I avoid, you evade, he defrauds: the semantics of cheating

Here we go again. Yet another “war on benefit fraud”, with David Cameron pumping his biceps and promising an “uncompromising” clampdown on “welfare cheats”.

Fair enough: if benefit fraud is, as reported, £1.5bn a year then that’s money that would be better spent elsewhere. But as many have pointed out, the amount stolen through benefit fraud is far lower than the amount stolen through tax evasion – a reported £15bn a year, equivalent to 3% of total tax liabilities (compared with 0.8% for benefit fraud).

Yes, the authorities take action against tax evasion as well as benefit fraud, but we don’t have the same steady drumbeat of propaganda implying that benefit fraud is to blame for most of society’s ills. Where are the bus-stop ads with freefone numbers for shopping tax cheats? Where the outraged middle-market tabloid headlines? Are HMRC using credit reference agencies to help catch tax evaders?

In short, the emphasis on benefit fraud is as much concerned with blaming the poor for their own problems and delegitimising welfare benefits, and claimants, generally (“They’re all at it, you know”).

However, in pointing this out we need to be careful that we do not make basic errors that let our opponents off the hook (“You don’t know what you’re talking about, LOL!”). In particular we need to be careful in distinguishing between tax evasion and tax avoidance, rather than falling into the trap exemplified by this tweet doing the rounds today:

Tax evasion – failing to pay tax which you are legally required to pay – is fraud and a criminal offence. Tax avoidance is a different matter: it is “simply” minimising the amount of tax which you are legally required to pay in the first place. Nothing illegal about it, at least until the occasionally-mooted “general anti-avoidance measure” sees the light of day.

And in broad terms there is “good” tax avoidance and “bad” tax avoidance. “Good” tax avoidance is what most of us do in one shape or form. If you put your savings in an ISA rather than a conventional deposit account, you’re “avoiding” paying tax on the interest. If you pay your pension contributions through a “salary sacrifice” scheme rather than as a deduction from pay, that’s tax (or, to be precise, national insurance) avoidance. If you invest in a company through an EIS, that’s tax avoidance. These things are all above-board and recognised by HMRC as legitimate means of minimising one’s tax exposure.

“Bad” tax avoidance is what many large corporations and rich individuals do, using complex and artificial arrangements to exploit loopholes in tax legislation. Perfectly legal but (in the view of many people) ethically murky. Not that it’s easy to draw a clear line between “genuine transaction carried out in a tax-efficient way” and “artificial transaction carried out purely to exploit the tax rules” – which is why the “general anti-avoidance measure” never progresses beyond party manifestos.

So in summary: yes, we need to point out repeatedly that for every pound lost in benefit fraud there is at least £15 lost in tax evasion, and probably even more lost in “bad” tax avoidance. To put it bluntly, we need to make it clear that depriving the exchequer of revenue is mainly something that rich people do rather than poor people. But if we’re not clear in the distinction between “illegal” and “legal but probably shouldn’t be”, then it’ll be all-too easy for the Tories to avoid, and indeed evade, this issue.


4 thoughts on “I avoid, you evade, he defrauds: the semantics of cheating”

  1. If there is a clear distinction to be drawn between “good” and “bad” tax avoidance, you have not drawn it, leaving me to suspect that the only thing bad about “bad” tax avoidance is that rich people do it.

    The tax code is used (at least here, but I suspect just as much in the UK) not only to generate revenue, but to promote policy goals. If a middle-class family puts the $10,000 a year that they are legally entitled to into their tax-deferred savings account, they are behaving the way that the tax code encourages them to behave. If a multi-millionaire goes through more arcane and complex machinations to save a few tax dollars, he is also behaving as the tax code encourages him to do. I frankly see no ethical difference.

    If the behaviour of the rich man in response to the tax code is not the behaviour that you want, the answer is not to moralize about how “evil” the rich are for behaving in their own interests (as, after all, we all do), as if he is somehow “stealing” from the exchequer. The answer is either to design the tax code to encourage the behaviour from the rich that is desirable, or (far better) to give up the idea of using the tax code to manipulate behaviour and design it simply to raise the revenue that the state needs (and no more!).

    1. Chris: I wasn’t particularly intending to moralise about the behaviour of the rich (I never used the word “evil”, for example). As you say, they are entitled to arrange their affairs so as to minimise their tax. That said, I do think there is a distinction between transactions that are carried out as tax efficiently as possible and transactions whose primary (or only) object is to avoid tax. (See, for example, the way in which certain assets used to be “flipped” – sold at the end of one tax year and bought back at the beginning of the next – in order to realise gains and reduce future capital gains tax exposures.)

      The main point, however, is where the focus of policy and enforcement should lie.

      Why is the energy put into condemning and “cracking down” on benefit fraud so much greater than that put into (a) taking action against tax evasion and (b) finding ways to limit legal (but unwelcome) tax avoidance?

      It can’t simply be a rational desire to maximise revenues (since benefit fraud accounts for so much less money than tax evasion), nor even a more exalted desire to promote virtue and suppress vice among the citizenry: as you point out, there are “policy goals” here, in particular the delegitimisation of the welfare system, and benefit claimants, as a whole.

  2. I have no quarrel with your main point (quite the contrary).

    “transactions whose primary (or only) object is to avoid tax.”

    I don’t think this is a relevant distinction, because it applies both to avoidance you have characterised as “good” and that which you have characterised as “bad.”

    At the risk of generalising from my own experience, I regard tax-deferred savings plans as “transactions whose primary (or only) object is to avoid tax.” When I was younger (i.e. when I certainly should have started saving for retirement), I never had anything extra to put by at the end of the month. Despite the enticement of tax-deferred schemes, I never saved a penny. Now that I have come into a bit of an inheritance, I have a bit of money in the bank. Every year at tax time I move some of that money (the maximum allowable) into a tax-deferred scheme. That is a “transaction whose only object is to avoid tax.”

    It is not as if people were saving for retirement anyway, and now that we have tax deferral they are just doing what they were already doing in a more tax-efficient way; the whole point of tax deferral schemes is to encourage people to do what they ought to have been doing, but weren’t doing — to do the transactions we want them to do “only to avoid tax”.

    What’s true of tax-deferred savings is also true of a myriad of other policy-driven tax schemes. To take just one more example, people borrow too much money to buy homes they cannot afford because it is a tax shelter. Countless transactions — and not just on the part of the rich — have been undertaken on the basis that “the Exchequer will pay half.”

  3. Aksherly, HMG is dealing with tax evasion and complicated avoidance dodges: only perhaps not the way that you’d like! The Government has set up an Office of Tax Simplification, which has a mandate to simplify the tax system by broadening the base and lowering the rate: in other words, by removing reliefs and potential loopholes, with compensation through cutting the overall rate. One of the effects of this should be to reduce evasion by making it harder and less remunerative.

    It’s not as headline-grabbing as ‘cracking down on benefit cheats’, and curiously the Government itself isn’t plugging this as a benefit, but tax simplification is a solution well-suited to the problem of evasion.

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