tag:theconversation.com,2011:/id/topics/tax-loopholes-14083/articlesTax Loopholes – The Conversation2016-10-05T15:22:43Ztag:theconversation.com,2011:article/664892016-10-05T15:22:43Z2016-10-05T15:22:43ZWhat the Trump Foundation controversies reveal about the candidate and his business acumen<p>A surprising feature at the forefront of this year’s presidential election has been the <a href="https://www.philanthropy.com/article/Charity-Becomes-Hot-Election/237932?cid=cpfd_home">philanthropic endeavors of the candidates</a>. </p>
<p>The <a href="https://theconversation.com/what-do-the-clinton-charities-actually-do-and-where-does-their-money-go-65287">scrutiny of the Clinton Foundation</a> is understandable given its large scale and worldwide focus. The attention surrounding Donald Trump’s charitable endeavors comes from different reasons: primarily a desire to examine <a href="http://bigstory.ap.org/article/436328daf9ef488fb334159df5e3192b/proof-trumps-charity-giving-elusive">his much-touted largesse</a> and the rare public availability of financial statements that offer a window into his management approach. </p>
<p>Unlike Trump’s personal finances, piercing the veil surrounding his philanthropic activities has been more successful, in large part thanks to the <a href="https://www.washingtonpost.com/people/david-a-fahrenthold/">one-person muckraking operation</a> of the Washington Post’s David Fahrenthold. The reporting by him and others has followed three trajectories in questioning Trump’s charitable giving and his foundation: assessing its scale, examining funding sources and following the money. The critical coverage led <a href="http://www.politico.com/story/2016/09/new-york-attorney-general-opens-inquiry-into-trump-foundation-228125">the attorney general in Trump’s home state to open an inquiry</a> and even <a href="http://www.nytimes.com/2016/10/04/us/politics/trump-foundation-money.html">put a halt to fundraising in New York</a>. It’s also sown a lot of confusion about what it’s all about. </p>
<p>Relying on our experience with the accounting and regulatory rules for nonprofits, we’d like to clarify the Trump charity controversies and explain their potential significance. </p>
<h2>How much does Trump actually give away?</h2>
<p>The controversies surrounding Trump’s philanthropy begin with his <a href="http://bigstory.ap.org/article/436328daf9ef488fb334159df5e3192b/proof-trumps-charity-giving-elusive">repeated claims</a> that he has been very charitable, giving more than US$100 million over the past five years. </p>
<p>To verify the scale of Trump’s giving, the natural starting point is to look at the private foundation he established, the <a href="https://projects.propublica.org/nonprofits/organizations/133404773">Donald J. Trump Foundation</a>. </p>
<p>Private foundations are charities typically established by wealthy individuals or families to coordinate their own personal giving. What is immediately apparent from Trump’s private foundation is that its size pales in comparison to those of other wealthy philanthropists. </p>
<p>The Trump Foundation had <a href="https://projects.propublica.org/nonprofits/organizations/133404773">expenses of $5.3 million</a> from 2010 to 2014. That may seem like a lot, but the Clinton family’s private foundation <a href="https://projects.propublica.org/nonprofits/organizations/300048438">spent nearly twice as much in the same time frame</a>, despite the Clintons having a <a href="http://moneynation.com/hillary-clinton-net-worth/">fraction</a> of Trump’s reported wealth. And Trump’s foundation looks even smaller when compared with <a href="http://countingoncharity.blogspot.com/2016/06/observations-from-financials-of-donald.html">other wealthy philanthropists</a> such as Michael Bloomberg’s family foundation, which spent <a href="https://projects.propublica.org/nonprofits/organizations/205602483">$279 million in 2014 alone</a>. The foundations’ assets tell a similar story.</p>
<p>The <a href="http://www.nytimes.com/2016/10/02/us/politics/donald-trump-taxes.html?_r=0">recent revelation</a> that a nearly $1 billion loss carryover in the 1990s likely allowed Trump to avoid paying federal income taxes for many years suggests that his foundation’s small size may be due in part to the absence of any tax benefits of such giving. In other words, since one of the incentives for charitable giving is the tax write-off, Trump would have had one less reason to give his own money away. </p>
<p>In any case, the foundation’s relatively small footprint led the Washington Post’s <a href="https://www.washingtonpost.com/graphics/politics/2016-election/trump-charity-donations/">Fahrenthold to look elsewhere</a> for evidence of Trump’s personal giving. After relentlessly calling charities with some affiliation to Trump, he ran into many “no comment” responses but found only <a href="https://www.washingtonpost.com/politics/trump-promised-millions-to-charity-we-found-less-than-10000-over-7-years/2016/06/28/cbab5d1a-37dd-11e6-8f7c-d4c723a2becb_story.html?tid=a_inl">one example</a> of a cash gift (less than $10,000) during the period from 2008 to the launch of his campaign.</p>
<p>Instead, much of Trump’s charity has come from his companies in the form of free rounds of golf or other in-kind gifts such as, most notably, conservation easements. <a href="http://epubs.utah.edu/index.php/jlrel/article/viewFile/1149/839">Conservation easements</a> are commitments to set aside land with certain limits on development. Trump companies <a href="https://www.washingtonpost.com/politics/a-portrait-of-trump-the-donor-free-rounds-of-golf-but-no-personal-cash/2016/04/10/373b9b92-fb40-11e5-9140-e61d062438bb_story.html">have reportedly given over $60 million worth</a> of such easements over the years. But that’s hardly the same thing as giving away cash, and Trump continues to make money on at least some of those properties. </p>
<p>The search for Trump’s charitable largesse is far from conclusive given his tax returns remain unreleased, but the results so far suggest he has overstated his magnanimity. <a href="https://www.washingtonpost.com/news/post-politics/wp/2016/09/13/trumps-campaign-manager-just-said-the-donald-j-trump-foundation-is-his-money-no/">Efforts by campaign aides</a> to back up his claims are actually what led to a second area of controversy for his foundation.</p>
<h2>Whose money is it?</h2>
<p>Unlike most private foundations, the funding of Trump’s own charity doesn’t actually come from the candidate himself – at least not in recent years.</p>
<p>Over the last decade, the Trump Foundation <a href="https://www.washingtonpost.com/news/post-politics/wp/2016/09/13/trumps-campaign-manager-just-said-the-donald-j-trump-foundation-is-his-money-no/">has largely relied on donations from others</a> to support its giving. In fact, since 2008, <a href="https://www.washingtonpost.com/news/post-politics/wp/2016/08/26/donald-trump-has-now-given-more-to-charity-in-the-last-four-months-than-in-the-previous-10-years-combined/">no money flowing into the foundation</a> came from the candidate himself. </p>
<p>His supporters argue that many of the donors owed Trump money and were allowed to relieve the obligation by giving to the foundation instead. And for that reason, the donations should be viewed as the candidate’s. The Washington Post <a href="https://www.washingtonpost.com/politics/trump-directed-23-million-owed-to-him-to-his-charity-instead/2016/09/26/7a9e9fac-8352-11e6-ac72-a29979381495_story.html">reported</a> that about $2.3 million was donated this way.</p>
<p>This claim, however, has the potential to create tax problems for Trump. The assignment of income doctrine states that for tax purposes a person who directs amounts owed to him to another entity must reflect both the income and use of the funds on his personal tax return. <a href="http://prawfsblawg.blogs.com/files/the-tax-consequences-of-catalyzed-fans.pdf">Directing money to a charity</a> does not avoid the assignment of income problem.</p>
<p>Because the Trump Foundation listed the payers of these amounts as its donors, many have questioned <a href="https://www.washingtonpost.com/politics/trump-directed-23-million-owed-to-him-to-his-charity-instead/2016/09/26/7a9e9fac-8352-11e6-ac72-a29979381495_story.html">whether Trump properly claimed the income on his returns</a>. While one may conclude it doesn’t matter because offsetting the income with the charitable contribution deduction should end in a wash, there are limits to the deduction and other categories of taxes are not offset by the deduction (Medicare, for instance). </p>
<p>Though the tax consequence of improper treatment of assigned income is unclear, the issue only adds to the case for releasing his tax returns. If his returns do reveal improper treatment, the <a href="https://surlysubgroup.com/2016/10/03/trumps-abuse-of-trump-foundation-criminal-tax-implications/">consequences would most likely be</a> that Trump would owe penalties and interest. But they could also include <a href="https://surlysubgroup.com/2016/10/03/trumps-abuse-of-trump-foundation-criminal-tax-implications/">criminal penalties</a> if he knowingly violated tax law.</p>
<p>A final controversy involving the foundation’s funding sources largely revolves around the impromptu fundraiser for veterans that Trump organized in Iowa during the presidential primary. </p>
<p><a href="https://www.washingtonpost.com/politics/trump-foundation-lacks-the-certification-required-for-charities-that-solicit-money/2016/09/29/7dac6a68-8658-11e6-ac72-a29979381495_story.html">Recent news reports claim</a> that the Trump Foundation conducted fundraising without proper registration, leading the New York attorney general to <a href="http://time.com/4516803/donald-trump-foundation-new-york-attorney-general/">issue a cease-and-desist order</a>. </p>
<p>However, improper solicitation registration turns out to be a <a href="http://tonymartignetti.com/2011/02/published-in-paper-charity-registration-compliance/">somewhat common occurrence</a> (in fact, the Clinton Foundation too has made <a href="http://www.wsj.com/articles/clinton-foundation-amends-its-filing-with-new-york-1475623675">registration mistakes</a>). As such, absent other improprieties, such mistakes are often overlooked. Assuming this money is delivered to veterans organizations as promised, the violation seems to be primarily a foot fault.</p>
<h2>How is the money being used</h2>
<p>While the source of funds has received the most attention in recent weeks, it is their use that may actually be the most damaging. Congress subjects private foundations to strict rules by <a href="https://www.irs.gov/charities-non-profits/private-foundations/private-foundation-excise-taxes">imposing excise taxes</a> on certain improper use of charitable funds. </p>
<p>As Fahrenthold’s investigations have discovered, Trump’s grants risk being viewed as serving improper political or personal ends. For example, the foundation <a href="https://www.washingtonpost.com/news/post-politics/wp/2016/09/01/trump-pays-irs-a-penalty-for-his-foundation-violating-rules-with-gift-to-florida-attorney-general/">made a prohibited payment</a> to a political group affiliated with Florida Attorney General Pam Bondi. Around the same time, Bondi’s office declined to pursue an investigation into Trump University, <a href="http://www.cnn.com/2016/06/10/politics/pam-bondi-donald-trump-donation/">raising allegations</a> of a connection. </p>
<p>The foundation defended the payment as a mistake, and Trump personally reimbursed the funds and <a href="https://www.washingtonpost.com/news/post-politics/wp/2016/09/01/trump-pays-irs-a-penalty-for-his-foundation-violating-rules-with-gift-to-florida-attorney-general/">paid a $2,500 tax</a> to the IRS for violating the prohibition on political expenditures. It is <a href="https://surlysubgroup.com/2016/09/06/trump-foundation-pays-2500-political-expenditure-excise-tax-is-that-enough/">not clear that the foundation has done all things</a> necessary to correct this transaction. </p>
<p>The foundation flirted with political campaign violations again this year when it <a href="http://www.thedailybeast.com/articles/2016/08/08/watchdog-group-files-complaint-with-irs-against-trump-foundation.html">made payments to veterans charities</a> at Donald Trump for President political rallies. It allowed the campaign to present large foundation checks emblazoned with the political campaign motto “Make America Great Again.” Since political activity by charities <a href="https://www.irs.gov/charities-non-profits/charitable-organizations/the-restriction-of-political-campaign-intervention-by-section-501-c-3-tax-exempt-organizations">is prohibited</a>, the foundation put its exempt status with the IRS at substantial risk.</p>
<p>A second source of spending controversies surrounds the issue of <a href="https://www.irs.gov/charities-non-profits/private-foundations/taxes-on-self-dealing-private-foundations">self-dealing</a>. Private foundations are prohibited from engaging in activities that are for the benefit of their founder or other “disqualified persons,” such as directors and officers.</p>
<p>The most public of these are the instances in which the foundation purchased items at charity auctions, such as <a href="https://www.washingtonpost.com/news/post-politics/wp/2016/07/01/donald-trump-used-money-donated-for-charity-to-buy-himself-a-tim-tebow-signed-football-helmet/">an autographed Tim Tebow football helmet</a> and <a href="https://www.washingtonpost.com/news/post-politics/wp/2016/09/27/trump-is-actually-doing-his-foundation-a-favor-by-storing-its-portrait-his-golf-resort-wall-his-adviser-says/">two separate paintings of Trump himself</a> (one of which is on display in a Trump-owned resort). The acquisition of the paintings is not per se problematic, but using the paintings in Trump private businesses is. Perhaps even more concerning is that the foundation <a href="https://www.washingtonpost.com/politics/trump-used-258000-from-his-charity-to-settle-legal-problems/2016/09/20/adc88f9c-7d11-11e6-ac8e-cf8e0dd91dc7_story.html">made payments of over $250,000</a> to charities in order to settle private lawsuits of Trump businesses. </p>
<p>If the IRS were to audit the foundation it could determine that these acts are taxable self-dealing transactions. <a href="https://surlysubgroup.com/2016/10/03/trumps-abuse-of-trump-foundation-criminal-tax-implications/">The legal consequence</a> would be that either Trump would owe a 10 percent self-dealing excise tax on the total amount of these transactions, or, more significantly, the foundation could lose its exempt status if it is determined they constitute a significant pattern of self dealing.</p>
<h2>Full disclosure?</h2>
<p>While there are certainly legal and compliance questions that surround these controversies, the arguably larger issue is their consequence for the public perception of the candidate himself. </p>
<p>Charities are normally viewed as behaving in good faith until there is strong evidence otherwise. The glue that holds this social contract together is the disclosure requirement: As part of their accountability, charities generally must make their <a href="https://www.irs.gov/charities-non-profits/annual-reporting-and-filing">financial statements</a> available to the public for review. </p>
<p>It is this <a href="https://projects.propublica.org/nonprofits/organizations/133404773">feature</a> that has given the public a glimpse of the activities of the candidate. Barring a full release of his tax returns, this glimpse may be all the public has on which to gauge his business acumen as well. </p>
<p>For this reason, the controversies surrounding the campaign of Donald Trump are unlikely to go away in the last weeks of this campaign.</p><img src="https://counter.theconversation.com/content/66489/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Philip Hackney is a registered Democrat. </span></em></p><p class="fine-print"><em><span>Brian Mittendorf is a registered Democrat.</span></em></p>The Trump Foundation has received lots of scrutiny in recent months questioning how much the candidate gives, where the charity’s money comes from and how it’s used. Here’s what we know so far.Philip Hackney, James E. & Betty M. Phillips Associate Professor of Law, Louisiana State University Brian Mittendorf, Fisher College of Business Distinguished Professor of Accounting, The Ohio State UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/418872015-05-20T20:06:15Z2015-05-20T20:06:15ZClose look at tax avoidance laws shows they lack teeth<p>Treasurer Joe Hockey’s budget promise last week to “stop multinationals using complex schemes to escape paying tax” suggested a comprehensive regime to address tax avoidance by companies such as Apple, Google and Microsoft, as well as BHP and Rio Tinto. </p>
<p>All these five companies appeared before the recent Senate Committee hearings on corporate tax avoidance.</p>
<p>However, a close look at the draft legislation suggests that the proposal is far from comprehensive. It is a step in the right direction - but possibly not a big enough step. Out of the five multi-nationals mentioned above, only two – Google and Microsoft – are likely to be covered by the proposal. Even for these two companies, it is doubtful if the proposal is powerful enough to be an effective weapon for the Australian Taxation Office to challenge their tax avoidance structures. </p>
<h2>The proposal</h2>
<p>In broad terms, the proposed law will apply if a number of conditions are satisfied. It is important to summarise the key conditions here to highlight the limitations of the proposal. First, a foreign multinational – with an annual global revenue of more than A$1 billion – derives income from sales made to Australian customers. Second, it avoids booking the sales income in Australia. Third, the profits generated from the sales are subject to low corporate tax rate overseas. Fourth, the structure is designed with a “principal purpose” of avoiding Australian income tax.</p>
<h2>Limited targets</h2>
<p>The conditions imposed by the proposal dictates that many multinationals that are engaging in tax avoidance structures are not covered. For a start, the proposal will apply only to foreign multinationals. Local multinationals are immune from the anti-avoidance rule. This is despite the fact that recent news reports as well as the Senate Committee enquiry on corporate tax avoidance have revealed that major domestic multinationals – such as BHP and Rio Tinto – have been shifting profits to their marketing hubs in Singapore.</p>
<p>Many foreign multinationals will also be immune from the proposal. For example, it is unlikely that Apple will be subject to the proposed law. Its tax structure does not rely on avoiding booking sales income in Australia, which is one of the key conditions before the proposed anti-avoidance law will apply. In fact, Apple does book its sales income in Australia, but shifts over 90% of the sales income to Ireland through intra-group sales.</p>
<p>The limited scope of the proposed law also means that it is unlikely to be effective to deal with new tax avoidance structures that inevitably will be invented by multinationals and their highly adept tax advisors.</p>
<h2>Will the proposal be effective to its intended targets?</h2>
<p>It is also doubtful whether it will be a very effective weapon to allow the ATO to challenge tax avoidance structures of companies such as Google and Microsoft. </p>
<p>A key test to satisfy before the proposal law can apply is that in general a “principal purpose” of the structure is to avoid income tax. This is an untested concept in Australian income tax law. It may eventually be subject to interpretation of the courts. However, some lessons may be learnt from the experience of the existing general anti-avoidance rule in the tax law, known as Part IVA.</p>
<p>In an internal ATO document disclosed under Freedom of Information Act and revealed in the Senate Committee enquiry on corporate tax avoidance, the ATO admitted that the Part IVA is unlikely to be effective to deal with most tax avoidance structures of multinationals. The main reason for this shortcoming is that Part IVA will not apply unless in general the ATO can prove that the “sole or dominant purpose” of a tax structure is for a tax benefit.</p>
<p>In practice, it is very difficult for the ATO to substantiate that the “dominant purpose” of a complex tax avoidance corporate structure is for tax avoidance. Multinationals often have substantial resources to engage industry experts and tax lawyers to argue that the structure is driven primarily by commercial reasons, and tax benefit is merely an incidental consequence. </p>
<p>Information asymmetry often dictates that the ATO lacks full information about multinationals and their tax avoidance structures. This issue further tilts the odds against the ATO in applying Part IVA to these structures.</p>
<p>It is likely that the “principal purpose” test in the proposed law may suffer similar problems as the “dominant purpose” test. </p>
<p>For anti-avoidance purposes, a more effective purpose test may be found in an existing provision in Part IVA. While Part IVA in general requires a “dominant purpose”, it has a specific section that in broad terms is applicable if “a” purpose of the structure is for tax avoidance. </p>
<p>In other words, as long as one of the purposes of a corporate structure is for tax benefit, that section may apply. It is unclear why the government does not adopt the “a purpose” test in the proposed law.</p>
<p>Given the limitations and doubts on the effectiveness of the proposed law, it may not be surprising that the Treasurer refused to provide an estimate for the tax revenue that may be raised from the proposal.</p><img src="https://counter.theconversation.com/content/41887/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Antony Ting does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>A close look at Hockey’s tax avoidance laws aimed at multinationals like Apple and Google, shows they can avoid them.Antony Ting, Associate Professor, University of SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/401662015-04-15T20:36:38Z2015-04-15T20:36:38ZGovernment inquiry takes aim at green charities that ‘get political’<p>The <a href="http://www.environment.gov.au/system/files/pages/1fbfb20f-5749-4468-b008-feaf1804e969/files/register-environmental-organisations-2015.pdf">almost 600 environmental groups</a> that hold tax-deductibility status in Australia are being scrutinised by a federal government <a href="http://www.aph.gov.au/Parliamentary_Business/Committees/House/Environment/REO">inquiry</a>, with reports that <a href="http://www.abc.net.au/news/2015-04-10/environment-groups-could-lose-tax-concession-status/6384554">more than 100 of them face being struck off the list</a>.</p>
<p>Some, like the state and territory <a href="http://www.theguardian.com/environment/planet-oz/2014/may/15/budget-axe-of-small-grant-fund-will-hurt-conservation-groups-across-australia">Conservation Councils</a> and <a href="http://www.abc.net.au/environment/articles/2013/12/18/3914079.htm">Environmental Defenders Offices</a>, are still reeling from cuts to their programs and core funding. Others, such as Greenpeace, The Wilderness Society, and Friends of the Earth, could lose access to the tax-deductible donations that help sustain their work. </p>
<h2>Encouraging donations</h2>
<p><a href="https://www.ato.gov.au/Non-profit/Gifts-and-fundraising/Deductible-gift-recipients/">Deductible gift-recipient status</a> allows eligible organisations, such as those on the environmental register, to receive tax-deductible gifts and contributions. Consistent with similar schemes in the <a href="http://www.law.unimelb.edu.au/files/dmfile/35_2_2.pdf">United States and Europe</a>, the environmental register was established as an incentive for citizens and corporations to fund organisations that are active in the public sphere, while also feeding into the logic of small government and shifting the burden of catering for social needs back onto the community. </p>
<p>In Australia, an environmental organisation is <a href="http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s30.260.html">defined</a> as a body or society whose <a href="http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s30.265.html">primary purpose</a> is to protect the environment or conduct education and research. </p>
<p>Importantly, however, in 2010 the <a href="http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/cth/HCA/2010/42.html">High Court ruled</a> that groups with tax-deductible status also have the right to engage in political debate and advocacy. The judgement described the freedom to speak out on political issues as “indispensable” for “representative and responsible government”. </p>
<p>Moreover, the court pointed out that there is no general rule that excludes “political objects” from charitable purposes. Instead, the key consideration is whether the organisation “contributes to the public welfare”. The ruling has been used as a precedent both in Australia and overseas, such as when Greenpeace won a <a href="http://www.nzlii.org/nz/cases/NZSC/2014/105.html">favourable decision from the New Zealand Supreme Court last year</a>.</p>
<h2>Why is Australia holding the inquiry?</h2>
<p>The review’s chair, Liberal MP Alex Hawke, <a href="http://www.aph.gov.au/DocumentStore.ashx?id=3d5ff3ed-c1d4-4623-983c-917aa024ccb2">said</a> the inquiry aims to: </p>
<blockquote>
<p>…ensure that tax deductible donations, which are a generous concession from the taxpayer, are used for the purpose intended and expected by the community. </p>
</blockquote>
<p>His colleagues’ comments have given some more insight into what Hawke means by the adjectives “intended” and “expected”.</p>
<p>Nationals Senator Matthew Canavan <a href="http://www.abc.net.au/7.30/content/2015/s4214478.htm">said he is concerned</a> by the development of environmental groups from “a niche village industry” into “serious professional organisation[s]”, while highlighting what he described as a “large minority” of “100 or 150” groups that are “clearly engaged primarily” in stopping fossil fuel and industrial development in Australia. </p>
<p>Liberal MP Andrew Nikulic <a href="http://www.theguardian.com/environment/2014/jun/30/liberal-party-environmental-groups-charitable-status">sought to distinguish</a> groups like the Bob Brown Foundation who “campaign against the government” from “real charities” like “St Vinnies and Salvos”. Ignoring the fact that the latter groups have been <a href="http://www.smh.com.au/nsw/charities-warn-they-cant-fill-in-the-gaps-if-abbott-cuts-welfare-20140416-36qzd.html">vocal critics</a> of government cuts to welfare spending, Nikulic has also made <a href="http://www.abc.net.au/7.30/content/2015/s4214478.htm">unsubstantiated claims</a> that green groups have been involved in “illegal activities”. </p>
<p>His Liberal National Party colleague George Christensen <a href="http://www.theguardian.com/environment/2015/mar/25/great-barrier-reef-nationals-mp-says-environmentalists-are-guilty-of-treason">went even further</a>, labelling certain groups as “terrorists” and accusing them of treason. </p>
<p>Their views are echoed by Gary Johns, a former Labor MP and now columnist for The Australian newspaper, who has <a href="http://www.theaustralian.com.au/opinion/columnists/give-eco-charities-a-check/story-fn8v83qk-1227293363933">criticised</a> the entire rationale for tax-deductible status on the basis that it contradicts the “voluntary nature of charity”. </p>
<p>While conceding that the Hawke review may be interpreted as an “attack on [environmental organisations’] efforts to protect the environment”, Johns also argued that governments “should be reticent” about supporting organisations that “promote viewpoints on issues where there is reasonable disagreement in the electorate”.</p>
<p>It is difficult to see what organisations would satisfy such a test. Certainly not the <a href="http://www.abc.net.au/news/2012-02-24/hamilton-the-shadowy-world-of-ipa-finances/3849006">Institute of Public Affairs</a>, the <a href="http://www.chifley.org.au/our-mission/">Chifley Research Centre</a> or <a href="http://www.menzieshouse.com.au/?page_id=4560">Menzies House</a>, which also enjoy tax deductibility but seem unlikely to face the same scrutiny advocated by Hawke.</p>
<h2>The political context</h2>
<p>Clearly, we have strayed some way from Hawke’s official justification for the inquiry. His vague reference to the undisputed notion that tax-deductible donations should be subject to public scrutiny disguises deeper political and ideological goals.</p>
<p>To properly understand those goals, we must interpret the current inquiry in the appropriate political context. Parts of this have been described by Joan Staples in an <a href="https://theconversation.com/step-by-step-conservative-forces-move-to-silence-ngos-voices-29637">earlier Conversation article</a>, and by Mike Seccombe in the <a href="http://www.thesaturdaypaper.com.au/news/politics/2014/07/26/brandis-ties-ngo-funding-non-advocacy/1406296800">Saturday Paper</a>. </p>
<p>In terms of the wider political context of this inquiry, we might also consider:</p>
<p>• last year’s attempt by Liberal MP Richard Colbeck to <a href="http://www.theguardian.com/environment/2014/apr/02/coalition-review-of-consumer-laws-may-ban-environmental-boycotts">ban environmental boycotts</a>;</p>
<p>• incidences of <a href="http://www.smh.com.au/nsw/state-funds-come-with-proviso-not-to-protest-20130523-2k3wb.html">gag clauses</a> being written into the contracts of community legal centres;</p>
<p>• the <a href="http://www.theguardian.com/environment/planet-oz/2014/may/15/budget-axe-of-small-grant-fund-will-hurt-conservation-groups-across-australia">defunding</a> of voluntary environment, sustainability and heritage organisations and national environmental defenders’ offices; and</p>
<p>• the drafting of <a href="http://www.abc.net.au/news/2015-03-18/attorney-general-dismisses-concerns-over-protest-laws/6330504">anti-protest laws</a> in states such as Western Australia.</p>
<p>Against this backdrop, the inquiry can be seen as part of a trend towards quieting the environment movement. Even if it does not result in substantive changes to the law, the inquiry is forcing poorly funded groups to spend time and resources on making submissions to justify their status. </p>
<p>Another difficulty is the committee’s desire to frame the “public welfare” requirement in terms of ill-defined community “expectations”. These can be difficult to discern and for this reason we ought to strive for the broadest possible political debate, rather than attempting to narrow it. If that means that taxpayers subsidise perspectives with which they don’t necessarily agree, it is a small price to pay for a robust public sphere. </p>
<p>Finally, given the urgency of the environmental crisis, an <a href="http://www.theguardian.com/environment/2014/jun/03/lowy-poll-more-australians-seriously-concerned-about-climate">increasing number of Australians</a> recognise that we need environmental groups who do more than plant trees. </p>
<p>In the run to this year’s <a href="https://theconversation.com/au/topics/paris-2015-climate-summit">Paris climate talks</a> and next year’s federal election, we need laws that encourage full-blooded political participation.</p><img src="https://counter.theconversation.com/content/40166/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Peter Burdon is affiliated with the International Union for the Conservation of Nature.
Between 2005-2009 he volunteered with Friends of the Earth, Adelaide. He also volunteered on the management committee of Conservation SA between 2007-2010 and on the executive of the Environmental Defenders Office SA between 2011-2013.</span></em></p>A federal government inquiry that reportedly threatens the tax-deductibility status of dozens of environmental groups is the latest move towards quieting outspoken green groups, writes Peter Burdon.Peter Burdon, Senior lecturer, University of AdelaideLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/399612015-04-13T16:30:18Z2015-04-13T16:30:18ZFact Check: would abolishing non-dom status raise more tax?<figure><img src="https://images.theconversation.com/files/77764/original/image-20150413-24294-14zhlwt.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Will non-doms be driven away?</span> <span class="attribution"><span class="source">Kamira/www.shutterstock.com </span></span></figcaption></figure><blockquote>
<p>There are now 116,000 non-doms. It is costing at least hundreds of millions of pounds to our country. And it cannot be justified. It makes Britain an offshore tax haven for a few.</p>
</blockquote>
<p><strong>Ed Miliband, Labour party leader in <a href="http://press.labour.org.uk/post/115841294434/the-fabric-of-our-country-speech-by-ed-miliband">a speech</a> at the University of Warwick</strong></p>
<p>The Labour party wants to abolish the <a href="http://www.bbc.co.uk/news/business-32216346">non-domiciled (non-dom) resident status</a> for UK tax purpose. This includes removal of some or all of the tax advantages that non-doms enjoy, including the <a href="https://www.gov.uk/government/publications/residence-domicile-and-remittance-basis-rules-uk-tax-liability">“remittance basis”</a> which means they can avoid paying tax on income outside the UK. </p>
<p>People can claim non-dom status if they were born outside the UK, but now live here. The status, which has been around for 200 years, can also be inherited through the father. Ed Miliband, the leader of the Labour party, claimed that the reform would raise “<a href="http://www.bbc.co.uk/news/32213003">hundreds of millions</a>” for the UK. However, in January 2015 shadow chancellor Ed Balls contradicted the campaign by saying that scrapping the rule “<a href="http://www.bbc.co.uk/news/32213003">would cost Britain money</a>”. If the non-dom status is abolished using a cold-turkey approach, many non-doms may leave Britain, which could result in huge losses to the economy. </p>
<p>Miliband later explained that the Labour party proposes to scrap the rule giving non-doms a transition period of around two years to “<a href="http://www.ft.com/intl/cms/s/0/3a1257a0-dd3e-11e4-bc0d-00144feab7de.html">get their affairs in order</a>”.</p>
<h2>Current non-dom tax policy</h2>
<p>UK residents with non-dom status can currently choose whether to pay taxes in Britain on their overseas earnings. Although they are already taxed in full on their UK income and capital gains, they can opt to be taxed on the remittance basis, which allows them to pay an annual fee to avoid tax on their overseas earnings. </p>
<p>In particular, claiming the remittance basis implies that the non-dom loses tax-free allowance for income and capital gains in the UK, and pays an annual charge depending on how long they have been in the country. The <a href="https://www.gov.uk/tax-foreign-income/non-domiciled-residents">fee is</a> £30,000 if resident in the UK for at least seven of the previous nine years, £60,000 for 12 of the previous 14 years, or £90,000 for longer stays. Non-doms also enjoy favourable treatment of non-resident trusts.</p>
<p>According to the most recent <a href="https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/404153/Table_2.4.pdf">available data from 2012-13 from HMRC</a>, the <a href="http://election2015.ifs.org.uk/article/unknown-quantities-labour-s-non-dom-proposal">Institute of Fiscal Studies</a>, and law firm <a href="http://www.pinsentmasons.com/en/media/press-releases/2014/income-tax-paid-by-non-doms-hits-record-high-of-68billion/">Pinset Masons</a>, the HMRC raised £8.2 billion from the 114,800 people who claimed non-dom status in the UK, which amounts to 5% of the total revenue from income tax collected by the HMRC. </p>
<p>Only 46,700 non-doms took advantage of the remittance basis and 5,100 of them are paying the fees. More of them are not paying the charges presumably because they have lived in the UK for less than seven years. Only 19% of the total £226m total HMRC received in charges were paid by 3,700 non-doms who had lived in the UK for seven to 12 years. The remaining £183m was paid by 1,400 non-doms who had lived in the UK for more than 12 years. </p>
<p>According to figures released with the <a href="https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/384071/AS2014_policy_costings_final.pdf">2014 autumn statement</a>, a recent increase to the fees from April 2015 will raise a further £90m a year from those who have lived in the UK for more than 12 years. </p>
<p>In the UK, the number of non-doms in 2013 was 6.7% less than that in 2008, the year when the remittance basis and the charges were introduced. Between 2008 and 2013, the total revenue and the average revenue per person in taxes from non-doms increased by 39% and 51.6%, respectively. Following the introduction of the charge, in the past six years the UK has experienced a 1.7% average decline in the number of non-doms per year, together with 8.8% average growth in the total tax revenue from them, as the graph below shows.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/77765/original/image-20150413-24318-11xp6yt.PNG?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/77765/original/image-20150413-24318-11xp6yt.PNG?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/77765/original/image-20150413-24318-11xp6yt.PNG?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=325&fit=crop&dpr=1 600w, https://images.theconversation.com/files/77765/original/image-20150413-24318-11xp6yt.PNG?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=325&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/77765/original/image-20150413-24318-11xp6yt.PNG?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=325&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/77765/original/image-20150413-24318-11xp6yt.PNG?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=408&fit=crop&dpr=1 754w, https://images.theconversation.com/files/77765/original/image-20150413-24318-11xp6yt.PNG?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=408&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/77765/original/image-20150413-24318-11xp6yt.PNG?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=408&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Growth rates from non-doms, tax revenue from non-doms and average taxes paid by non-doms (2009-2013)</span>
<span class="attribution"><span class="source">Author's calculations using data from HMRC, IFS and Pinset Masons.</span>, <span class="license">Author provided</span></span>
</figcaption>
</figure>
<h2>Abolishing non-dom status</h2>
<p>There are some potential sources of additional revenue from Labour’s proposed reform. The 5,100 non-doms who had lived in the UK between seven and 12 years who pay the fees do so because it is less than the taxes on their unremitted income or capital gains would be if they were domiciled in the UK. </p>
<p>The majority of this group of non-doms have lived in the UK for a relatively short period and therefore may face a high cost of migration, because their “sunk cost” is high and they have not lived long enough to recover it. So the proposed reform, if implemented effectively, is likely to collect higher revenue than the total proceeds from the charges paid by this group – currently £43m. </p>
<p>The relatively more settled fee-paying non-doms – currently 27.5% of the total – can leave the UK incurring very low cost – because they have already spent more than 12 years in the UK to recover their sunk costs. If the majority of the fee-paying non-doms – the ones who have lived less than 12 years – remain in the UK and pay taxes accordingly, it is likely to increase the total proceeds from this group.</p>
<p>However, this depends largely on HMRC’s set of information on the unremitted income and gains of non-doms in other countries, which is not available because currently the fee-paying non-doms do not have to disclose these. Similar uncertainty (due to lack of information) is associated with the removal of the tax advantages on non-resident trusts. </p>
<h2>Verdict</h2>
<p>Whether the proposed reform will generate “hundreds of millions of pounds” for the UK remains uncertain. Apart from the extreme response of leaving the UK, it is likely that the non-doms will pay accountants to avoid taxes. That will add to the existing costs of foregone revenue from and tax compliance of the non-doms, and therefore may result in loss of total revenue. </p>
<p>Other behavioural responses, such as transferring assets to family members abroad, spending more time abroad, or utilising the non-resident trusts more, may also add to this loss. The “higher end” non-doms, who can explore any other tax-haven and can buy a good life in any other location (such as the Middle East) can leave the UK at any stage of their residency. It is therefore very likely that following the reform, HMRC will not be able to raise the projected £90m every year from the charges.</p>
<p>The net revenue effect of this proposed reform remains uncertain, and the claims made by the Labour party are too premature, and to some extent, misleading. We need more details before assessing the credibility of the projection of revenue-gains from this reform.</p>
<h2>Review</h2>
<p>There is no question that this is extremely difficult to calculate with any precision for two reasons. First, a lack of relevant information about offshore assets owned by non-doms. It is such assets that give rise to the income and capital gains which are potentially to be brought into the UK tax net under the proposed changes. It’s also not known to what extent such income and gains will be sheltered by double tax relief for tax paid in the country of origin. </p>
<p>Second is the behavioural response of the non-doms, which will be mixed depending on the circumstances. Non-doms are not a homogeneous population and their motivation for remaining in the UK either physically or for tax purposes is not uniform, so their response to any change won’t be either. </p>
<p>To suggest, however, that being a non-dom who at present is claiming the remittance basis indicates a propensity to avoid tax (“will pay accountants to avoid taxes”) is not entirely appropriate.</p>
<div class="callout">The Conversation is fact checking political statements in the lead-up to the May UK general election. Statements are checked by an academic with expertise in the area. A second academic expert reviews an anonymous copy of the article.<br><br><a href="https://theconversation.com/factchecks/new">Click here to request a check</a>. Please include the statement you would like us to check, the date it was made, and a link if possible. You can also email factcheck@theconversation.com </div><img src="https://counter.theconversation.com/content/39961/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Lynne Oats receives research funding from the European Union, the Economic and Social Research Council, HMRC and HMT but the views expressed in this article are her own personal opinion. She has previously received research funding from the Institute of Chartered Accountants in England and Wales.</span></em></p><p class="fine-print"><em><span>Sheikh Selim does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Labour has pledged to get rid of the centuries-old non-dom rule.Sheikh Selim, Senior lecturer, University of WestminsterLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/375932015-02-13T14:33:12Z2015-02-13T14:33:12ZTedious spats about tax avoidance don’t make anyone change their ways<p>A <a href="http://www.theguardian.com/politics/2015/feb/12/miliband-victory-fink-drops-threat-sue-tax-avoidance-conservative-hsbc">row</a> between a Conservative peer and Labour leader Ed Miliband is once again throwing up some inconsistent thinking about tax avoidance.</p>
<p>Stanley Fink, the former treasurer of the Conservative party, and a party donor, has brazenly argued that “<a href="http://www.theguardian.com/business/2015/feb/12/lord-fink-tax-avoidance-is-normal-in-british-society">everyone does tax avoidance</a>”. Miliband is having none of it, arguing that it says “something about the Conservative party” to have “dodgy donors” in its midst.</p>
<p>Fink has admitted engaging in what he calls “vanilla” or “bland” tax avoidance by transferring shares to family trusts in Switzerland – and Miliband’s criticisms will make intuitive sense to many people.</p>
<p>The case clearly didn’t involve particularly large sums of money and Fink had broken no laws. But he had done some juggling to enable his family to be better off in the long run. For many who don’t have the luxury of being able to pay accountants to advise them, that may well leave a nasty taste in the mouth. Miliband sensed an opportunity to make a bit of political capital.</p>
<p>But the Labour leader has, for some time, seemed more eager to talk about some cases and less about others. There is <a href="http://www.bbc.co.uk/news/uk-politics-22793181">John Mills</a>, for example – a man who donated £1.65m in shares to the Labour Party in 2013.</p>
<p>Chancellor George Osborne accused Miliband of double standards over the Mills case and Miliband responded by saying that Mills was simply donating the shares to give the party “a steady stream of income”. The party, he said, would of course pay tax, including on the dividends.</p>
<p>The <a href="http://www.bbc.co.uk/news/uk-politics-22793181">Electoral Commission</a> ruled the donation to be fine but that is not the point. Mills, the brother-in-law of former cabinet minister Tessa Jowell, let the cat out of the bag when he admitted the donation was crafted in such a way as to avoid having to make a big tax payment on it. </p>
<p>What’s good for the goose, is surely good for the gander, no? If Fink’s tax affairs should be abhorred, then why shouldn’t Ed’s?</p>
<h2>Sniping without acting</h2>
<p>The problem in both of these cases is that a judgement on a nimble-footed bit of accountancy often has a lot to do with who benefits. Accountants, after all, exist not just to make sure that financial affairs are in order, they often get paid good money to ensure that the person paying that money is not paying more tax than he or she has to. </p>
<p>Getting tax burdens down is one of their core tasks. And this inevitably leads us into a grey area. One person’s set of clever financial arrangements can often be another person’s morally and ethically inappropriate behaviour.</p>
<figure class="align-left ">
<img alt="" src="https://images.theconversation.com/files/71960/original/image-20150213-13226-feefuc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/71960/original/image-20150213-13226-feefuc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=905&fit=crop&dpr=1 600w, https://images.theconversation.com/files/71960/original/image-20150213-13226-feefuc.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=905&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/71960/original/image-20150213-13226-feefuc.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=905&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/71960/original/image-20150213-13226-feefuc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1138&fit=crop&dpr=1 754w, https://images.theconversation.com/files/71960/original/image-20150213-13226-feefuc.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1138&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/71960/original/image-20150213-13226-feefuc.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1138&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Stanley Fink says he’s not alone.</span>
<span class="attribution"><span class="source">UK Parliament.</span></span>
</figcaption>
</figure>
<p>Our understanding of inappropriate behaviour will often be linked to the identity of the person whose behaviour we are talking about. There is no consensus whatsoever on when reducing your tax burden crosses the line into unethical behaviour.</p>
<p>To be clear, deliberate tax evasion is a different beast altogether. That’s the illegal evasion of taxes by individuals, corporations or trusts. Tax avoidance may be many different things to many different people, but ultimately it will always be legal.</p>
<p>Politicians shouldn’t spend their time waging battles within the Westminster “village” about who is more or less morally and ethically challenged when they could be working out how to get people and organisations paying the right amount of tax.</p>
<p>Expecting them to do it out of the goodness of their hearts is all well and good, but they are much more likely to pay their bills if they know that they have no choice but to do so. Fink, after all, has made it clear that he could have undertaken much more aggressive tax-reducing measures if he had been that way inclined.</p>
<p>This is an international problem and solving it will be difficult. Different states operate (at times vastly) different tax regimes and clever people find loopholes in even the most well thought-through legislation.</p>
<p>But that shouldn’t put politicians and policy wonks off; pointing the finger and tutting about things one doesn’t like is fine, but crafting laws that leave those with no choice but to “act appropriately” should be the ultimate aim.</p><img src="https://counter.theconversation.com/content/37593/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Daniel Hough does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>A row between a Conservative peer and Labour leader Ed Miliband is once again throwing up some inconsistent thinking about tax avoidance. Stanley Fink, the former treasurer of the Conservative party, and…Daniel Hough, Professor of Politics, University of SussexLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/373762015-02-10T06:42:20Z2015-02-10T06:42:20ZWinston Churchill’s simple answer to the HSBC tax scandal<figure><img src="https://images.theconversation.com/files/71486/original/image-20150209-24660-x49itg.jpg?ixlib=rb-1.1.0&rect=1%2C35%2C1022%2C676&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Ringing the changes on tax avoidance</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/9731367@N02/7134294207/in/photolist-bSr87x-7gnbiN-FEBNn-7DqTEi-mMfmxi-9p7dNM-biaYZP-eebxNq-biaWZ4-7Ff4Av-9mu7MM-5vNnwp-jcktAs-4cZQaF-9VwGaa-biaMc2-axuhRV-4rjUcM-9ABqgL-bPLRLH-bz5zDq-m7rSri-cxtNp-biaH2x-7PopTc-ahxhw9-xNhig-a1w2xS-biaDRz-biaAS2-dM3ZSU-9VxbfZ-bASdkj-9VwzJV-nmKg73-bDw2PE-6UxmGp-ir8LWg-mnnL7y-e9jR4-7P8bpB-exDgp3-bgfFKc-biaW1z-bqAhJ1-9VzXJ9-5g3poz-9Vzsr7-obN1p-o5bh9S">Philip Taylor</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><p>The <a href="http://www.bbc.co.uk/news/business-31248913">revelation on the BBC</a> and in the Guardian that British bank, HSBC, the <a href="https://www.gfmag.com/awards-rankings/best-banks-and-financial-rankings/worlds-50-biggest-banks-2012">second biggest in the world</a> has allegedly helped UK residents sidestep taxes through a Swiss subsidiary should really come as little surprise. More of a shock might be that the solution has been with us for decades.</p>
<p>Tax legislation – and its enforcement in the UK over the past 30 years – has been based on the following school of thought: that the government’s fundamental economic role is to let the unchecked forces of international capital and supply and demand reign supreme. This will, according to the mainstream neo-classical economic theory, allow for the best allocation of limited capital, as well as for the lowest prices and the most efficient output of goods and services. </p>
<p>Providing the state does little except uphold free competition where it can, the theory is that all businesses will evolve to purely serve the consumer in an increasingly stable, prosperous and free society.</p>
<h2>Electoral imperatives</h2>
<p>This week’s news follows other revelations about <a href="https://theconversation.com/the-uk-should-look-closer-to-home-before-crying-foul-over-luxembourg-leaks-34180">what has been happening in Luxembourg for years</a> and the 2013 <a href="http://www.financialsecrecyindex.com/">finding by the Tax Justice Network</a> about UK dominance in the global tax evasion/tax avoidance industry. But it is only because of the desperate need by UK politicians to show that “we’re all in this together”, that this has suddenly captured so much political and public space. We are, of course, less than 100 days before the <a href="https://theconversation.com/uk/topics/uk-general-election-2015">most important election</a> in a generation.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/71488/original/image-20150209-24675-17kinra.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/71488/original/image-20150209-24675-17kinra.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/71488/original/image-20150209-24675-17kinra.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=402&fit=crop&dpr=1 600w, https://images.theconversation.com/files/71488/original/image-20150209-24675-17kinra.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=402&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/71488/original/image-20150209-24675-17kinra.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=402&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/71488/original/image-20150209-24675-17kinra.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=505&fit=crop&dpr=1 754w, https://images.theconversation.com/files/71488/original/image-20150209-24675-17kinra.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=505&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/71488/original/image-20150209-24675-17kinra.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=505&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Towering example.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/singapor3/2262599353/in/photolist-4rWpXF-6UX5en-7awNPi-oZ3VpC-S6Qw7-75ivJn-3fwmC-asikbk-9JzjU8-5yQ1gb-s6ptt-5Hdic-75NGY9-ppZEHM-pj8UkN-6DfvYr-7wvTof-79FKyn-8J5WSY-4q6G65-6Bm34W-6VwJ9M-kBHNLB-5m8tVn-7cR1zd-c2N8v5-eaGygK-2YE2hH-ed18BC-aQi7Wg-usFkP-eaGyb8-acVcQf-XGWKt-4hhmXc-acVe73-7ZzaR-7pPca1-7pPbXu-7pKi5n-7pKhRn-7pKhDR-agQPCP-qzwAjv-9g7u9m-ozSYk-6q9rzY-kS3zvg-qzyjAF-4duG2X">Gyver Chang</a>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span>
</figcaption>
</figure>
<p>What continues to be the real and unresolved issue facing UK PLC is that, regardless of tax havens and other tax avoidance opportunities – and even though <a href="http://www.telegraph.co.uk/finance/budget/9944515/Corporation-tax-falls-to-20-per-cent-in-fourth-consecutive-Budget-cut.html">UK corporate tax rates have fallen</a> three times since 2010, private and public debt and income inequality continues to rise across the country. The political parties might argue the toss about whether <a href="http://www.ft.com/cms/s/0/fefd56d2-a152-11e4-8d19-00144feab7de.html#axzz3RGgA7aW9">wages are edging higher</a>, but this should be only be viewed against the <a href="http://www.pieria.co.uk/articles/the_risk_of_deflation_in_2015?utm_source=Pieria+Subscribers&utm_campaign=9ffb4c72b9-Newsletter_15_23_2013&utm_medium=email&utm_term=0_deda1ba8c1-9ffb4c72b9-70891289">looming risk of deflation</a> to add to our financial concerns. </p>
<p>It all seems very different from the <a href="http://lyceumbooks.com/pdf/PeoplesBritishIslesIII_Chapter_11.pdf">political maturity and consensus</a> ushered in by World War II. Why have the most prominent UK politicians seemingly refused to learn from the way that approach fed a rapid and sustained increase in economic growth, income equality and social progress in the UK between 1945 and the mid-1970s?</p>
<h2>Churchill’s plan</h2>
<p>Perhaps one of the principal leaders of the post-war UK consensus offers a time-honoured solution to improve the tax take from Britain’s richest individuals and public companies and to finally destroy the notion that tax is <a href="http://www.theguardian.com/business/2007/aug/21/usnews">“only for little people”</a>. In 1909, Winston Churchill, during the first <a href="http://www.etsu.edu/cas/tahg/pictures/Industrial/documents/Capitalism%20in%20the%20Gilded%20Age.ppt">“Gilded Age” of monopoly capitalism</a> and plutocratic socialism, saw the need for a simpler, fairer and easier tax system to avoid the following blight on social progress. </p>
<p>As <a href="http://www.landvaluetax.org/current-affairs-comment/winston-churchill-said-it-all-better-then-we-can.html">he explained</a>:</p>
<blockquote>
<p>Land monopoly is not the only monopoly, but it is by far the greatest of monopolies – it is a perpetual monopoly, and it is the mother of all other forms of monopoly. Unearned increments in land are not the only form of unearned or undeserved profit, but they are the principal form of unearned increment, and they are derived from processes which are not merely not beneficial, but positively detrimental to the general public.</p>
</blockquote>
<p>As Churchill, Adam Smith, John Stuart Mill and many others have pointed out time and time again, those who own the land skim precious limited capital from everyone else, without any effort or skill. A simple-to-administer land value tax, achieved in Taiwan as part of socially progressive economic policy to <a href="http://www.tax.taichung.gov.tw/webpad/webpad.aspx?EpfJdId9UuCPR1RnYsHaJXhVTBOSTNUs">transform a broken people in a few years</a>, is today’s solution to recoup this levy on every form of wealth and enterprise in the UK.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/71507/original/image-20150209-24691-1tpzm1h.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/71507/original/image-20150209-24691-1tpzm1h.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/71507/original/image-20150209-24691-1tpzm1h.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=323&fit=crop&dpr=1 600w, https://images.theconversation.com/files/71507/original/image-20150209-24691-1tpzm1h.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=323&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/71507/original/image-20150209-24691-1tpzm1h.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=323&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/71507/original/image-20150209-24691-1tpzm1h.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=406&fit=crop&dpr=1 754w, https://images.theconversation.com/files/71507/original/image-20150209-24691-1tpzm1h.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=406&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/71507/original/image-20150209-24691-1tpzm1h.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=406&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Churchill in the shadows.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/patersor/2873651548/in/photolist-L67jg-L65xk-L67Gx-L5Phw-L66QV-L63VV-L5MQU-L5Qbs-L63sM-L64Lk-L5QSd-8N1kd2-4gQAnp-GnPwr-sv6Wp-6RWHw9-6eWdeu-KbEmr-5nWdum-mJAbYr-mJAeuP-b4KD9R-7L5h9h-ghPK4S-HypzZ-dH6d5M-dQZmSf-dQTNda-dQZn2d-9zY72R-6Mq52N-9hvgsc-8NwESx-8NKEPz-pcSXwp-6cKyXE-6cKyDN-8Y1s75-6LkXdq-mcHEa-2b4Gc-nwW8D-eoFHrs-3cdUW-31u8e5-7SBXYA-enVSAt-eovyhm-6eD5qj-tnBWp">Richard Paterson</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc/4.0/">CC BY-NC</a></span>
</figcaption>
</figure>
<p>Land value tax remains the simplest, fairest, least avoidable and easiest to administer tax on unearned income and wealth, one which the major UK parties will now not even discuss. Surely a better political consensus is needed for a modern Britain than discredited neo-liberalism built on protecting the wealth of the few. </p>
<p>Even the largest banks, such as HSBC, have to compete in a global tax avoidance industry. They are just one of many international financial institutions that have a legal responsibility to <a href="https://theconversation.com/fixing-the-hole-in-the-heart-of-corporate-capitalism-35515">maximise profits for their shareholders</a>. One way to make this fairer and to honour the sovereignty of the UK parliament to levy national taxes is land value tax. But where is the voice of Churchill in today’s “Gilded Age”?</p><img src="https://counter.theconversation.com/content/37376/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jonathan Winship does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The revelation on the BBC and in the Guardian that British bank, HSBC, the second biggest in the world has allegedly helped UK residents sidestep taxes through a Swiss subsidiary should really come as…Jonathan Winship, Lecturer in Accounting and Finance, The Open UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/353542014-12-19T10:53:07Z2014-12-19T10:53:07ZTax loopholes draw bi-party fire but don’t expect them to vanish<figure><img src="https://images.theconversation.com/files/67371/original/image-20141216-14150-19444i.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Closing the thousands of loopholes that riddle the US tax code is a rare area of bipartisan agreement in Congress. So why is it so hard to end them? </span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>The thousands of tax loopholes that litter the corporate tax code in the United States are frequent targets of criticism from both Democrats and Republicans. </p>
<p>Outgoing Republican Senator Tom Coburn released a <a href="http://www.coburn.senate.gov/public//index.cfm?a=Files.Serve&File_id=dbbaf505-c79b-49d2-9097-d7c69c2b9e4f">300-page report</a> this month denouncing the “complicated mess” that is the federal tax code. Coburn’s swan song described it as riddled with tax breaks benefiting specific groups and companies, creating a “powerful and elaborate system of rewards and punishments” for American taxpayers. </p>
<p>Meanwhile, liberal tax reform group Citizens for Tax Justice decried the one-year extension of a bundle of corporate tax breaks – a measure just passed by the House and Senate, and expected to be signed by the president – as <a href="ctj.org/ctjreports/2014/12/even_at_one_tenth_the_size_of_previous_tax_deal_house_extender_bill_is_a_giveaway_for_corporations.php#.VInc24tcT4h">wasteful, unfair and ineffective</a>.</p>
<p>But if railing against corporate tax breaks is a rare area of bipartisan consensus, then why is the tax extender bill one of the few things a lame-duck Congress was able to agree on? And why are these tax breaks — many of which were designed to be temporary — enduring features of tax policy? In fact, despite their apparent unpopularity, tax loopholes generate their own distinctive type of politics that protects them from repeal, no matter how wasteful or frivolous they may be.</p>
<h2>Tax break and spend?</h2>
<p>Tax loopholes are provisions written into the code that reduce the amount of money a specific type of taxpayer would otherwise have to pay. It could mean offering a special exemption, a deduction, a credit against taxes owed or some other type of write-off. Tax analysts call these provisions “tax expenditures” because, by reducing the amount of revenue that flows into public coffers, they amount to spending. </p>
<p>Some corporate tax expenditures apply to many businesses. For instance, the expensive “accelerated depreciation” break allows companies to deduct the cost of new capital investments from their taxable income <a href="https://www.americanprogress.org/issues/open-government/news/2011/03/23/9370/tax-expenditure-of-the-week-accelerated-depreciation/">more quickly than the value of the asset actually declines</a>. Other corporate tax expenditures, like some of those highlighted in Coburn’s recent report, are narrowly written to apply only to specific sectors or a few companies. </p>
<p>Tax expenditures make up a major share of government spending. The <a href="http://www.cbo.gov/publication/45449">Congressional Budget Office recently estimated</a> that individual and corporate tax expenditures will amount to 8.2% of GDP in fiscal year 2014. This is a major increase from the mid-1970s, when the Treasury Department first began estimating the cost of tax expenditures and when they only amounted to <a href="http://www.taxpolicycenter.org/briefing-book/background/expenditures/change.cfm">about 5% of GDP</a>. Most of this <a href="taxfoundation.org/article/corporate-vs-individual-tax-expenditures">goes to individual income taxpayers rather than corporate taxpayers</a>. But some breaks in the former category go to businesses that pay taxes through the <a href="http://www.gao.gov/assets/660/653120.pdf">individual rather than the corporate income tax</a>. </p>
<p>Just on the corporate side, the size and number of tax breaks can have a significant impact on government revenue. For instance, a 2013 analysis by the Government Accountability Office <a href="taxprof.typepad.com/taxprof_blog/2013/04/gao-corporate.html">revealed that the cost of such tax expenditures in 2011</a> was roughly equal to the total amount raised that year in corporate income taxes. For every dollar raised, one was spent on a tax break. </p>
<h2>Under the radar</h2>
<p>However, while these breaks might be fiscally equivalent to government spending, they are often not treated as such. And herein lies the source of their political attractiveness to legislators on both sides of the aisle. </p>
<p>First, unlike spending programs that are subject to annual review when Congress debates appropriation bills, many corporate tax expenditures are simply adopted as permanent features of the tax code. Since no money has to be explicitly set aside to fund them, tax breaks fly under the radar of policymakers and the public even as they structurally lower the amount of revenue raised.</p>
<p>Even when tax expenditures do come under fire, their design makes them difficult to abolish. Repealing a tax break — or allowing one to expire — causes a tax increase for anyone benefiting from the loophole. As a result, these provisions create constituencies that fiercely advocate for their provision, even while the narrow scope of the loophole shelters it from broader public scrutiny. </p>
<p>Indeed, politicians often deliberately design tax breaks to be temporary in order to minimize their price tag while they are being debated. They know that <a href="http://www.washingtonpost.com/politics/in-congress-sunset-clauses-are-commonly-passed-but-rarely-followed-through/2012/12/15/9d8e3ee0-43b5-11e2-8e70-e1993528222d_story.html">political pressure</a> will make it difficult to avoid renewing the tax break far into the future. </p>
<h2>Politically appealing</h2>
<p>Finally, the dual nature of tax expenditures, which can be viewed both as tax cuts and as spending on desirable priorities, makes them politically appealing to both parties. For instance, Republicans might promote targeted tax credits for businesses as a way to lower corporate taxes. Democrats, meanwhile, can applaud the same credits as a way of increasing spending on certain types of activities, such as wind-energy production or the hiring of disadvantaged workers. </p>
<p>Given their attractiveness to both parties, we should expect most corporate tax loopholes to stick around. And this has big implications for the prospects for broader corporate tax reform in 2015. Most reform proposals are revenue-neutral, meaning they hinge on abolishing enough loopholes to recoup sufficient revenue so that corporate tax rates can be lowered. The end result of this type of trade would likely be a fairer and less discriminatory tax code. Companies benefiting most from loopholes would pay more than they’re remitting now, but all companies would face lower tax rates and total revenue would be roughly the same. </p>
<p>But if the debate over the tax extenders is any indication, while tax breaks may periodically draw bipartisan fire, their very design creates an uphill battle for Democrats or Republicans who wish to simplify the tax code.</p><img src="https://counter.theconversation.com/content/35354/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>From 2010-2014, Elizabeth Pearson received support for her graduate research on taxation in the United States from the U.S. Department of Education through the Jacob K. Javits Fellowship Program.</span></em></p>The thousands of tax loopholes that litter the corporate tax code in the United States are frequent targets of criticism from both Democrats and Republicans. Outgoing Republican Senator Tom Coburn released…Elizabeth Pearson, PhD Student in Sociology, University of California, BerkeleyLicensed as Creative Commons – attribution, no derivatives.