Saturday, March 03, 2012


I don't intend to write any more posts about tax for a while. However, Tim Harford makes an interesting point in this article
But few people seem to have recognised that if the entrepreneurial activity in question is avoiding tax through artificial loopholes, it might be a very good idea to generate some uncertainty and give pause for thought.
I don't agree, but an interesting comment nevertheless.


Matthias said...

I think the problem here is that, from a legal perspective, uncertainty operates differently depending on whether it benefits the individual or public institutions. Whereas reasonable uncertainty about the legal or illegal character of an action might reduce risks of legal sanction with regard to a private individual (after all, legal systems operate from the presumption that what is not prohibited to private persons is lawful), the exact opposite is true with respect to public institutions. Loosely worded regulations and unclear legal provisions do not expand the power of enforcement of the state.Rather, they grant citizens an opportunity to challenge administrative or legislative acts. Sanctions imposed by the state must be generally based on clearly worded, previously enacted legislation. In other terms, in the old liberal tradition, the state's authority can only be exercised in the strict terms of the law. The shady areas benefit individuals, not public authority (or so the theory goes...).

Of course, the issue with 'gaps' or 'loopholes' in the law is that they are always there: there is no such thing as a 'clear statute' in the abstract. Certain cases might pose easier interpretative questions, but all application of the law is potentially contentious.

Rajeev Ramachandran said...

I do agree with you that the benefit of the doubt should rest with the citizen, though I would not have put it quite so clearly.
This is why I don't agree with Tin Harford on this: as I understand it, they actually passed a law forbidding certain kinds of action, as being tax evation, and then applied the law retrospectively.
I agree with Tim Harford that spending time and money trying to avoid tax is a waste of time, and that it is a good idea to discourage this, but the surely way to do this is to keep the tax code utterly simple and get rid of all exemptions. It should be possible to do this, and also ensure adequate redistribution through straight cash transfers..

Matthias said...

I don't have a clear idea of what the UK Govt did in practice. It could be a retroactive application of substantive law (ie, creating new definitions of illicit behavior), but it could also be retroactive procedural rules (ie, modifying procedural rules to the effect that loopholes used in the past become more difficult to exploit today), or it could be simply modified interpretative arrangements (ie, memoranda to administration authorities clarifying the operational interpretation of some fuzzy concept in the law).

The thing that shocked the government into action, however, was disrespect for a 'a “code of practice” politicians had put forward as one of many bizarre attempts to reduce the political liability of banks’ behaviour without using the power of the law', according to the FT editorial. So it would seem that faced with the unwillingness of Barclay's to comply with soft rules, the government decided to go for hard rules. Once again, it is not clear whether this involves actual legislation, or just technical arrangements around how rules are to be applied in practice.

Finally, the issue of simplifying tax law is certainly helpful, but the point is that whatever the law is, there will still be an army of lawyers ready to assist business to structure their organizations in ways that reduce fiscal liability. Not sure that uncertainty would help the state tax more effectively, so I also disagree with Tim Hartford. But I don't think that reducing uncertainty -- including through simplified laws -- will improve efficiency of taxation either.