LEADING ARTICLE : Privatising tax cuts

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The Independent Online
"Only little people pay tax." So said the American millionairess Leona Helmsley, as she defended herself, unsuccessfully, against tax evasion. Add to the little people most ordinary employees and companies with bad accountants, and Leona is probably right. Avoiding tax - legal manoeuvring to cut the tax bill - has become a British pastime for individuals as well as companies.

When Labour's transport spokeswoman Clare Short enthused this weekend about the possibility of paying more tax herself, she not only deviated from the party line, she also misjudged the public mood. Although the 1980s passion for tax cuts may have ebbed, enterprising tax avoidance is as popular as Delia Smith recipes.

In the 1990s companies, and increasingly self-employed individuals, shrug their shoulders, grudgingly accept tax levels as they are and then do their very best to find their own way round them. Tax cutting has been privatised.

Yet this fashion for tax avoidance has serious political consequences. As economists and Treasury officials search for an explanation for the unexpected shortfall in government tax revenue last year, it appears that new business strategies for avoiding tax may be a major contributor. VAT avoidance is certainly growing among both big and small companies, perhaps because the rate has risen so much over the past 17 years. But City analysts suspect that companies have increased their efforts to avoid tax across the board. Although the economy is growing, and profits are swelling, companies remain desperate to keep costs down. For responsible company executives, reducing their tax liabilities has become just another cost- cutting measure.

As for individuals, the rise of self-employment and temporary contracts combined with self-assessment means that more of them are in charge of their tax affairs and looking for ways of minimising what the state takes from them.

The consequences are troubling: governments find it harder to make future tax and spending plans, the tax burden on the little people increases and pre-election tax cuts are harder to forecast with certainty.

So what to do about it? The main problem is with highly sophisticated tax avoidance schemes run by multi-national companies. Closing loopholes and enforcing existing rules will help, but only a bit. It is proving increasingly difficult to police national frameworks of taxation in a world of multi-national companies and global capital flows.

Where companies engage in other kinds of immoral behaviour - polluting seas or mistreating workers - consumer disapproval is a potentially powerful corrective. But can you seriously imagine the British public boycotting a company that had avoided tax?

As long as we accept it is a sign of ingenuity to avoid paying tax, we must also pay the price. Only if we come to see paying tax as a duty or obligation - as many ordinary people do - will we make large-scale tax avoidance beyond the pale. What is needed is not just new rules but a new ethic of tax.