Tax breaks for the rich: A terrible error of judgement

by Michael Roberts

Most of the readers of this blog won’t know Jimmy Carr.  He is a successful comedian who appears on UK TV and seemingly all over, on a regular basis.  He recently did a satirical skit exposing the way the big banks paid so little tax.  Then it was revealed that his accountant had arranged for much of his earnings to pass through a tax scam.  Apparently he was legally employed by a nameplate company in tax-haven Jersey, a small island in the English Channel near France that has special privileges to allow this, although the island is supposed to be part of the UK.  Carr’s millions thus avoided UK tax.

Carr was one of thousands of very rich earners engaged in this practice of perfectly legal tax avoidance.  When Carr was exposed as a hypocrite in attacking corporate tax scams but operating his own, he admitted his ‘mistake’ and called it a “terrible error of judgement” and said he was ending the practice.  Other rich people in the media world have not been so contrite.  Jeremy Clarkson is a top British TV pundit who leads a TV programme and writes a newspaper column on fast cars and other ‘manly’ things, earning millions.  In the tabloid, Murdoch-owned newspaper that he writes for, he told his readers that Jimmy Carr had worked hard to ‘earn’ his millions, so he should be allowed to reduce his tax bill to a minimum by any legal means possible.  We all would do it – wouldn’t we?  Well, there is a small grain of truth in that argument.

But there is also a heap of sophism.  First, most people in Britain, Greece or the US cannot use these special tax avoidance schemes.  They are working for an employer, private or public, who deducts their tax at source (pay as you earn) and not by submitting a tax return through an accountant who has thought up every possible tax dodge.  Only the rich and corporations can generally do this.  In the case of Greece, they often don’t even bother to find tax avoidance schemes, but simply don’t pay – and nothing happens (see my last post, Greece, Exit poll?, 17 June 2012).  But it is not just in Greece.

Second, according to the UK’s Inland Revenue inspectors, who have seen cuts in investigator staff making more difficult to chase tax evaders and check on tax avoidance schemes, there is now such a backlog of cases in tax tribunals, to which  rich taxpayers have appealed, that it will take 30 years to clear!  So those avoiding or evading tax are likely to get away with it.

And third, the answer to these tax avoidance scams is to ban them by law: that removes the moral issue of whether an individual person or company should use them or not.  British footballers on £200k a week use a host of schemes, the latest of which is to ‘invest’ in a movie film, where the income invested is eventually returned to the footballer tax-free.  And of course, we know about the host of scandals where very large UK companies like Vodafone, the telecoms giant, avoided paying billions in tax with the shake of a hand with the head of the UK’s Inland Revenue at a private meeting.  One leading accountant said in response to all the noise about Jimmy Carr.  Well, if they ban one scheme, we’ll just find another.  What that tells you is that unless large companies are under the democratic control of the state and its employees and stops paying any individual huge amounts of pay. bonuses and perks, these tax scams will continue.

And that gets to the heart of the matter.  Tax scams come about because of the existence of very rich people and giant companies i.e modern capitalism.  It has got even more grotesque when the 99% are experiencing the difficulties and misery of the Long Depression, which has not affected 1% at all.  Indeed, inequality of income and wealth has never been so extreme.  A new IMF study finds that the share of national income received by labour dropped during the Long Depression.  The link between the labour share and inequality is not necessarily tight. While more income may be flowing to capital and less to labour, workers may own shares directly or via their pension funds. Thus, some of the income that goes to capital flows back to them, diminishing the impact of falling labour shares on inequality. Still, the labor share is a good indicator of trends in inequality.   And during the recovery since the Great Depression, profits have rebounded quite strongly in most economies, leading to a decline in the labour share.

In advanced Europe, the behaviour of the labour share during the most recent recovery seems broadly similar to what took place during other recoveries between 1980 and 2006: profits increased quite strongly relative to labour income (see chart, middle panel).   In contrast, the recent recovery in the United States appears unusual from a historical perspective and more similar to an average European recovery, with a much stronger rebound in profits relative to labor income.  In many European economies, workers are not worse off after the Great Recession in terms of their share of national income. The labour share is still higher today than just before the Great Recession in many economies (see chart, bottom panel). Yet, in the United States and in a few European economies (especially Greece and Spain), the labor share remains well below its pre-crisis level.


And one concomitant effect of this rise in profit share and inequality of income and wealth is a further rise in poverty.  A recent report on the UK found that almost seven million adults of working age are struggling financially, finding it difficult to feed themselves and their families despite working full-time.   Poverty is rising among those with jobs, let alone those without.  Around 3.6 million British households say they are unable to cope on their income and have no assets or savings to fall back on, leaving them vulnerable if they face a sudden large expenditure. And one group that is suffering most are young people.

The number of young people unemployed for more than a year has increased almost nine-fold over the past decade, according to a new study by Britain’s trade union federation.  The TUC said the number of 18 to 24-year-olds out of work had soared by 874%, from 6,260 to 60,955 since 2000, going up by 264% in the last year alone.  Long-term unemployment across all age groups increased by 50%. Workers aged between 18 and 21 have seen their pay rise by 35%, around 3% less than the rise in inflation, compared with average wage increases of 41%, said the report.
And there is nothing unique about Britain.  The story is the same in the US.  A recent report by the

US Bureau of Labor Statistics (A Profile of the Working Poor, 2010) fod (BLS Report 1035), published in March 2012 showed that “10.5 million individuals were among the “working poor” in 2010; this measure was little changed from 2009 … In 2010, the working-poor rate—the ratio of the working poor to all individuals in the labor force for at least 27 weeks—was 7.2 percent, also little different from the previous year’s figure (7.0 percent) … 4.2 percent of those usually employed full time were classified as working poor, compared with 15.1 percent of part-time workers.”

The Great Recession and the Long Depression reveal the stark contrasts.  Jimmy Carr may have ‘worked very hard’  to earn his millions, but there are millions of others also working very hard for so little that taking advantage of tax avoidance schemes is never going to be a “judgement call” for them, as it was for Carr.  They are just struggling to make ends meet.