Paradise Lost

The recent revelations about tax avoidance schemes and the use of offshore tax havens, has, once again, shone a light on the issue of personal tax management , and the lengths that some people will go to in order to avoid paying tax.

Yet amidst the undeniable outrage at the antics of the rich and famous, and calls from politicians, journalists and the arbiters of public opinion for increased regulation and a clampdown on such practices, there is an essential element that is being lost. Many of the schemes exposed are actually legal, either under local or international law, and, more fundamentally, there is no moral or ethical obligation to pay more tax than is legally required.

As the famous American jurist Learned Hand opined: “there is nothing sinister in arranging one’s affairs to keep taxes as low as possible….nobody owes any public duty to pay more than the law demands….to demand more in the name of morals is just cant”.

There is no doubt that some of the worst excesses highlighted by the Panama Papers are either against the spirit or the letter of the law. However, the vast majority of people who employ tax havens are doing so perfectly legitimately, using the existing law to minimise their personal tax burden accordingly. There is actually nothing wrong with this if you can afford to pay for the proper professional advice to set-up an appropriate offshore tax structure.

Unfortunately, these people, and the accountants, lawyers and tax experts who advise them, run the risk of being demonised for just doing what every citizen has the right to do, and that they will become victims of the politics of envy.

At the same time, the demand from the authorities and regulators to “do something” about the perceived abuses will force many offshore centres to radically curtail their activities, which will cause irreparable damage to local economies heavily dependent on financial services for the bulk of their income.

It also might have another unintended consequence.

Whilst proponents of increased regulation and transparency will argue that the net result of the Paradise Papers will be that more people will be forced, or shamed, into paying their fair share of tax, there is also the strong possibility that the incidence of tax evasion will increase, as tax avoidance or minimisation loopholes are closed. As a result, the total tax take will fall, not increase.

There is also a wider debate to be had about the fairness of current personal tax rates, especially when put into the context of the wider burden of taxation imposed on citizens – VAT, sales tax, capital gains tax, inheritance tax etc.

Unfortunately, there is a real danger that this debate will get lost in the noise about the dishonest practices of a few advisers and their clients, with the inevitable consequences of tighter regulation and scrutiny of one’s tax affairs.  As a consequence, it might be that we look back in a few years’ time, and realise what further control we have ceded over our own tax affairs to national governments and regulators.

If that is the case, it might truly be Paradise Lost.



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