Andreas Whittam Smith: Pay up, pay up and play the game

Reckless banking and tax avoidance have characteristics in common. Both depend upon finding barely legal ways round the rules

The Liberal Democrat part of the Coalition Government has put tax dodging and excessive bank bonuses up in lights at its annual conference. I am glad they have done so. For there is always a tendency to regard these nasty subjects – involving, as they do, charges of dishonesty and greed – as hot-under-the-collar questions not worthy of consideration by the worldly wise.

An example of the worldly wise is Adair Turner, chairman of the Financial Services Authority. Whereas a year ago he described some areas of banking as "socially useless", in a speech on Tuesday evening he urged us to "to move beyond the demonisation of overpaid traders... to recognise that, in finance and economics, ill-designed policy is a more powerful force for harm than individual greed or error, and to ensure that we address the fundamentals of what went wrong". No thanks. That is being worldly wise to a fault, so broad-minded that it loses touch with reality. Lord Turner's assertion is like saying that tax dodging is primarily the fault of the Government because its legislation isn't sufficiently clear.

Personal responsibility to behave well doesn't seem to come into it. As a matter of fact, reckless banking and tax avoidance have characteristics in common. Both depend upon finding barely legal ways round the rules. Reckless bankers and tax dodgers often become obsessive in their hunt for loopholes and draw intellectual satisfaction from the activity – as well as profits. Both are essentially selfish, for the bankers know that if they make big mistakes the Government will bail them out and the tax avoiders well understand that when they pay less, somebody else must pay more.

Vince Cable, the Business Secretary, on the other hand, is a hot-under-the-collar type. Speaking about the bankers yesterday at the Liberal Democrat conference, he remarked: "On banks, I make no apology for attacking spivs and gamblers who did more harm to the British economy than Bob Crow could achieve in his wildest Trotskyite fantasies, while paying themselves outrageous bonuses underwritten by the taxpayer. There is much public anger about banks and it is well deserved."

He had earlier said the Government would not be "blackmailed" by banks threatening to leave the UK, and there were various sanctions available. They ranged from getting banks to give more details of bonuses, to taxing high profits or financial transactions. Ministers had been warned to expect a "very large bonus payout", he added.

In fact, Mr Cable's outbursts serve the Coalition well. People instinctively feel it is unacceptable for bankers to accept taxpayers' support and then pay themselves extravagant salaries. They also believe it is unfair to prepare plans to crack down on welfare cheats without putting as much vigour into limiting the scope for tax-dodging. The Coalition Government is more united on the latter than on the former. Danny Alexander, the Liberal Democrat Chief Secretary to the Treasury, told the conference that he and the Chancellor, George Osborne, had agreed a package of new measures to crack down on tax avoidance and evasion. "We will be ruthless with those often wealthy people and businesses that think they can treat paying tax as an optional extra," he said.

There is tax avoidance – finding ways to limit tax liabilities without quite breaking the law – and tax evasion, which is using fraudulent means to deceive the tax authorities. I came across a good example of the first the other day. The question was asked at a meeting why a company registered in Guernsey owned a particular property. Because no capital gains tax is payable in Guernsey, came back the reply. Well, close the loophole, I would say to the Government. Except that increasing the complexity of the tax system often produces fresh avenues for tax avoidance.

One can get the flavour of what is involved from a recent, somewhat plaintive Government announcement that stated it would examine whether further changes to the rules on stamp duty on high-value property transactions were needed to prevent avoidance in this area. And that in turn is why the Government is considering the introduction of a general anti-avoidance rule. In other words, the Government would be able to say to blatant tax avoiders: stop it and pay up.

As far as the supervision of banking (as opposed to bankers) is concerned, Lord Turner made two very interesting points in his speech. In the first place, he explicitly linked the imposition of stricter rules for the amount of capital and of readily available resources that banks should hold to the state of the world economy. Referring to the long debates that have taken place between international regulators and central bankers, he said that while "we want much higher capital and liquidity levels in future", it has been accepted that if they are introduced too rapidly, economic recovery is stymied.

Now that same consideration should apply to the British Government's plans to impose sharp cuts on public spending, but there are few signs that such a debate is taking place. If international regulators can be sensitive to this consideration, why cannot British policy-makers try to make the same judgment?

Lord Turner's second notable set of remarks concerned the difficult problem of dealing with banks that are judged "too big to fail". They have been given a special name – systemically important financial institutions (SIFIs). I am glad that it has been accepted that in future the taxpayer should not be on the hook to bail them out. Were one of these banks to fail in future, then all the suppliers of the firm's resources should suffer, holders of equity and loan capital alike. The trick is to make sure that this can happen while avoiding confidence and contagion effects and while maintaining crucial functions, such as lending to the real economy.

In the case of bankers' bonuses, however, Mr Hot-Under-The-Collar seems to have been pushed aside by Mr Worldly-Wise. We are told that the Chancellor of the Exchequer has no intention of imposing a new levy on bonuses or of forcing more detailed disclosure of individual payments. And of course I accept that ensuring the safety of the financial system is far more important than punishing individuals. Yet bankers did us a great wrong and we should regard them as being in disgrace for a long time to come.

a.whittamsmith@independent.co.uk

Comments