The taxes avoided also ensure that British workers receive one of the lowest unemployment benefits and pensioners receive the lowest pension, as a percentage of average earnings, in Western Europe.

Since 1997, the richest 1000 people have seen their wealth increase from £99 billion to £250 billion, which enables them to exercise huge social power and political influence. Over 65,000 rich individuals live in Britain, but pay little or no tax. They are sheltered by Britain’s archaic ‘domicile’ and ‘residence’ laws which enable them to live here but avoid paying taxes.

To finance a crumbling social infrastructure, taxes on ordinary citizens have been increased by raising VAT and freezing personal allowances. To alleviate poverty, in 1999-2000, the government introduced a lower rate of tax of 10%, which now is payable on taxable income of £2,020. The number of taxpayers caught in this bracket has increased from 2.28 million to 3.4 million. Over 3.3 million individuals, the highest ever, pay tax at 40%, the highest possible rate, at a modest taxable income of only £31,400. Is it any surprise that many people cannot afford to buy homes or save enough for their pension? In fact, top fifth of earners pay a smaller proportion of their income in tax than the bottom fifth. At the same time, ‘fat cats’ use tax havens, pay themselves in gold bars, fine wine and exotic currencies to avoid taxes and national insurance contributions.

Successive British governments have failed to shackle the tax avoidance industry. Some $11.5 trillion of world’s money is hidden away in tax havens, such as Jersey, Guernsey, Gibraltar and the Isle of Man. This wealth, if taxed, could raise worldwide tax revenues of $255 billion each year and help to alleviate poverty in Africa and developing countries, which are estimated to be losing at least $50 billion of tax revenues each year due to tax avoidance by corporations and the rich.

Many tax havens are UK Crown Dependencies and the government could end their shady business. It should refuse to award public contracts to any company that avoids taxes by using tax havens and concocting transactions that are solely designed to avoid taxes. Yet these organisations and their controllers have been pampered by all governments, especially as they finance political parties, individual politicians and think tanks. Government could make accountancy firms and their partners personally liable for developing and marketing dubious tax avoidance schemes, but instead they have been rewarded with massive public contracts. The Private Finance Initiative (PFI) alone has yielded over £500 million in fees for major accountancy firms.

 Isn’t it time that political parties explained their proposals for ending the wealth transfers from ordinary people to multinational companies and the rich elite.