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In praise of tax avoidance The best way to crack down on tax avoidance is through lower, flatter, simpler taxes

The best way to crack down on tax avoidance is through lower, flatter, simpler taxes Some politicians maintain that tax avoidance is an intrinsically immoral attitude

Here are some ways to reduce the amount of tax you pay. Tell me which of them you think constitute sensible tax planning, and which amount to tax avoidance. (The examples I give are British, but most developed countries have equivalent mechanisms.)

Buying premium bonds or other tax-free government products

Putting your money in a tax-free savings account, such as an ISA

Setting up a company so that your freelance earnings are more efficiently offset against costs

Giving some of your assets to your children while you’re still alive, so that they are not hit by death duties

Establishing a trust for your children

Establishing an off-shore trust for your children

Working shorter hours

Taking earlier retirement

Moving to a place with lower taxes such as Hong Kong

Moving your company to Hong Kong

Moving part of your company to Hong Kong, and paying taxes there, but continuing to do a chunk of business where you were before

Paying in cash to get a discount

Giving your accountant carte blanche to cut your bill in any legally permissible manner

Most people, in my experience, draw the line at things they don’t do, or can’t imagine doing, themselves. We are programmed by our genome to put our own actions in the best possible light. Psychologists have all sorts of fancy words for these self-serving biases, but we don’t need to use technical vocabulary. We can all recognise the tendency in others. (Of course, we find it much harder to recognise the tendency in ourselves, which rather proves the point.)

The chances are that, as you looked down the list, you were subconsciously influenced by a desire to validate your own behaviour. For what it’s worth, though, I’m not sure that any of the items is qualitatively different from the others. All involve reducing your tax liability within the law. Sure, some laws are more asinine than others, but that’s hardly your fault as an individual taxpayer.

It’s hard to see much difference, other than of degree, between putting money into an ISA and putting money into one of those ingenious schemes favoured by comedians and rock musicians that involve investing in, say, unsuccessful films. In both cases, people are opting to pay as little tax as the rules allow.

Some politicians maintain that this is an intrinsically immoral attitude – though you rarely see those politicians queuing up to make additional voluntary contributions to the taxman, an option that the Revenue authorities specifically permit. More to the point, there is surely greater morality in choosing to give to a good cause than in handing over cash to wasteful state agencies. I’d rather see someone minimise his tax contributions and maximise his charitable donations than pass his open wallet, with a self-satisfied grin, to a government bureaucrat. As John Wesley used to say, “Get all you can, save all you can, give all you can.”

The best way to crack down on tax avoidance is through lower, flatter, simpler taxes. In a flat tax system, it is pointless to defer or reclassify your income. If taxes are low, no one will emigrate to avoid them. And here’s the really good news: as you lower, flatten and simplify, you generally get more revenue. Not only do wealthy people pay more in absolute terms; they also pay more in proportionate terms, which is good news for everyone else.

The problem with this approach is not economic but political. A Right-of-Centre party which is working to close tax loopholes will none the less be hurt by media coverage of tax avoidance – just as, equally unfairly, a Left-of-Centre party will generally be hurt by strikes, even when it unequivocally condemns the strikers. Conservatives are reluctant to make changes which would be of general benefit for fear of looking as though they’re “on the side of the rich”.

In truth, any tax cut, any flattening of rates, any elimination of exemptions can usually be caricatured as a “tax cut for the rich”. If you cut taxes across the board, the rich will incidentally benefit. Refusing to countenance any tax cut that might help the better off means, if you think about it, ruling out virtually any reduction of rates.

Those politicians who complain about “aggressive tax avoidance” have the solution in their hands. A flat tax would make impossible most of the items I listed at the outset; and, as revenues rose and rates fell, emigration, outsourcing and the establishment of offshore accounts would become purposeless. I understand that some Leftists would rather have a redistributive tax system than an efficient one. Fine, but if that’s your view, please stop moaning about tax avoidance: it’s your system that creates it.

Daniel Hannan is a Conservative Member of the European Parliament and blogs at www.hannan.co.uk

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