If you are looking for useful insights into the behaviour of homo economicus, don’t look to the left

The coalition government has waded into an avoidable mess on tax because it has been led in search of a limit of what people will hand over to the state by people who don’t believe such a limit exists

A tax avoidance protest taking place in Topshop, Brighton
John Phelan
On 17 April 2012 17:41

Few subjects currently arouse the political passions quite like that of tax avoidance. Such is the subjects’ flammability that the antics of glorified Rag Week pranksters like UK Uncut have, none too indirectly, prompted government action. And, predictably, action with such pitiful inspiration has blown up in the government’s face.   

It might be wondered why tax avoidance generates such emotion. It’s a perfectly legal activity after all, even though some people seem incapable of (or unwilling to) understand the difference between tax avoidance and criminal tax evasion.

Indeed, most of us are tax avoiders. If you have ever modified your behaviour because of taxation, say by taking the train to Edinburgh rather than the plane, quitting smoking, or buying a little less of something because VAT has gone up, you are a tax avoider.

To illustrate the scale of this common or garden tax avoidance, here, literally, are some back of a fag packet calculations. There are 10 million ex smokers in the UK. The average smoker smokes 13.5 cigarettes a day (13 for women, 14 for men) so that is 135 million cigarettes these people are not smoking everyday. Now, with the each tab generating 26p in tax that is a whopping loss to the Exchequer of over £35 million per day because these people stopped smoking. Can we expect to see the guilt ridden middle class poseurs of UK Uncut chasing ex smokers down the street, throwing fags at them and demanding that they continue to puff for the public sector?

In fact, whole areas of public policy rely on us being tax avoiders. Government raises taxes on smoking and drinking (ostensibly) to get us to smoke and drink less. They put all manner of green taxes on carbon consumption because they want us to consume less carbon. To assume these measures will have any effect you have to assume first that most people are responsive to tax changes; that they are tax avoiders, in other words.

Recognising perhaps that government would have very few policy tools left if there were no such thing as tax elasticity, George Osborne has lately been trying to distinguish between this widespread fact-of-human-nature tax avoidance and what he calls “aggressive tax avoidance” which he finds “morally repugnant”. As you might have expected, policy based on such a non-existent distinction has come a cropper.

You will know the details by now: rich people are giving money to charities and offsetting this against tax liabilities. This has the effect of reducing the newly popular but entirely bogus‘effective’ tax rate paid by the rich. To prevent this, the government announced plans to cap the tax relief on charitable donations.

All hell broke loose. Apparently it came as a shock to Osborne and David Cameron to find that if you effectively tax charitable donations, charitable donations might actually decline. That they should have been so stunned is quite bizarre. As we’ve seen, swathes of public policy depend on us being tax avoiders. And, in the very same budget, Osborne announced the reduction of the top rate of tax from 50p to 45p citing exactly those incentive effects that he dismissed when applied to charities.  The eminently avoidable fiasco looks likely to end in a clumsily executed U turn.     

You could have known all of this, in fact, before it happened. That is because, to repeat, people are generally tax avoiders. Individuals generally think that they have the most right and are the best qualified to spend the money they earn on satisfying their wants and needs.

This is not to say that the tax avoidance bandwagon does not have some support. But when you ask people which taxes they think should be increased or whose avoidance should be clamped down upon the answer is always the same: “Somebody else’s”.

This natural self interest is something the left has always struggled with, as demonstrated by their renaming it ‘selfishness’. It is a key tenet of left wing belief that state spending is good (not entirely coincidentally very many on the left receive large amounts of their income from state spending). This is why you heard people supporting the retention of a 50p tax rate which actually saw the rich pay less in tax. This arose because, if you hold to the idea that state spending is good, then if your taxes increase you will simply keep on working or giving to charity as before and taxes will rise proportionally. And, by extension, if the goodness of state spending is so self-evident, then everyone will think like this.

But they don’t, as common sense and a wealth of history attest. Instead people have some idea of what they should fairly be paying in tax and any attempt to raise the tax take much beyond this is doomed. Obviously, with a raft of lawyers and accountants on the payroll, the opportunities for the rich to skip out of any increase are greater than for others.  

If you are looking for useful insights into the behaviour of homo economicus don’t look to the left. The effective raising of tax on charitable giving was always going to lead to less charitable giving because the levying and raising of tax on anything generally leads to less of whatever is being taxed. The government has waded into this avoidable mess because it has been led in the search for the limit of what people will hand over to the state by people who don’t believe such a limit exists.

John Phelan is a Contributing Editor for The Commentator and a Fellow at the CobdenCentre. He has also written for City AM and Conservative Home and he blogs at Manchester Liberal. Follow him on Twitter at @TheBoyPhelan 

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