The problem with tax havens

Despite everything you might hear, most New Zealanders mostly pay their taxes, on time and in full. We’ve got a very good compliance rate here. Somewhere between 80% and 90% of taxpayers pay their tax on time, and over 60% file their returns on time.

But some New Zealanders just don’t want to pay their taxes, including some people who are already incredibly wealthy. That’s what the Secrecy for Sale project has revealed. A team of investigative journalists from all over the world has been investigating tax havens and the people who use them. As it turns out, some New Zealanders are deeply involved in moving money around the world, for reasons of secrecy, and in order to get out of paying taxes. See: Dirty deals in paradise and Money trail leads home to New Zealand.

The problem is not just the tax revenue forgone by New Zealand and other tax jurisdictions. That’s bad enough. But the bigger problem is the attitude of people avoiding tax, especially when they are already incredibly wealthy.

What people who are using these havens are saying is that they have no interest whatsoever in participating in, or contributing to, the communities in which they live. They will take all the advantages of living in New Zealand, and not pay a penny towards them. Those advantages aren’t just the obvious things, like health, education, welfare, roads, defence, and so on. It’s things like the established and robust rule of law that this country enjoys, and the stable society, and the pleasant environment. This things haven’t come about by sheer chance: they are part of our nation because generations of New Zealanders have committed to building them. People who won’t pay their taxes free ride on other New Zealanders.

Tax avoiders not only free ride on other New Zealanders, but they undermine the whole tax system. Tax compliance is a trust game: if people think that other people comply with tax law, then they are more inclined to do so themselves. But if they think that other people are rorting the system, and not paying taxes, and squirreling money away, then they lose confidence in the system, and start to avoid paying taxes themselves. The reasoning is straightforward: who wants to be the only schmuck left. This has been precisely the problem in Greece: people routinely avoid taxes, because they think that everyone else is doing it, and so the Greek tax system has been undermined, perhaps fatally so.

The one defense that these tax avoiders might try is that their activities are perfectly legal. And precedent in tax law suggests that it is perfectly permissible to minimise your taxes to the greatest extent possible. There is a famous judgement to this effect.

Every man is entitled if he can to arrange his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure that result, then, however unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax. (IRC v Duke of Westminster [ 1936 ] AC1 (HL)).

This principle has been beaten back in recent years, in particular by laws that ask people to consider whether the tax minimisation scheme they have entered into is so artificial that instead of merely avoiding tax, the taxpayer is actively evading tax.

But even if the procedures used are legal, it’s not clear that they are ethically acceptable. This is in fact the closest I can get to understanding exactly what a rort is: it’s something that is technically legal, but nevertheless pushes the law to such an extent that it is immoral.

And it is immoral to make such a big effort to avoid paying taxes. It amounts to saying that you just don’t give a damn about anyone else, and that all you want to do is take. And take. And take some more.

We’ve heard a great deal of nasty rhetoric about people on benefits in recent years, but very little about the scungy behaviour of tax avoiders and tax evaders. But of course, it’s always much easier to attack people who don’t have any resources and any other defences.

We’ll know that the government is serious about all New Zealanders contributing fairly to the common good of our society when they start asking hard questions of their tax avoiding mates.

This entry was posted in Economics, NZ Politics, Taxation and tagged , , , . Bookmark the permalink.

18 Responses to The problem with tax havens

  1. Mark Hubbard says:

    Deborah, your entire piece is predicated on a sweeping assumption that the Left ethic of redistribution ruthlessly enforced by the state is the ‘moral position’: an ethic that many of us have come to realise has destroyed the Free West economically and philosophically, under the oppression of dependency and authoritarian rule.

    The Soviets thought they had achieved this nirvana of redistribution and welfare from cradle to grave, but it ended up costing them everything they had. In place of the common good, they got the prison of each other’s minds. In place of the caring state, they got the surveillance state to keep them all in line. You think you are preaching the caring society, you’re actually laying the groundwork for Orwell’s nightmare society.

    Many of us believe the moral position is the free, peaceful society based on laissez faire, thus minarchy: that is, voluntarism and a classical liberal individualistic ethic, where we can be masters of our own lives.

    The powers given to our IRD under the Tax Administration Act are those of the full police state, and we know what unbridled statism leads to. The sweeping away of the Westminster Principle at the hands of a judiciary now brainwashed by Gramsci at the head of our classrooms, is an abhorrent thing. Surely, as an academic, you have some type of onus to at least acquiesce to the fact there is another opposing point of view to the Keynesian Big Brother Surveillance socialism of this piece?

    As importantly, do you carry this line through in the lecture halls of Massey to your students? Or just stick to technical tax? If the former, I’m rightly appalled.

    • Deborah says:

      Technical tax, Mark. I’m very, very conscious of the need to not influence them in their thinking. I also tell them up front that I tend to be left wing in my political views, so they are aware of that about me, and can take that into account when they listen to what I say about issues such as tax avoidance and tax evasion.

  2. Mark Hubbard says:

    They’re impressionable minds that haven’t lived yet: dissembling that left ethic on issues like evasion and avoidance is dreadful. No disrespect Deborah, but you’re wrong on this. And your society is the nightmare society for people like me.

  3. Mark Hubbard says:

    Tell you what: every time you give that slant on society in your lectures, refer your students to my blog for the opposing view … put it on the white board 🙂

  4. Erik Champion says:

    Deborah, your piece is relatively politically neutral.
    Mark Hubbard, by contrast, you have used a reductio ad absurdum.
    The IRD does NOT have the full powers of a police state.
    To be on the left does not NECESSARILY equate with either the USSR – not Russia -or with Communism.
    Current Russia is as close or closer to the tax avoidance AND police state you are so scared of compared to NZ.
    Still, if you are unhappy with the current NZ Govt and their laws then vote them out.
    Further, one does not have to be on the left to believe that tax avoidance is immoral.
    Finally, learn to read Orwell a little better, his dystopic vision was about regimes of the far left OR right.

  5. Mark Hubbard says:

    Actually, and just one little thing. Obviously to keep a blog such as mine, I need to be scrupulous, as is possible within the insane mish mash of our tax laws, and conservative in my tax affairs: have no fear, I’m scared witless of what IRD can do to me, that ‘is’ my problem. Even if I had enough money to make the use of tax havens worthwhile, I wouldn’t use them: I have many priorities in life, fighting IRD through the courts is definitely not one of them: life is short. IRD reads my blog, and I meant it on my Deborah post, I’m a laissez faire hippy, the logical result of the 60’s peace and love movement: I have many valuable relationships with IRD staffers. .. Just for the record, so to speak.

  6. Pj says:

    Well as another self described Laissez faire hippy I’d just like to say I think this is a well written piece. The best bit about godsown is we can still both articulate our opinions – not something we can so easily do if we lived in more extreme left or right wing countries. My objection to the tax avoiders is the way they still use the supplied resources to promote their own selfish gains. Fiscally right to do so, yes, but so is wanting to remove them from our society…

    • Deborah says:

      Thanks, Pj. And welcome!

    • PJ, please reconcile for me this contradiction:

      Your statement: “… as another self described Laissez faire hippy …”

      And the powers of the IRD legislated to ensure your desire free men and women are sacrificed for total strangers; these powers are listed in the authoritarian government link on my rebuttal post (please excuse gender references to male, it’s the English language) – quote:

      Redistribution has required Parliament to give IRD the powers of the full police state. Despite the businessman lives his life peacefully in the community of the voluntary transaction, the state, via the IRD, treat him worse than a murder or rapist. In respect of the innocent businessman:

      The burden of proof is reversed in a tax case. He is not innocent until proven guilty, IRD can simply assess, and it’s up to him to prove them wrong. This happens in no other jurisdiction.

      Despite he has done nothing wrong, he has no right to silence, and must attend audit room 101 for any interrogation by the Big Brother state, with serious criminal charges for daring to keep his peace and wanting to be left alone.

      He must hand over all documentation the IRD wish, yet;

      To get information regarding assessments from the IRD, in return, requires him to go the tortuous and expensive path of obtaining a court order, which practically makes this impossible for SME’s.

      IRD actions up to issuing their assessments cannot be judicially reviewed; they are above the rule of law.

      From: http://lifebehindtheirondrape.blogspot.co.nz/2012/10/a-riposte-to-jacinta-aderns-privacy.html

  7. nakimuse says:

    Not quite sure what Your point is sorry. Etymology is not my forte and laissez faire to complex for my fried hippy brain. But to clarify what I mean, to exist I desire a range of services, these I believe are best provided by a mix of state and private provision to prevent tragedy of the commons and monopolies. The private providers charge me as do the state through taxes. Unless I decide to not pay either provider I do not have to worry about the room 101/court you refer to. If I choose to pay either provider less than what they charge then again room 101/court may beckon. if in the case of IRD I can not justify why I do not pay the fair assessment (fair in the sense it applies to everyone) then just like a court payment can be demanded. If I object to the stricture/structure of either private or state providers then I have the choice to leave that society (or become robin hood I guess).

    • You deal with the private providers voluntarily – you can walk away, or vountarily transact, and both parties will gain value: the state action is a theft, a call on your labour, dealt to you by force, and you cannot walk away. Right there is the line between a free man and a slave. What do you think was the ethic of the West that so many people living under tyranny risked everything in trying to escape to?

      The free market doesn’t lead to monopolies: statism is founded on a monopoly, and a monopoly that holds always a gun at your head.

      Don’t confuse our command crony capitalist economies to laissez faire capitalism based on sound money; it’s like trying to compare sea horses to horses.

      Finally, as with Deborah, you employ the notion of fairness. Examined via methodological individualism – thus courting controversy – it has no meaning in this context; for example, try answering the three scenarios I pose on this thread:

      http://lifebehindtheirondrape.blogspot.co.nz/2012/07/taxing-language-question-for-politicians.html

  8. Tony says:

    Thanks Deborah, it IS important to point out that it can be just as immoral to “work the system” to minimise your tax contribution as it is to “work the system” to maximise (or obtain) a benefit. It is a general principle of democracy that everyone should contribute towards the maintenance of a good society.

    However, there always seem to be those who do not contribute the same share as the majority. They can justify their actions with a variety of reasons be they objection in principle to taxation, disagreement with what the government has decided spend tax on or plain old selfishness. The degree to which this is important appears to be related to the amount of services funded through taxation . . . the more that is funded by tax the greater financial benefit from efforts to avoid payment of the tax (just like the greater the benefit payment, the greater the effort it is worth to get onto the benefit).

    That said, I still cannot see a solution to the problem of tax havens. That there are selfish, immoral people in this world is not news and neither is how they behave. If everyone was moral, most forms of society (socialism, capitalism, democracy, perhaps even anarchy) would probably work but this is not real world. Perhaps one measure of a good society is how well it ensures that such immoral people do not get an unfair advantage from “working the system” and by this measure, as you rightly point out, we are not doing so well.

    • Deborah says:

      Yes indeed with respect to not living in an ideal world, which leaves us with the problem of how we ensure that everyone behaves in a minimally decent manner. We can do it though carrots and sticks – rewards for good behaviour, and sanctions for bad. We’ve gotten very good at sanctions for beneficiaries, including a huge amount of social sanctions, but we don’t seem to have the same attitudes towards people who rort the tax system.

      Thanks for your comment, Tony.

  9. Taken my head out of ‘that’ book for a minute to add something I wish I had in my original reply 🙂

    You say, quote:

    ” This has been precisely the problem in Greece: people routinely avoid taxes, because they think that everyone else is doing it, and so the Greek tax system has been undermined, perhaps fatally so.”

    I disagree entirely. The ‘fatal’ aspect of Greece, and which is bankrupting the West, proper, is the size of the state, and how under mobocracy the state just keeps growing until the current tax take can’t cover it, hence governments need to borrow, so enslaving the next, and the next generation of tax slaves. This was certainly so for Greece: taking even the Greek state rail system, it had more employees than passengers. It would have been cheaper for the Greek taxpayer to simply give all passengers taxi chits. That’s insanity. Even a country can only print their way out of distorting free market forces for so long.

    Regarding statism and the inherent advantage it has over freedom, Daniel Horowitz sums that up well:

    ““We must understand that there is an imbalance of power in the political system of any democracy in that the forces of statism have an innate advantage over the defenders of freedom. It takes but one legislative or administrative victory for statism to succeed in guiding society on an indelible path towards dependency. We cannot perpetuate the free-market, but we can perpetuate statism by creating inveterate dependency constituencies. Statism enjoys the inherent advantage of self-perpetuation through its own pernicious activities that engender a continued need for the government programs.”

    (Ref: http://www.redstate.com/dhorowitz3/2012/05/17/charting-a-path-to-reauthorizing-free-markets-and-ending-statism/ )

    In the West, under your Left ethic, Deborah, unfortunately democracy has finally triumphed over economics, which has been the triumph of insanity over reality.

    Right, got that off my chest now. As you were 🙂

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s