Tax evasion vs. tax avoidance

April 08, 2008 12:55 PM

Tax evasion is rightly a crime and honest taxpayers should not have to subsidise a criminal minority.  Equally, there are sensible measures - such as simplifying the tax system - that can be taken to reduce the extent to which people can plan their way around tax (and reduce the advantages accorded to those with expensive accountants).


However, we don't think that trying to blur the line between tax evasion (breaking the law in order to avoid paying tax) and tax avoidance (arranging your affairs, within the law, in a way that minimises your tax burden) is a good idea at all.  There are a number of reasons why, in practice and economic theory, such schemes turn out poorly whether you attempt to clamp down on anti-avoidance through a grand General Anti-Avoidance Principle or by encouraging the HMRC to become extremely aggresive (as has happened in recent years).


However, the basic problem is that the people who pay the highest price are never the rich foreigners that many on the left like to set up as bogeymen.  It is ordinary people.  Ex-cabbies starting up a business who haven't done anything wrong but are bankrupted for 88p, for example.  This morning we found this 1909 election poster from the excellent collection at the Bodleian library which illustrates the basic problem pretty beautifully:


Tax_avoidance

Tax evasion is rightly a crime and honest taxpayers should not have to subsidise a criminal minority.  Equally, there are sensible measures - such as simplifying the tax system - that can be taken to reduce the extent to which people can plan their way around tax (and reduce the advantages accorded to those with expensive accountants).


However, we don't think that trying to blur the line between tax evasion (breaking the law in order to avoid paying tax) and tax avoidance (arranging your affairs, within the law, in a way that minimises your tax burden) is a good idea at all.  There are a number of reasons why, in practice and economic theory, such schemes turn out poorly whether you attempt to clamp down on anti-avoidance through a grand General Anti-Avoidance Principle or by encouraging the HMRC to become extremely aggresive (as has happened in recent years).


However, the basic problem is that the people who pay the highest price are never the rich foreigners that many on the left like to set up as bogeymen.  It is ordinary people.  Ex-cabbies starting up a business who haven't done anything wrong but are bankrupted for 88p, for example.  This morning we found this 1909 election poster from the excellent collection at the Bodleian library which illustrates the basic problem pretty beautifully:


Tax_avoidance

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