Dodgy crusade undermines freedom

The pious war against tax dodging is much more dangerous than any schemes for evading or avoiding tax.

When individuals or corporations act to minimise their tax payments the worst that can happen is that the authorities lose billions in tax revenue. In contrast, the stakes in the sanctimonious offensive against tax dodging are much higher. By blurring the line between legal and illegal activity it threatens to undermine fundamental freedoms.

A careful examination of the discussion over the last few days illustrates the considerable dangers involved.

On 8 February the Guardian broke the story that HSBC’s Swiss banking arm had helped wealthy customers dodge taxes and conceal millions of dollars of assets. The report was based on files obtained by an international collaboration of media outlets including the Guardian, Le Monde, the BBC Panorama programme and the International Consortium of Journalists based in Washington DC.

Although the files covered the period 2005-7 it was the first time their content had been made public. Hervé Falciani, an IT expert who worked for HSBC at the time, had obtained them by hacking into customer accounts. In late 2008 he fled from Geneva to France where he was detained but not extradited by the authorities. In early 2010 the French authorities distributed a list of names based on Falciani’s data to their counterparts in several other countries.

Unfortunately the recent frenzied discussion has muddied the traditional distinction between tax evasion and tax avoidance. It used to be the case that evasion was illegal while avoidance simply meant the minimisation of tax payments by legal means. So, in a simple example, someone claiming their full entitlement of allowances would be engaging in tax avoidance. Of course, tax avoidance schemes can also be incredibly convoluted and complex.

However, in the discussion of the HSBC case the two different practices, one legal and the other illegal, were frequently jumbled. For example, Lord Fink, a former hedge fund manager and also a former co-treasurer of the Conservative party, was attacked by Ed Miliband, the Labour leader, for having undertaken “tax avoidance activities”. Lord Fink, after initially baulking at the description, went on to argue that “everyone does tax avoidance at some level”. In his original statement Miliband had called David Cameron“a dodgy Prime Minister surrounded by dodgy donors” but in a follow-up speech the opposition leader made clear he was not suggesting Lord Fink was dodgy.

The Labour leader therefore played a part in blurring the line between illegal and legal activities but the prime minister has previously done the same. Cameron’s attacks on “aggressive” tax avoidance have played a similar role. The implication of this new category is that legal activity should be outlawed.

If politicians want to make certain forms of behaviour illegal they have the power to do so. If they want to make tax rules stricter in future they can. But stigmatising legal practices and possibly even making them illegal after the fact sets a dangerous precedent. It opens the way to a substantial increase in state power and undermines the rule of law.

This article first appeared today on Fundweb.