It has been interesting to note the marked difference of opinion between commentators on exactly where the boundary lies between sensible tax planning and immoral tax avoidance and what the problems are with avoiding tax.
On one side, some argue that in this time of austerity, people and companies have a moral obligation to pay their taxes. Meanwhile, others argue that, given the UK government and governments in general have made a questionable job of spending our money thus far, it would seem sensible to keep some of it out of their reach.
Not helping the argument was the decision to change the lexicon surrounding the issue, with George Osborne now famously referring to aggressive tax avoidance as “morally repugnant” in his March Budget – note this is in addition to the illegal tax evasion which is of course always morally wrong.
The lexicon does not entirely explain why there is such a disparity in people’s views though.
Perhaps to look at it from another direction would be helpful. If avoiding tax is morally wrong, then surely, as good citizens, those fortunate enough to be in a position to make serious tax planning decisions, should be maximising their tax bill?
In the US, this has had some discussion, with billionaire investor Warren Buffet last year suggesting the super-rich should pay more tax to help its country out of recession. Nothing significant as yet has come of this although the US government has introduced a huge bill, known as FATCA (Foreign Account Tax Compliance Act) which aims to catch US tax cheats around the world.
In the UK the idea of the rich increasing their tax bill has been explored less so. Indeed, it seems over the past few decades, tax for the richest has actually decreased.
Be thankful I don’t take it all
According Prudential’s technical manager Gerry Brown, before more modern rates of taxation, the Treasury was much tougher on those further up the pay scale. In the 1978 to 1979 tax year, for example, someone earning more than £24,000 would attract an income tax bill of 83%. Even those with an income of between £9,000 and £18,500 could expect attract between 45% and 70% tax on their earnings above £8,000.
In addition, there was a surcharge on investment income above a specified limit chargeable at 10% or 15%, depending on the level of investment income, says Brown, resulting in a top tax rate of 98% on investment income.
Brown points out that this whopping rate of tax prompted Beatle George Harrison to write Taxman – a song bemoaning the Treasury for getting its grubby hands on almost all the band’s earnings. One could even argue Harrison thought this a moral issue, although the lyrics perhaps do not make this argument watertight.
Another example of morality entering the world of taxation was during the Second World War when the British government introduced the Excess Profits Tax (EPT) in an attempt to stop wartime profiteering by firms.
EPT, says Brown, was designed to tax profits in excess of those made in peacetime. To ascertain this, wartime profits were compared with pre-war or ‘standard’ profits – the excess was taxed initially at 60% and then at 100%. Repealed in 1946, 20% of the taxed amount was paid back to firms to help with post-war reconstruction.
To bring us up-to-date, the highest rate of personal tax is currently 50%, although the technical team at Prudential suggests there is the potential to suffer higher rates if one were to fall into a “tax trap” which could put your bill beyond 50% and even up to 60% or more if you have a large family and earn a decent wage.
So, back to the question of morality. Perhaps it is not then a question of how much tax, but of who is paying it or not paying it. Most would agree that aggressive tax avoidance by large FTSE 100 companies is wrong, but who would question the need of a middle class family to shelter some hard earned money from the taxman?
What do you think? Do people and companies have a moral obligation not to aggressively avoid tax? Use the comment box below…
