An alternative to tax avoidance

Nick Clegg and David Cameron have both been talking tough on tax avoidance, and trailing plans to introduce a general “anti-avoidance power” so that HMRC can ensure everyone pays “their fair share”.

As usual, Tweedledee and Tweedledum have proved themselves incapable of distinguishing between avoidance and evasion. But there’s a world of difference between the two. Evasion means not paying taxes you are legally obliged to pay. Tax avoidance means paying the lowest amount of tax permissible under the law. And what’s wrong with that? Should we voluntarily give the government more money to waste than we are legally obliged to?

It isn’t clear, moreover, what is meant by a ‘general anti-avoidance power’. To me, that sounds worryingly like granting bureaucrats a broad discretionary power to tell people they must pay more tax than the law requires them to. Such a power would a blatant affront to any concept of the rule of law.

Perhaps they have something more like the United States’ Alternative Minimum Tax (AMT) in mind. Simplifying somewhat, that would add up to the following – if your assessed tax liability is less than X percent of your income/profits, then you must pay taxes equalling that percentage instead.

That approach would certainly be more reasonable than allowing broad bureaucratic discretion. But how long would the AMT remain targeted at large companies with, as David Cameron put it, ‘fancy corporate lawers and the rest of it’? The smart money says not long: in all likelihood, an AMT would quickly become a stealthy way of raising taxes across the board. The Treasury would not be able to resist.

More to the point, once you’ve accepted the logic of the AMT, isn’t a better solution staring you in the face? If a simple, exemption and allowance free flat rate tax levied on income and profits works so well, why not just scrap the 900+ page tax code and use the ‘alternative’ system for everyone instead? It might upset a few lawyers, accountants, and special interests, but if you want people to pay their ‘fair share’, that’s the way to do it.

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