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The Peace Party of the United Kingdom

Tax, Austerity and Tax Evasion

THERE are few things more galling to those of us who punctiliously pay our taxes fully and by the due date than the fact that there are others who do not. There are greater injustices in the world, but this one strikes at our sense of fairness. While we may baulk at the amount of tax – of ‘our money’ – that the government ‘takes from us’, and cavil at the uses to which it is put, nevertheless we pay up. It’s part of our ‘social contract’: we all have to pay tax.

If the tax evaders then turn out to be financially rich, well able to pay their taxes without hardship of any kind, and if, on top of that they have used the power that comes from excessive wealth to enable them to evade their tax obligations, our sense of injustice is compounded. Socialists and non-socialists alike (most of them anyway) see at least some merit in the maxim, ‘from each according to means, to each according to needs’. We are willing to pay our share of the tax burden, we will say, so that the poor and the needy can be given a helping hand, but we rebel against the idea of contributing to the share owed by those who are much better off than we are.

And, indeed, there is, or should be, a social contract (albeit unwritten), and any failure of the rich and powerful to abide by its supposed terms is rightly deplored. There must not be one law for the rich but another for everyone else. Natural justice demands that they be pursued – and not less vigorously than the poor are pursued for alleged benefits fraud, since with greater power should come greater responsibility. To excuse their wrong-doing, to ‘negotiate’ with them as HMRC says it has done (in a recent case), on the pragmatic grounds that this is more cost-effective, completely misses the point. HMRC doesn’t negotiate with me – it simply demands that I pay what it says I should pay. And the benefits agencies do not negotiate with ‘job-seekers’ as to whether they should attend job interviews, even when it’s patently obvious that a potential job is unsuitable.

And yet, and yet…

By focusing on tax evasion we may be implicitly condoning a vastly greater fraud. We are giving credence to a myth that perverts our whole economic system – the myth that taxation pays for public expenditure. As the eminent economist Warren Mosler and many others have shown this is simply untrue. And it has dire consequences.

This is not to suggest that tax should not be paid: it has regulatory functions that may be legitimate and valid. But it does not pay for public expenditure, and it follows that non-payment of tax does not, of itself, reduce the funds that are available for paying unemployment benefits or building hospitals. Neither does the failure of the rich to pay their taxes, of itself, increase the tax burden on the rest of us.

For most people this comes as a bit of a shock. We have been told so many times that tax pays for public expenditure, and it seems intuitively obvious. But it is simply not true. See, for example, Warren Mosler’s book, ‘The 7 Deadly Innocent Frauds of Economic Policy’ where this and other issues are explained more fully, as well the Peace Party’s paper In Search of a Rational Economic Policy (available on request). If you’re still not convinced please follow up some of the references in the latter. There are many interwoven myths and it’s impossible to deal with them all in a few sentences – and at present we have other fish to fry.

However, here’s the catch. The fact that practically everyone, probably including the government, believes that taxation does pay for government expenditure, means that in effect it might just as well do so. A government that believes that taxation finances public expenditure, will not willingly spend more than it can raise from taxation. So the failure of the rich to pay their taxes will reduce the funds wrongly thought to be available, effectively, albeit unnecessarily, increasing the burden on everyone else.

What’s to be done then? Should we say that since taxation doesn’t pay for government expenditure it doesn’t matter whether the rich pay their taxes or not, or should we acknowledge that as a matter of misguided policy the government will only spend what it can raise from taxation and therefore the rich must pay their share, along with everyone else? Clearly it has to be the second – as a simple matter of justice. But we need to be aware that in doing so we are inevitably reinforcing the mistaken belief that there is a direct link between taxation and spending, and that this belief has disastrous consequences – the most obvious of which is austerity.

And here the circular nature of all this starts to become apparent. We started off talking about an evident injustice – the failure of many of the rich to pay their taxes, and slowly but surely we have found our way to the much more important issue, austerity. In doing so we seem to have shown that by attacking one injustice, tax evasion, we are inadvertently and implicitly supporting another, austerity.

For just as the belief that taxation is the source of funds for public expenditure, is essentially just homespun folk-lore with no basis in economic reality, so also is the assumption that austerity is an appropriate policy response to an economic recession. The reverse is in fact the case – austerity both prolongs and worsens the recession. (So, incidentally, would increasing taxation, the other Pavlovian response to a recession.) The government points to a minute ‘recovery’ to justify its policy of book-balancing and austerity, but in fact an economy will always, given time, tend to recover to some extent, and the current recovery is one of the slowest on record. Meanwhile austerity penalises the poor, not the rich.

So there we are. We should recognise – and attempt to deal with – the injustice of tax evasion, particularly by the rich and super-rich, but in focusing too much on the issue there is a danger that we will be distracted from the much more important issues, in particular austerity. Yes, the system is corrupt – of course it is! Wealth brings power and power corrupts. What do we expect?

George Osborne can score some Brownie points by going after some wealthy tax-dodgers, but it doesn’t change anything. They won’t care (even though they’ll complain) because they’ll still be outlandishly rich, and it won’t do anything for the economy or for the poor as the tax they are dodging won’t get redistributed. Yes, Caroline Lucas is right to attempt to close the loop-holes that allow the super-super rich to avoid taxes, but let’s not kid ourselves that this will change anything.

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