Abhishek Majumdar: Avoiding tax avoidance and restoring confidence to the UK

Abhishek Majumdar is an Oxford graduate and sometime corporate financier who lives in London.

A Conservative Prime Minister once remarked at a party conference that he would define Conservative party policy as ‘the upholding of confidence’. The speaker was the Marquess of Salisbury, and he was speaking in 1889. Much has of course changed since then; including the Conservative party itself, but the idea of restoring and upholding confidence is still crucial, especially with regard to the current economic crisis.

Arguably the most vital task of the Conservative party in government, should it win the next election, will be to maintain investor and business confidence in the UK. Without this, the nation faces the very real and serious threat of permanent decline, as capital flies to other destinations and job creation grinds to a halt.

Bearing this is in mind, the Guardian’s latest crusade against ‘tax avoidance’ is as destructive as it is misguided. A word of caution is necessary. Nobody is accusing anybody – yet – of tax evasion, which is a crime. What is being alleged is that companies are exploiting loopholes in the law in order to pay as little tax as possible.

The Guardian is exercised over this because it has assumed that everybody has a duty to pay as much tax as possible (what is usually referred to as a ‘fair share’) to the State. The principle of private property, however, is completely ignored. If property is sacrosanct, as it should be in a sovereign democracy, then each individual or association of individuals is entitled to try and make their finances as tax-efficient as possible. This is only ‘avoidance’ if one considers, as many on the political Left do, that the redistributive affairs of State take priority over individual freedom.

Furthermore, to accuse a company – a voluntary and entirely consensual association of autonomous people – of avoiding tax is like accusing a football team of trying to score goals.

Companies are set up for the express purpose of delivering profits to their shareholders, and as such are designed to avoid any costs at all, be they taxes or otherwise.

A company cannot shoulder a tax burden in any meaningful sense because it is not a person. It will simply shift the burden somewhere else, onto human beings. Shareholders will see less profit, consumers will see higher prices and so on.

In other words it is always individuals, not faceless evil corporations, who lose out in some way. One may argue that the tax collected from these people will be put to better use than the individuals can put it to themselves. Conservatives should of course reject this argument out of hand, as it is a line of reasoning that explicitly distrusts people in favour of governments.

Companies will always seek to make profits as efficiently as possible and will look for low tax countries in which to invest. The Left, who view such countries as a nuisance, seek to use the coercive power of government to stop this from happening. Already Barack Obama has pledged to shut down tax havens. If he succeeds, this will be a straightforward victory of State muscle over individual enterprise.

There is a simple answer to all this: cut taxes. A lower and simpler tax structure attracts investment and encourages enterprise. Conservatives will be familiar with the Laffer curve, which shows that a reduction in the overall tax rate can lead to an increase in the tax take.

The argument for lower taxes is actually simpler. It is that a low tax economy is good for its own sake. The productive activities and prosperity generated benefit us all. Whether or not this leads to greater tax revenue for the State is of secondary importance.

The Institute for Fiscal Studies recently calculated that thanks to the catastrophic state of Britain’s finances £20 billion worth of fiscal tightening will be necessary to slash the national debt. This will be necessary to prevent a crisis of confidence among investors, who don’t want to be left holding the bill for a decade of disastrous economic policy.

No doubt there will be harsh measures necessary, including perhaps tax rises. But when struggling through recession, it makes no sense to unnecessarily penalise and harass business for seeking efficiency. The rational response of any company will be simply to shift its assets, investments and jobs overseas. This is a loss of confidence against which the Tory party must guard.