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KEY POINTS
- Adam Smith would agree that fairness is an essential element of any tax system
- Retrospective taxation is normally considered to be arbitrary and unfair
- Does the Exchequer have a right to be protected against arbitrary avoidance of tax?
In The Tempest, when she first sees the assembled Italian noblemen, Miranda says 'How beauteous mankind is! O brave new world, that hath such people in it.' To which Prospero replies, in a tart tone which any father of teenage girls will understand, 'Tis new to thee…'
I feel the same about two Comment articles that we have published recently: Simon McKie's Squeezing the pips and last week's piece from Barry Brinsmead and John Hiddleston, The Scottish connection.
They were both well argued, and I can see why the writers said what they did. I can even see that putting the taxpayer in the position of market consumer, which both articles do to some extent, could be a way of raising the necessary tax revenues efficiently.
What it would not do is raise them fairly, which is why I would not want to live in a state run on those principles.
Simon was responding to my article So long, farewell. He correctly summarised this by saying that I was 'mainly concerned with a moral argument that it is unfair that non-domiciliaries should have special tax privileges', and not on a balance of the tax gains from those who stay set against the economic losses from those who leave.
He saw this as 'no more than the old view that it is better for everyone to be poorer provided they are less unequal; a belief in the virtue of equality of misery.'
One of the problems I have with this analysis is that it assumes the people who can leave for a better tax rate are the ones who will pay the high taxes. Whilst that is now probably true, it hasn't necessarily been the case in the past.
In the days of exchange controls, the wealthy were the ones who couldn't escape, because they couldn't get their capital out.
They were forced, therefore, to pay 98% tax rates. That may have reduced inequality, but it certainly wasn't fair. By contrast, those who carried their wealth in their heads escaped in the 'brain drain', along with a lot of skilled tradesmen.
Adam Smith
So I don't accept that you can leave everything to the market and ignore fairness in devising a tax system. Nor did Adam Smith, who (as Barry Brinsmead and John Hiddleston pointed out) said that 'the subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities'.
He went on to say, when looking at rental income, that any inequality this created was acceptable, because it would 'in general fall heaviest on the rich, and … it is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion'.
So when Barry and John say that the changes to the rules for non-resident trustees receiving rental income might not only affect 'fat cats', and that the change might therefore infringe Adam Smith's first principle, it would appear that Adam Smith himself would have disagreed with them, because he considered the issue, and moreover considered it with regard to rental income.
The provision only applies when there is a non-resident trust and the trustees have entered into a partnership; it is hard to believe that this is a structure that will be used by someone letting out their house while on a secondment abroad, for example.
Since it will 'in general' be the rich who pay most, it appears Adam Smith would have been satisfied.
They also claim that the fourth of Adam Smith's maxims is breached. This, to précis, says that the collection of tax should not be too expensive. The claim is that developers require high returns from a high risk business, and that tightening the tax regime may drive them out of business.
First, I am not at all sure that this falls within Adam Smith's fourth maxim at all, and second it is surely unsound economics. High risk enterprises do indeed require high potential rewards, but they are supposed to be paid by the market, not the Exchequer.
The true effect of any increase in tax on such development projects would be to reduce the price of land, as developers insisted on retaining their profit potential, and that is exactly where the economic cost should lie.
Arbitrary and retrospective
However, their main argument was based on Adam Smith's second and third maxims, that taxes should be certain, not arbitrary; and that they should be levied at the time when it was most convenient for the contributors to pay.
Their complaint is not so much with the attack on the scheme itself as with the retrospection of the clause that outlaws it, since the operative provisions are deemed always to have had effect.
As a result, the tax liability is uncertain and arbitrary, and the tax may be due some years after the transaction it relates to.
Now retrospective taxation is rightly considered anathema in most cases. The government will say that they are merely putting into statute what they believe the law to be anyway in order to put it beyond doubt, but the right place to test such claims is the courts not the House of Commons.
Nevertheless, I can't help thinking that the right not be taxed arbitrarily must surely carry a concomitant right for the Exchequer not to discover that some people do not escape tax arbitrarily.
If not, then the majority of taxpayers who do not have the ability to pay for aggressive tax planning schemes are being taxed arbitrarily at a higher rate than those who do, when their true economic circumstances are similar.
And it is hard to see this as an arbitrary change in any case. There is already an anti-avoidance rule in place to deal with the income of foreign partnerships; it is the specific and casuistical argument that the income which the beneficiaries receive is the same income as that of the foreign partners (as trustees) which is now being retrospectively attacked.
I am still not quite sure that I am prepared to live with the idea that retrospective legislation can be fully justified in this case, and John and Barry make a good case against the vagueness of the drafting.
But I disagree with the claim that this creates arbitrary taxation — if anything, it does the reverse.
