3.2.4.4 Tax Avoidance, Exemptions and Evasion

(This is a current page, from the Patterns of Power Edition 3 book contents.  An archived copy of this page is held at http://www.patternsofpower.org/edition03/3244.htm)

A government can grant legal exemptions to allow specific individuals or activities not to pay some taxes.  This is one of the ways in which politicians can use their economic powers for political purposes, as discussed later (3.3.7); it complicates the tax code and increases administration costs.

People don’t like paying tax.  The term ‘tax evasion’ is used to describe illegal withholding of tax payments, for example by failing to declare income or assets.  The authorities can use the law to prosecute tax evaders.

Individuals may wish to opt out of an element of tax payment because they disagree with the use to which the money is being put.  This may seem to be a principled stance for someone to take, but it is both illegal and undemocratic.  The government cannot usually compensate by reducing its spend: if pacifists withhold the amount of tax they think that they are contributing to the defence budget, for example, the government cannot cut defence spending accordingly without reducing the protection offered to the rest of the population.

There are several legal ways for people and organisations to reduce the amount of tax they pay.  The term ‘tax avoidance’ is used for aggressive, but legal, ways of dodging the payment – by exploiting loopholes in the tax codes, or by shifting money around to reduce the tax liability.  There is a lot of evidence of such practices:

  • According to a 2015 report,[1] “Multinational corpora­tions’ use of tax havens allows them to avoid an estimated $90 billion in federal income taxes each year.” Solutions have been proposed for this problem, requiring increased transparency and international cooperation.[2]
  • Ugland House, in the Cayman Islands, is a modest-sized building that “serves as the registered address for 18,857 companies” which pay no tax on profitsclaimed there and which do not need any physical presence there other than the postbox.[3]
  • The report highlighted the financial sector: “The 30 companies with the most money held offshore… — all large financial institutions that received taxpayer bailouts in 2008 — disclose a combined 412 subsidiaries in tax havens”.[4]
  • A BBC report, entitled Starbucks, Google and Amazon grilled over tax avoidance, revealed how these (and other) multinational corporations have avoided paying tax in the countries where they earned their profits.
  • As revealed in the Panama Papers, many prominent politicians, including national leaders such as President Putin, have hidden wealth in offshore tax havens.[5]

Corporations which reduce their tax liabilities by aggressive (but legal) tax avoidance can reasonably argue that they have an obligation to act in their shareholders’ interests.  The onus therefore falls on politicians to close these tax loopholes in the interests of society as a whole.

The impact of all these mechanisms of avoiding the payment of tax, whether illegal or not, is that everybody else has to pay more.

© PatternsofPower.org, 2014

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[1] The U.S.  Public Interest Research Group Education Fund (U.S.  PIRG Education Fund) and Citizens for Tax Justice (CTJ) jointly produced a report entitled Offshore Shell Games 2015: The Use of Offshore Tax Havens by Fortune 500 Companies; it was available in March 2018 at http://www.uspirg.org/sites/pirg/files/reports/USP%20ShellGames%20Oct15%201.3.pdf.  The report identifies companies and their tax havens, noting that “as of 2014, 358 of Fortune 500 companies — nearly three-quarters — disclose subsidiaries in offshore tax havens, indicating how pervasive tax haven use is among large companies”.  It mentions that “Apple …would owe $59.2 billion in U.S.  taxes if these profits were not officially held offshore for tax purposes”.

[2] A paper by Joseph Stiglitz and Mark Pieth, entitled Overcoming the Shadow Economy, was published in November 2016 and was available in March 2018 at http://www.momentofiscal.com/leyes/Stiglitz-and-Pieth-Overcoming-the-Shadow-Economy.pdf.

[3] Offshore Shell Games 2015, as cited above; p 4.

[4] Offshore Shell Games 2015, as cited above; p 7.

[5] The Panama Papers are an unprecedented leak of 11.5m files from the database of the world’s fourth biggest offshore law firm, Mossack Fonseca.  They reveal that several national leaders, including Russia’s President Putin, have hidden wealth overseas.  The Guardian published a report, entitled What are the Panama Papers?, on 5 April 2016; it was available in March 2018 at http://www.theguardian.com/news/2016/apr/03/what-you-need-to-know-about-the-panama-papers.