Wednesday, July 25, 2007

Vipers and Enablers

The groups that subvert democratic tax systems can be divided into three: tax dodgers who avoid (legal) or evade (illegal) their taxes; "enablers" who help them do it: and the governments that create the right environment for these shenanigans in the first place. The enablers are a crucial part of this murky world, and Prem Sikka has written a lively article outlining some of the efforts by law enforcement bodies to try and police the line between the legal and the illegal.

Although KPMG has rightly been the focus of a lot of the probes, Sikka describes one of these schemes set up by Ernst & Young and challenged by the U.S. authorities:

It was known as "Vipers" (Value Ideas Produce Extraordinary Results) and sold its products, including the exotically named "Cobra" (Currency Options Bring Reward Alternatives), to rich individuals with incomes in excess of $10-$20m. The aim was usually to create a series of complex transactions to either eliminate or defer taxes. The schemes were mass-marketed to clients. Even the September 11 terrorist attacks were allegedly used to advance and sell avoidance schemes (paragraph 22). In case any rich individuals had doubts about the schemes, they were assured by what the justice department alleges were: "false and fraudulent opinion letters" (paragraph 15) issued by leading law firms for a fee of between $50,000-$150,000. Some of these were "back-dated" (paragraph 62).

Articles like this one always attract rash comments from the unhinged fringe. Here is one example:

"If the author doesn't understand the difference between 'avoidance' and 'evasion' he should not be given space here.The UK Revenue is not entitled to stick its shovel into any citizen's 'store' and remove what it likes. And any citizen has an inalienable right to order his affairs to mimimise the Revenue's depradations."

This illustrates the blindness, whether wilful or not, of those who would stick up for tax dodging. For one thing, it's important to recognise the dividing line between evasion and avoidance is extremely blurred. It's an arena of great complexity - and thus the source of big fees for enablers like KPMG and Ernst & Young. Another post underneath Sikka's article provides the correct response:

Whatever the legality, both are tax dodging, and both are harmful, for they allow the wealthiest parts of society - whose members can afford to set up increasingly complex tax-dodging schemes while ordinary people can't - to lessen their tax burden, leaving everyone else to make up the difference. This has two main effects. First, they widen inequality - and as we have seen recently in reports by the Rowntree foundation and the IMF, it is particularly high in Britain and growing faster than in other more equal countries. Second, they damage our democracy - by allowing élites to escape their responsibilities to the societies and governemnts that educate them, that protect them with police forces, that provide the roads that transport their children to school, that regulate to prevent market abuse, and so on and on.

Think about tax avoidance, and then think about this word: "loophole". That comparison alone should make you realise that something isn't quite right here.

Those who think that tax dodging is "completely ethical" are clinging to the difference between one form of tax dodging and another. Take an analogy: until the late 1990s, the oil-rich African state of Angola had a dual exchange rate, which allowed insiders to get access to cheap dollars, often at a rate of 10 or more to one. This was, in effect, free money for the rich, while everyone else lay in appalling poverty. The point here was: it was all perfectly, 100% legal! Tax avoidance in the UK is the same thing. We should see it for what it is: a corruption of the system.


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