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June 30, 2006

The WSJ – on Barclays and its tax trick

Filed under: Barclays, Tax avoidance — Richard Murphy @ 3:00 pm

The WSJ – on Barclays and its tax tricks

The Wall Street Journal has published an article on the tricks that a team at Barclays bank have been playing to reduce the tax bills of some of their major multinational clients. A story stub is available on the WSJ site.

The story starts as follows:

The Wall Street Journal via Dow Jones – Glenn Simpson
LONDON — At Barclays PLC, a British bank steeped in 300 years of tradition, the work of a team led by banker Roger Jenkins is far from traditional. For instance, in 2003 his team set up a company with no employees, no products and no customers — just a mailing address in Delaware and a slate of British directors, mostly employees of his office. It was co-owned by Barclays and U.S. bank Wachovia Corp.
The following year, according to documents filed in the United Kingdom, the jointly owned company had $317 million in profits. It paid U.K. taxes on them. Barclays and Wachovia were both able to claim credit for paying all of the tax.
This was one of at least nine such structures Mr. Jenkins and his team have set up involving U.S. banks, which also included Wells Fargo & Co. and Bank of America Corp. The complex transactions involve a strategy called tax arbitrage, which plays off one nation’s tax system against another to reduce the banks’ tax bills.
Barclays is the leader in this esoteric field. It collects hundreds of millions of dollars in revenue generated by Mr. Jenkins’s group. His team of lawyers and bankers has helped turn Barclays from a sleepy Main Street lender into an investment-banking power.
Critics of tax arbitrage are blunt about it. “This is just a complete and utter construct to get around the rules at both ends,” says Richard Murphy, an accountant and professor who works with a London nonprofit called Tax Justice Network and has consulted for the U.K. government on financing.

You will note I am quoted (although I should add, Glenn overstates my academic credentials). I had the privilege of working with Glenn on this story. And by work I mean work. It takes months to get such a story to publication and hours of fathoming out just what is going on when companies structure deals o this sort.

As the story says, to be effective these arrangements are supposed to have economic substance. And the banks involved claim they have, but if I was a judge deciding the issue I’d say otherwise.

What I do know is that extraordinary effort is being expended by Barclays, with extraordinary rewards being paid to undertake an activity whose main purpose appears to be to seek tax subsidy for bank finance. And I have one simple comment to make about that, which is that it makes a mockery of this claim:

Corporate Responsibility for Barclays is embodied by the concept of ‘responsible banking’. Responsible banking is an integral part of the way we do business, and a central element of our overall strategy to make Barclays one of the world’s leading banks. Responsible banking means making informed, reasoned and ethical decisions about how we conduct our business, how we treat our employees and how we behave towards our customers and clients. You can find more about our activities on these pages.


June 28, 2006

There is no Celtic Tiger

Filed under: Ireland, Tax avoidance — Richard Murphy @ 8:58 pm

OK, I’m an Irishman (after all, what did you expect with a name like Murphy?). Alright, I was brought up in the UK, but 27 million of the world’s 30 plus odd million Irish passport holders were born outside the place, but we remain Irish all the same. And unlike a lot of them I’ve run a real company in Ireland, for seven years, so I know something about its economy and its taxes. So, let me respond to Dennis Howlett’s comments on my article on the Taxpayer’s Alliance, below, from that view point.

And let me make one thing clear – there is not, and never has been a Celtic Tiger! Nor are there leprechauns, by the way, but if you believe one you might also believe the other, so I thought I’d better add that just to make sure.

So let’s look at what I said – which was to suggest that Ireland has “the intent(ion) … to undermine the income stream of other nation states”. Which I contend to be true.

What’s the evidence? Well, let’s take this from on article on Microsoft’s tax in the Wall Street Journal on 7 November 2005 (to which, I admit, I contributed quite a bit of the research, and which did quote me). It gave these stark facts (which are facts):

1. Microsoft’s subsidiary Round Island One Limited is Ireland’s biggest company;
2. It had gross profits of $9 billion in 2004;
3. It paid tax of $300 million in Ireland in 2004 – not bad in a country with about 4 million resident people;
4. In the rest of Europe Microsoft paid just $17 million of tax in 2004 – although those countries had populations exceeding 300 million.

So let’s be clear – massive profits are being declared in Ireland (by implication of the tax paid they must be at least $2.5 billion) but the domestic revenue in Ireland is vastly lower than that. And almost no profits are being reported elsewhere – including in the UK where it looks likely from Round Island One’s accounts the turnover is around the billion dollar mark (give or take). The same pattern is true, broadly speaking for Google, NCR, Oracle, Pfizer, Dell, Apple and Intel, amongst others in Ireland.

This means that Irish GDP is being massively inflated not by real economic activity being relocated there (NCR are believed to have less than 100 employees there, but book about half their world wide profits in the country) but by profits being booked there. It so happens this boosts GDP because GDP includes profits coming in – even if they then flow straight out again. And that’s true even if the profits are not generated by local labour but by patent and copyright royalties on licenses transferred from the US, which like the revenue authorities of all the European countries where Microsoft appears to have paid less than you would expect based on relative turnover, also loses out from this wholly artificial, tax driven booking of profits in Ireland.

So the evidence is clear – this is not real growth in Ireland. For that to be the case real trade would go there. But what’s actually happening is transient profits are going there from which they cream off a bit. Which is why no one else can replicate this – as it would lead to tax war, not tax competition. It explains why Ireland is a tax haven that should be denied the benefit of international tax recognition by treaty, and it’s why the Celtic Tiger is just an accounting trick, not a matter of economic substance.

If the economic miracle were based on something of such substance – like Guinness – I’d be all for it. But it isn’t. It’s a con. So please don’t buy it.

Tax professionals should know better

Filed under: Tax avoidance — Richard Murphy @ 8:27 pm

Peter Penneycard, National Director of Tax at PKF, is quoted as saying “There is a huge gap between fraud and tax planning but the Government’s attitude is that they are merely different sides of the same coin.” on Shout 99.

Well, if he really said that (and I have little doubt that he did because it looks like press release language) then he should be ashamed of himself. The reason is simple: in my opinion he must know that’s not true, and to so massively overstate his case in that way can only undermine any case he wants to make.

Let’s be clear, on a scale of 1 to 5 my recent work for Sustainability suggested you could rate attempts to not pay take like this:

1. tax compliance – seeking to claim only those allowances and reliefs obviously provided for in law;
2. tax avoidance, making tax driven decisions between incentives clearly provided by the law but where tax distorts the decision making process;
3. aggressive tax avoidance – pushing the boundaries of the law into the grey area where certainty as to its intent is unknown, legality cannot be guaranteed and artificial, tax driven structures are adopted purely to secure a tax benefit;
4. tax evasion – what happens when the boundary of aggressive tax avoidance is crossed and it turns out the planning was not within the boundaries of the law;
5. tax fraud – knowingly suppressing information to secure a tax benefit e.g. not declaring income, misrepresenting the nature of a transaction and so on.

You can play with the wording as you like – but few would disagree with the scale. And however you look at it fraud is nowhere near planning, and nor have the Revenue at any time suggested anything remotely like that. Sure, they think aggressive tax planning is so close to evasion its sometimes hard to spot the difference (and they’re right – it often is) but I happen know some of the people at the top of HMRC, and quite a few more in the echelons below them, including many who tackle aggressive tax avoidance and these people are all too familiar with the difference between avoidance and evasion, and the games the profession, lawyers, bakers and others play to disguise that thin dividing line between the two. Which justifies my opinion that Penneycard is quite straightforwardly wrong.

I hope he has the sense to comment more appropriately in future, because he does no credit to his firm by speaking in this way.

June 27, 2006

Taxpayer’s Alliance whistling in the wind

Filed under: Tax avoidance — Richard Murphy @ 8:23 pm

The Taxpayer’s Alliance and others have called for the Treasury to develop a dynamic model of taxation at the weekend. But as is so often the case when the self interested talk about tax there are a number of serious flaws in their logic.

Firstly, they are a little naïve to assume that the Treasury do not take the consequences of their decisions on the tax code into account when undertaking their economic forecasting. To the best of my knowledge they do, and in a dynamic fashion. What they might not do, however, is assume that any cuts in tax rates automatically lead to growth, which is the assumption that the Taxpayer’s Alliance are asking be built into the Treasury’s work. The absence of any sophisticated analysis suggesting that this assumption is true might explain the reluctance of the Treasury to adopt it and the very limited resources the US is willing to dedicate to investigating it.

Secondly, it is disingenuous to ask for a model dedicated to modelling dynamic impacts of taxation decision making that would only be asked to consider the possibility that tax cuts do lead to growth. Such a narrow focus is clearly inappropriate. The consequences of changes in the tax code are much wider than any implication they have for growth. Dynamic modelling should also consider questions relating to:

1. the distribution of the tax burden within our society;
2. the impact on different types of business and the long term implications of that with regard to attracting sustainable inward investment to the UK rather than transient profit flows;
3. foreign relations if the intent of any change is to undermine the income stream of other nation states as Ireland has done,
4. whether taxation will, if inappropriately used as an incentive result in the misallocation of resources by some sectors in society resulting in an overall reduction in welfare in the UK and internationally.

I would welcome dynamic modelling that addresses these issues, but that of the type requested by the Taxpayer’s Alliance appears to be a policy prescription blinkered by a failure to consider the wider implications of taxation policy, and that can be of no benefit to the Treasury, the UK or the world at large. As such, it is not a serious policy suggestion but is instead, rather like the same organisations proposals for a flat tax, a simple bit of wishful thinking.

June 23, 2006

Jersey VAT abuse

Filed under: Jersey, Tax avoidance, Uncategorized — Richard Murphy @ 10:36 am

The Forum of Private Business in the UK, inspired by a remarkable record shop owner turned campaigner Richard Allen, has been campaigning against the VAT abuse where CDs and DVDs are shipped from the UK in bulk to Jersey in the Channel Islands to be returned in separate packets the next day to UK customers, VAT free, in response to sales generated on UK websites.

They’ve now got a mass campaign of smaller record retailers together to stop this tax abuse by the larger chain stores, as this link shows.

Good luck to them I say.

It’s time the UK government stopped this. Their estimate is that this is costing the UK £200 million a year.

And it’s time the Jersey government stopped the business in its tracks, which it has said it will do, but from which it does in the meantime profit enormously since the trade generates about £6 million of profit annually for Jersey Post, which is State owned, according to internal documents I happen to have seen.

7 out of 6 in Accountancy Age

Filed under: Richard Murphy — Richard Murphy @ 10:06 am

Is it a bit vain to blow your own trumpet? Well, maybe, but I admit I was amused to find I had been featured in Accountancy Age on 7 occassions in the last six weeks.

The individual stories were (the more important ones being in bold):

Offshore evasion continues

By Alex Hawkes | accountancyage | Thu, 22 Jun 2006 |

‘Unreasonable’ penalty resistance from advisers

By Alex Hawkes | accountancyage | Thu, 15 Jun 2006 |

Flat tax ‘would hit middle Britain’

By Alex Hawkes | accountancyage | Thu, 08 Jun 2006 |

Charities press their case to IASB

By Philip Smith | accountancyage | Thu, 01 Jun 2006 |

No avoidance, by any definition

By Alex Hawkes | accountancyage | Thu, 25 May 2006 |

Not-for-profit groups launch IFRS campaign

By Paul Grant | accountancyage | Thu, 25 May 2006 |

Taxman to dole out rewards for good avoidance behaviour

By Alex Hawkes | accountancyage | Thu, 18 May 2006 |

June 19, 2006

‘Sir’ Philip Green – the rewards of tax avoidance

Filed under: Jersey, Tax avoidance, Uncategorized — Richard Murphy @ 2:25 pm

Nick Cohen wrote eloquently in the Observer yesterday about the knighthood given to Philip Green. He noted that:

“in the spring, the BBC’s Money Programme calculated that Green and his family had ‘saved themselves’ £300m from their £1.2bn salary by living for a part of the year in Monaco, whose residents don’t pay income tax.

Standing up for such paupers used to be the point of a Labour government. Even if it could not force the likes of Green to pay their fair share, it retained the power to shun them and make it clear that those who don’t contribute towards their country can’t expect their country to be grateful.

Even that modest defiance of the plutocrats is beyond Labour now. Yesterday, the Queen announced her birthday honours and high on her list was Green, who received a knighthood for ‘services to the retail industry’.

If I were in the Inland Revenue, I would fret about the moment when the little people who stupidly still pay taxes realise that the state is treating them like fools. It insists that they must hand over their earnings on pain of punishment by the courts, while inviting Philip Green to Buckingham Palace to be honoured by the Queen.

I couldn’t have put it better. I would have corrected the figure for tax saved. It was £285 million, and I know because I was the person who calculated it and presented the number on air for the Money Programme.

But there is more to it than that. First of all, let’s put Green’s side of this. He said “no tax was avoided because none was due”. An interesting argument from a retailer but which means I hope in future he does not mention the word ‘save’ when promoting his regular sales because there will be no saving over the original price during such events since that original price is not due during the sale and, therefore the comparison cannot be made. Which just shows how disengenuous is his argument about tax saving because it is obviously contrary to current usage of English.

Second though, let’s be cautious about saying Green (or, perhaps his wife) enjoyed the biggest pay day ever in UK corporate history because there was more to this deal than met the eye. It’s true Green associates (and we can put it no better than that) received a dividend of about £1.14 billion. But a closer look at their accounts might suggest that this was not a pay day, more a financial architecture day. The reason is simple. A dividend is paid out of accumulated profits. But at the end of August 2004 (its year end date) the Arcadia Group had £291 million on its P & L account. In the year to August 2005, when the dividend was paid it earned after tax profit of £185 million (all data from Arcadia Group results announcement, by the way). That gives a maximum apparent positive balance of £476 million, out of which a dividend totalling £1,299 million in all was paid.

The result was obvious. At 27 August 2005 the profit and loss account had a deficit of £820 million on it and the overall accounts showed a deficit of £807 million. Borrowings grew by over £900 million in a year, which seems to have been used almost entirely to finance the dividend. The Arcadia Group parent company, Taveta Investments Limited showed a broadly similar consolidated position.

Now, I’m not for one minute suggesting wrong doing here. But my reading of the Companies Acts says dividends can only be paid out of accumulated realised profits, and my practical interpretation of this has always been that if a dividend leaves the profit and loss account overdrawn you do, at least in theory, have a problem to deal with.

No doubt PWC (who did not mention the issue in their audit of Taveta) found good reason why this was not an issue, and I’m sure advice was taken from learned friends, so all is fine. But given that the Greens did not pay tax on this deal it looks rather more like a bit of sophisticated financial engineering to me than the UK’s biggest corporate pay day.

Oh, and as usual there is a Jersey dimension to this story. Taveta Investments Limited in the UK is owned by a company of the same name in Jersey (just to confuse things) and it is owned by two nominee companies that appear to own each other. Which makes things as clear as mud when it comes to working out what’s going on.

June 15, 2006

Jersey passes law allowing ‘sham’ trusts for use by tax evaders

Filed under: Jersey, Trusts — Richard Murphy @ 2:13 pm

I have always had a considerable problem with the concept of trusts, even as a practicing tax accountant. But I have much more of a problem with Jersey’s new trust laws passed in May 2006 which allow the creation of ‘sham’ trusts where there is in fact no such thing, but just the bogus impression of one. I have even more difficulty with this because I have no doubt that Jersey knew the new laws would facilitate tax evasion. Indeed, it is hard to see what other purpose they could have.

Let me deal with the concept first though. Trusts are an instrument normally only available in Anglo Saxon common law. Wikipedia describes a trust as:

“a relationship in which a person or entity (the trustee) holds legal title to certain property (the trust property) but is bound by a fiduciary duty to exercise that legal control for the benefit of one or more individuals or organizations (the beneficiary), who hold “beneficial” or “equitable” title”

I have simplified this slightly for clarity, but that is a fair description. To put it another way, one person says to a second “please look after this asset for me, but when doing so make sure (for example) that the income goes to this third person during their life and when they die the remaining property goes to another, fourth person”. All trusts are meant to incorporate this split of roles, responsibilities and entitlements. If they did not then there would be no need for a trust. The property would be owned absolutely by one person for their own benefit.

Why is this important? There are two reasons. First of all trusts are not registered. Unlike companies or partnerships which are either legal entities, or which if trade have to disclose their identity, if not their accounts, there is no requirement anywhere that I know of for a trust to be registered even though it is an artificial arrangement that exists only under the rule of statute law, even if the concept started in common law. So trusts are used to assist secrecy on and offshore, and especially in the latter case where nominee trustees act as trustees to hold nominee shares in companies managed by nominee directors etc., etc. As the Swiss rightly point out this means that the UK and its offshore dependencies do not need banking secrecy to achieve the benefit for clients they had to introduce banking secrecy for, Anglo Saxon common law countries achieve it through trusts. This secrecy is almost without exception harmful.

Second, and as importantly, the role of trusts in tax planning is dubious at best. Unfortunately the UK has encouraged this. For example when the EU Savings Tax Directive was introduced the entities for whom disclosure of information would have to be made did, in the opinion of the EC, include trusts. But the UK objected, saying trusts were not entities and so helped massively reduce the effectiveness of the Directive. It was not one of the UK’s prouder moments.

Now I come to my main point. Because the use of a trust can prevent disclosure of offshore interest earned under the terms of the EU Savings Tax Directive to a person’s home country of residence those seeking to avoid such disclosure have poured their cash into them. My recent research on funds held in Jersey proves this point. And, as a matter of fact the trust market in Jersey has boomed, up by 30%, for example, in 2004 according to Phil Austin, CEO of Jersey Finance. The reason is simple. There are a great many people who have money on which tax has been evaded in Jersey and elsewhere and who do not want the interest declared to their home state as that would lead to questioning on where the money on which the interest was paid came from as well as to questions about the interest itself. Using a trust prevents such questions arising and perpetuates the tax evasion.

But note what a trust is. It is something where the settlor gives the property away. This imposes a cost on the settlor. But now look at what Jersey’s doing with its new trust law. These are explained by the Jersey firm of Volaw Trust & Corporate Services Limited. Jersey will now allow the creation of what can only be called ‘sham trusts’, although they’re calling them trusts with ‘reserved powers for the settlor’. What are those reserved powers? Well, the settlor can tell the trustee what to do, which means the trustee only has a nominee role. And the settlor can claim the property back, which means that no gift of assets into trust has taken place since they clearly remain in the ownership of the settlor in that case. And, because they can be claimed back the settlor is always likely to be the beneficiary of such a trust. In other words, the settlor continues to have complete beneficial ownership of the asset and there is in fact no trust in existence at all, just a sham that suggests that there is.

In that case what is Jersey actually doing by passing this law? It is creating a situation where a person can claim they have put an asset into trust but the reality is they have done no such thing. This is a completely bogus transaction. And why would Jersey want to do this now? I have no doubt that a primary reason is to assist people who wish to avoid declaring their income under the EU Savings Tax Directive or suffer tax withholding at source, which is the alternative. Indeed, at a meeting I attended recently some very senior people in the financial services industry complained about the effort they have had to put into the process of creating such arrangements to assist those clients who had evaded funds offshore and who do not wish them to be disclosed now even though (as I suggested to them) they are assisting money laundering by doing so. These new trusts assist that objective and shoot a massive hole through Jersey’s claim to only want legitimate business in the Island.

There is only one purpose for this new law. It is to promote secrecy, and the prime use for that is to assist tax evasion.

This legislation proves that the mentality of promoting aggressive tax avoidance and even of providing shelter for outright tax evasion persists in Jersey, and is, regrettably, assisted by its government, which passes legislation of this type that facilitates such arrangements.

June 12, 2006

What is flat tax all about?

Filed under: Flat tax — Richard Murphy @ 10:15 am

The ACCA published a report they commissioned from me entitled “A flat tax for the UK? The implications of simplification” on 6 June.

The report was paid for by ACCA research funds and as such had to meet strict, objective academic research standards, including (as is essential for a professional institute) a neutral approach. But this article is not subject to those constraints, and I can therefore be more straightforward about what the evidence I uncovered when writing the report reveals.

The first conclusion I reached was that there are no “flat tax states”. Those countries that claim this title in Eastern Europe have tax systems that are nothing like the flat tax model as laid out by Alvin Rabushka and Steve Forbes in the USA, who are the main political promoters of this idea. At best they have single rate income tax, capital gains tax and corporation tax systems with all the resulting complexity that flow from retention of such structures. In fact, Russia, Lithuania and Serbia even manage multiple rates of income tax, which somewhat negates the claim to have flat tax systems.

Secondly, the tax systems that these states operate are not simple. They all retain complex rules for calculating income, the treatment of capital allowances and the consideration of capital gains. They also have a wide variety of allowances and reliefs available for ordinary citizens to claim against their personal income including, in most cases, relief for pensions, mortgage interest, education costs, home to work travel, union and other dues, charitable contributions and so on, and on (in some cases).

Next, these systems do not appear to reduce the administrative burden on the tax payer, as is claimed. In Estonia 84% of adults submit a tax return each year; in the UK it’s 16%. And in the same country details of benefits in kind supplied by an employer to their employees have to be made monthly, which makes the annual P11D routine in the UK seem like a positive panacea in comparison.

These departures from the myth that is promoted around flat taxes might have been acceptable if the claims for their economic performance had been shown to have any support. Unfortunately that was not the case either. It is widely claimed that tax revenues increase when flat taxes are introduced. No evidence was found to support this claim. Income tax revenues fell in countries introducing flat taxes if other obvious factors (such as Russia’s oil boom, the creation of which can hardly be attributed to a tax change) are taken into account. Indeed, if tax revenues did increase it was almost entirely of VAT and NIC, as was he case for example in Slovakia and Romania, where income tax revenues fell.

Nor can this increase in indirect tax be attributed to economic growth resulting from the adoption of a flat tax. Indeed, the Estonian Ministry of Finance specifically warned against making an assumption that this was possible. Their spokesman when interviewed for the report said of flat tax “it’s a tax; it’s not a medicine for the economy.”

And the IMF and Institute for Fiscal Studies did not find the rich in Russia were more tax compliant after the introduction of a flat tax, as its proponents claim they should have been. But curiously though those on low pay who actually saw flat taxes increase their tax burden in that country were more tax compliant, counter intuitively to the claims of those who propose such taxes.

Finally, although the UK’s leading exponent of flat taxes, Richard Teather of Bournemouth University claimed that his proposals for a flat for the UK would not help the rich in the UK and would only benefit the less off, my work showed that the data he used when coupled with HMRC data could not support that view. In fact, those earning less than £22,000 might save an average of about £200 a year (before NIC changes, which are likely to increase their bills based on the precedent of other flat tax states), those between about £22,000 and £74,000 would see their tax bills rise by up to £2,000 whilst those earning over £74,000 might see their tax bills reduce by over £7,000 an average. This is a clear indication that this system will favour the rich, as all other surveys in the UK and the range of data I reviewed for other countries also showed to be true.

So, the evidence failed to support any of the claims made by the flat tax lobby. In which case I have, outside the framework of the report considered what that lobby want. I conclude that they wish to promote these four things:

1. Reduced taxes for the rich
2. Increased taxes for working people
3. Reduced tax on companies
4. Reducing the role of government.

As some indication of this two quotes from Alvin Rabushka, the man who invented flat tax are illuminating. Both come from the interview with me for this research, which he consented to be published. About the redistributional effects he said:

“The only thing that really matters in your country is those 5% of the people who create the jobs that the other 95% do. The truth of the matter is a poor person never gave anyone a job, and a poor person never created a company and a poor person never built a business and an ordinary working class guy never drove economic growth and expansion and it’s the top 5% to 10% who generate the growth for the other 90% who pay the taxes to support the 40% in government. So if you don’t feed them [i.e. the 5%] and nurture them and care for them at the end of the day over the long run you’ve got all these other people who have no aspiration for anything more than, you know, having a house and a car and going to the pub. It seems to me that’s not the way you want to run a country in the long run so I think that if the price is some readjustment and maybe some people in the middle in the short run pay a little more those people are going to find their children and their grandchildren will be much better off in the long run. The distributional issue is the one everyone worries about but I think it becomes the tail that wags the whole tax reform and economic dog. If all you’re going to do is worry about overnight winners and losers in a static view of life you’re going to consign yourself to a slow stagnation.”

I think that pretty much supports my first two claims, and since the third is part of the same metric, it’s covered by the same evidence.

As for the role of government he said:

“I think we should go back to first principles and causes and ask what government should be doing and the answer is “not a whole lot”. It certainly does way too much and we could certainly get rid of a lot of it. We shouldn’t give people free money. You know, we should get rid of welfare programmes, we need to have purely private pensions and get rid of state sponsored pensions. We need private schools and private hospitals and private roads and private mail delivery and private transportation and private everything else. You know government shouldn’t be doing any of that stuff. And if it didn’t do any of that stuff it wouldn’t need all of that tax money so that’s the fundamental position and as long as you’re going to have government do all that stuff you’re going to have all those high taxes.”

As he also made clear, that then let’s you have a flat tax. But in that case what I wrote for the Guardian last year is true:

“Flat tax is not a serious attempt at taxation, but is instead an exercise in social engineering. That is why its innocent appeal is so dangerous.”

That ‘social engineering’ process is designed, as Rabushka himself say, to ‘take the tax code out of the economy’. In other words, it leaves people wholly dependent upon market forces. The consequence happens to be that politics is neutered on the way because as anyone who follows general elections knows, at the end of the day politics is about the economy. Rabushka and the right wing want to stop that. And if you don’t believe me, John Meadowcroft who writes for the Institute of Economic Affairs, a think tank Margaret Thatcher still supports, said recently when asked if he thought democracy a ‘market institution’ (when undertaking an interview on that :

“Democracies and free societies tend to go hand in hand. Having said that, democracy tends to lead to socialist policies, such as protectionism. If democracy leads to property rights and the rule of law, then yes, you need democracy. But otherwise, democracy is not a prerequisite for a market economy. Democracies tend to create very large states. In most European countries, including the UK, nearly half of GDP goes to the state. This is not good for the creation of free markets.”

Democracies tend to create very large states. In most European countries, including the UK, nearly half of GDP goes to the state. This is not good for the creation of free markets.”

It seems fair to conclude that some in the mainstream the right wing now think democracy can be sacrificed to the market, and I believe that flat tax is part of that process. Which leads to the conclusion that two writers (Hettich and Winer) have put forward that:

“it is possible to have a flat tax, or to have democracy, but not both”

I agree.

June 9, 2006

What is happening in the Isle of Man?

Filed under: Guernsey, Isle of Man, Jersey, PWC — Richard Murphy @ 2:52 pm

A curious tale is unfolding in the Isle of Man.

It passed its new tax legislation that, among other things introduces a 0% corporation tax rate, in March. Then they sent it to the UK for approval as is required as the Queen is the Lord of Mann.

In April they expected approval by the end of the month.

In May when I asked them they were confident they’d get approval by the end of May.

Now it’s June and they’re only hoping that they’ll get approval by the end of this month.

They claim this is normal, but as yet have not provided evidence to support that claim. Nor is any explanation available for the failure of their previous confidence.

Or could it be that the UK government is in fact very worried that the Isle of Man’s proposals for “look through” taxation on shareholders so that they pay the tax on the profits of the companies they own do not in fact comply with the EU Code of Conduct on Business Taxation, as I suggested last year, and with which opinion PWC concurred in January this year in a change of heart on their part when telling Guernsey not to go down this route, having previosuly told Jersey it was OK to do so?

If the new laws don’t comply with the Code it will be the UK’s job to report that fact to the EU Code of Conduct Group, whose chair happens to be Dawn Primarolo, the long serving UK Paymatser General. And that would not be fun.

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