COMMENTARY: Tax evasion is more about hiding wealth than income

When I was in Panama in 1989, the place had a wild and edgy feel. Poor barrios were plastered with anti-American slogans, the rich hid in gleaming glass towers, and US troops guarded ‘their’ canal.

Later that year, tensions came to a head when the US mounted air strikes and mobilised the infantry in situ to depose the maverick General Noriega and establish a more malleable regime.

Wind the clock on to 2011: when the US Senate was debating a trade pact with Panama, the senator for Vermont, Bernie Sanders, warned the deal would make tax evasion worse.

“Panama is a world leader when it comes to allowing wealthy Americans and large corporations to evade US taxes,” he said.

Last week’s gargantuan revelations from the files of the Panama-based lawyers Mossack Fonseca show just how accurate and prescient Sanders’s speech was.

That one firm acted as registered agent for more than 200,000 companies serving as conduits to tax havens for the fabulously rich across the globe.

With David Cameron implicated through his father, people are naturally wondering what sort of wattage he had in mind when he said he would “shine a spotlight on who owns what and where the money is flowing”.

Some are claiming that industrial-scale evasion occurs because the tax system is too tough on the rich. To back this up, they select a statistic that suits the argument, namely that the top 1% of earners pay 25% of the income tax collected.

But this is disingenuous because income tax is only 26% of government revenue. They could say the income tax paid by the top 1% accounts for about 6% of government revenue, but that would not sound nearly as onerous.

The fact is the majority of government revenue comes from VAT, national insurance, council tax and various duties, which are not levied at higher rates if you are a higher earner.

That’s why, according to the Equality Trust, the bottom 10% of households pay 43% of their income in tax when the top 10% pay only 35%.

But even this is not the whole story: tax evasion is more about hiding wealth than income. A seriously rich acquaintance of mine, who doesn’t as far as I know evade tax, is fond of saying that he is paid less than the engineers and scientists he employs.

And it’s true, because what matters to him is the way their discoveries and innovations build the value of the businesses he owns. For the rich, capital gain is far more important than income, and they hate paying tax on it.

At this point, enter George Osborne. The Chancellor is a man with a plan for beating the tax havens, and its simplicity is brilliant: if you can’t beat them, join them.

While we all argue about the fairness of the salary level at which a 40p or 45p rate kicks in, George is stealthily delivering billions in ‘reliefs’ and lower rates on capital gains and corporate profits.

By last year, he had already reduced capital gains tax (CGT) and corporation tax to only 0.8% and 6.2% respectively of government revenue.

And the downward trend is continuing:  the corporation tax rate will fall to 17% by 2020, CGT is being cut from 28% to 18% and entrepreneurs relief (ER), which limits CGT to 10%, has been extended from founders who work in a business to people who simply invest in it (the already-rich who may never have been entrepreneurs).

When ER started in 2008, it applied to gains of up to £1m. Under Osborne, ER has been increased to £10m and now investors will get a separate £10m allowance – each relief being worth, compared to the old rate of CGT, £1.8 million less in tax per person.

In lost revenue, ER cost £2.7 billion in 2013-14. Presumably, the new ER (which I call investors’ relief) will be worth something similar – but the government probably doesn’t know.

The all-party Public Accounts Committee says the Treasury shows “a worrying lack of curiosity about the cost” of tax reliefs and argues they should be evaluated like spending programmes.

Osborne claims his policy is a ‘rocket booster’ for investment, but it seems at best a scattergun. There are times, as with the steel industry now, when government intervention is a better weapon – but you need tax revenues to pay for it.

Steve Howell is chief executive of Freshwater UK, the Cardiff-headquartered communications consultancy, and author of Over The Line, which is available in paperback and on Kindle/Kindle Unlimited via Amazon. Follow him on Twitter: @FromSteveHowell