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May 31, 2013

We love paying taxes

I recently had a "heated debate" with my mother-in-law about tax – she said it was immoral for Google, Starbucks and Amazon to get away without paying their fair share of corporate tax. I countered by saying that they were not necessarily the bad guys here as they were just doing what anyone would do if they knew how to get round UK tax laws. She observed that most people could not afford to employ the best accountants who were able to negotiate the law so skilfully – while I agreed with this point, I suggested that it was the fault of our politicians lagging behind these companies and that the UK Government has a duty to act in a way that encourages investment to support the country not discourages the payment of tax to its detriment. On this final point, we agreed.

No doubt this debate is happening all over the UK and beyond, as tax becomes the latest battleground for mobilising public opinion. My concern is that the moral high-ground is starting to look a lot more appealing to the public than the pragmatic landscape we should all be occupying instead.

The executive chairman of Google Eric Schmidt recently responded to UK Opposition Leader Ed Miliband’s observation that Google was wrong to go to such lengths to avoid paying taxes by saying that: "…I don’t think companies should decide what tax policies should be. I think governments should…"

Tax is not an economic phenomenon – it has always been one of behavioural science, of sticks and carrots, and is supposed to embody Government policy as a way of raising necessary revenue for public gain. There is too much of a disconnect between Government and companies in terms of what paying tax can actually do for a company and how it can benefit the country it decides to invest in. Film tax relief schemes, while in the news for the wrong reasons in recent months, are a good example of this, and we need more of these things to encourage companies to pay tax – why else would they voluntarily pay more tax than they have to? This is why we need to remain pragmatic about tax policy both here and, crucially, across the world.

Disconnect between Government and companies can be seen in many ways – public sector vs private sector jobs, superannuation schemes vs pension contributions, redeployment vs redundancy – the list goes on. A casual observation recently led me to some interesting statistics – Barack Obama is paid US$400,000 p.a., which is around double the £142,000 ($215,722) p.a. that David Cameron earns, while Angela Merkel earns a little more than our boy at just over €200,000 p.a. This is roughly the same as France’s former PM Nicolas Sarkozy earned before he was voted out (curiously, the current French premier Francois Hollande reduced this salary by 30% on his first day in the job – talk about taking the moral high-ground when you were elected on an anti-sleaze ticket but within 6 months had lost your own budget minister to a scandal about offshore tax havens).

Contrast this with the recent published pay of the men in charge of our tax dodging buddies in the USA – in 2011 Amazon CEO and executive chairman Jeff Bezos earned a salary of US$81,840 plus other compensation of US$1.6m; in the same year Google paid Eric Schmidt a salary of US$937,500 plus US$100m in other compensation while Starbucks founder, chairman, president and CEO Howard Schultz was paid a salary of US$1,382,692 in 2011 plus other compensation of just under US$15m. To put this in some kind of transatlantic context, M&S (whose own tax arrangements are currently under some scrutiny) paid their CEO Marc Bolland £975,000 in 2012, plus up to £4.2m as part of a bonus and recruitment scheme.

I know that their time as politicians is brief, and that they will make fortunes from books and speeches in later life, but to me these sums suggest that the people in business who are currently prospering perhaps should be in Government instead.

I know it’s dangerous to just throw money at the problem but it’s also worth pointing out that these guys are evidently a bit better at getting results than our politicians and we are all losing out as a result – the most recent IMF observations about the UK economy are hardly a ringing endorsement and merely accentuate the need for some fresh ideas to get things moving again.

There are some signs of a recovery, both in the wider economy and in terms of tax policy – the UK Government recently advised blocking Big Four firms from advising HMRC as they are using this experience to advise their own clients on how to avoid paying more tax. However, I still think that more needs to be done to encourage business to come back to the UK: suggesting a tax on bankers’ bonuses, while politically popular, is very short-sighted and misses the point. We need another idea to create wealth, not stifle investment, and tax is not the solution to this problem.

Perhaps the answer is online – anyone know of a good search engine?

Steve’s previous blog postWhen is a film not a film?

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