Millionaires, Tax Loopholes & Fair Shares

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It has become very popular to rage about millionaires avoiding their fair share of tax by exploiting tax loopholes:

“Tories leave open tax loophole for the mega-rich” – Mirror
“Footballers pay 22% tax thanks to Loophole” – Daily Mail

Let us see how these claims stand up to some logical investigation:

“Tax Looholes”

Tax Loopholes are quite simply a logical impossibility.

The amount of tax to be paid is determined by tax law,
without tax law there is no obligation to pay tax at all.

A loophole that allows people to avoid paying a “fair rate” of tax, has to assume the existence of a  fair rate of tax outside the law.

What they mean when they cry “Tax Loophole” is simply that the law, as written and passed by Parliament, allows people they don’t like to pay less tax than they would like.

Let’s look at some legal ways to avoid tax (Loopholes)

1. Put your savings in an ISA. You can avoid income tax and capital gains tax.

2. Save some of your income into a pension to provide for your old age. You can avoid income tax and capital gains tax.

3. Give money to charity. A higher rate taxpayer can avoid the top rate element of tax on his donated money.

4. Fill your car up with petrol on budget day morning or buy duty free booze on holiday. You can avoid duty

When millions of ordinary people legally avoid paying the maximum amount of tax every day using these loopholes there is no moral outrage?

Most people would sensibly adopt Lord Clyde’s very sensible view from 1929:

“No man in the country is under the smallest obligation, moral or other, so to arrange his legal relations to his business or property as to enable the Inland Revenue to put the largest possible shovel in his stores. The Inland Revenue is not slow, and quite rightly, to take every advantage which is open to it under the Taxing Statutes for the purposes of depleting the taxpayer’s pocket. And the taxpayer is in like manner entitled to be astute to prevent, so far as he honestly can, the depletion of his means by the Inland Revenue”

There is no such thing as a tax loophole !

“Fair Share”

What is this Fair Share that millionaire’s are avoiding ?

Before the growth of the State, the Church thought 10% of a man’s income was a fair share:
“The tithe is that tenth of our income that we give to God, which enables Him to move on our behalf in the area of blessings”

A flat tax (Like the poll tax) can be argued to be fair. Each person contributes the same amount and has the same entitlement to services. The poor man pays £2,000 and the rich man pays £2,000. After all this is the system we use when pricing shoes, food, etc. So why not services provided by the state.

A flat percentage tax can be argued to be fair: Each person contributes 25% of their income. The man who earns £20,000 contributes £5,000, the man who earns ten times more £200,000 pays ten times more or £50,000.

A zero tax can be argued to be fair. Let each man keep what he produces and pay market price for what he consumes. What right has anyone to keep himself at the expense of another?

A 100% tax can be argued to be fair. Some say it is obscene for anyone to earn more than £100,000 a year, so it is fair to take 100% of anything above that.

Quite simply in real terms the idea of a “fair share” is meaningless, fair to who ?
Each persons “fair share” is different so to accuse somebody of not paying their fair share again means nothing more than: people I don’t like pay less tax than I would like them to.

There is no such thing as a fair share!

The moral outrage is without foundation and reflects nothing more than an unjustified prejudice, and perhaps envy, of those who have been more successful in life.

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  • Anonymous

    With respect to pension contributions, whilst these get tax relief , the pension when it is received in old age is taxable income. So tax has not been avoided, just deferred.

    With respect to charitable contributions, this too does not avoid tax. The system works by the State transferring income tax suffered to the charity. The donor suffers the same tax as if no donation had been made. The difference is that the donor is able to instruct the government to to donate to the charity of his or her choice.

    With respect to fairness. Yes, this is the stuff of political choice. What is fair will differ over the population and over time. There is no definitive answer to what is fair. Logically, those who are net recipients of public spending will be happy to see tax rates rise. Those who are net contributors will want to see tax rates fall. 

  • Stew

    I think you’re confusing the idea of the market setting the prices of item with taxation. If the government needs money in order to provide a universal infrastructure, something all countries have and would be impossible not to have, the it needs a certain amount of money. If you set the rate to be the same for everyone then this would be a major burdon on those who are on a low wage but no burdon on those on a high wage. The result, no matter how ‘fare’ you see it being, is that there would be an increased divide between rich and poor. In cases where financial divide  grow it becomes much harder to stay on the ‘rich’ side. So many who would support libertarian ideas that leads to the apparent protection of the wealthy will find they are on the wrong side of the cut off point that allows them to have a meaningful disposable income and will be living hand to mouth. The cost of living would natural rise if services once provided by the state where removed, as they are being. The alternative is to go without or enter into insurance type schemes. It is simply not a matter of working hard leads to financial riches, so how does someone born in a low income household jump the gap? 

  • I’ve asked New Zealand politicians to define for me what they mean by a fair amount of tax:

    http://lifebehindtheirondrape.blogspot.co.nz/2012/07/taxing-language-question-for-politicians.html

    No takers yet.

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