Rule of law

If there’s any element of morality worth discussing with respect to tax avoidance, I think it needs to be done under the heading of ‘rule of law’.

It’s something that was raised by Nigel Mills MP at this week’s House of Commons debate. It’s also something that David Goldberg QC argued was being undermined by the Public Accounts Committee. Both are very worthwhile contributions and actually speak more about morality than the superficial moralising that the media indulges itself in.

Law is not a substitute for morality or even natural justice. The law aims to be moral. It aims to implement natural justice. But it does not presume to substitute itself for those because it is an artificial construction.

It is, however, considered a moral necessity to observe and respect the rule of law. Most moral theories arguably support this contention, but I personally follow a Kantian categorical imperative. Basically, could I will it that everyone disregard laws in accordance with their own moral choices? No. Moral agents must therefore observe the rule of law.

It’s important to note that the rule of law isn’t just obeying whatever laws are in existence, regardless of the relationship between individual and state. The rule of law means something quite distinct from the requirement to obey the law.

The purpose of the rule of law is effectively to remove arbitrary governance and the risk of oligarchy or ochlocracy, being the arbitrary rule of the few or the many respectively. The law is there to provide an objective, principle-based guide to what is considered just by society. The rule of law applies equally to all and no individual should be above it.

To my mind, this touches on the fringes of what is known as the ‘social contact’.

The social contact is a term used to describe the submission of individuals to the state. There are various formats of it, originating in Ancient Greece. Glaucon, Plato’s brother, describes a social contract in Republic. A certain tax enthusiast might care to note that Glaucon was an actual sophist…

The social contract tends to fall under two categories: one where ‘the people’ contract with ‘the state’, and one where all individuals contract with each other.

The former appears to me to be more authoritarian in nature, an example being Hobbes saying that future generations will be bound by the existing contract.

An alternative is put forward by Rousseau author of The Social Contract. Rousseau preferred the second formulation but went a bit further and said that the the social contract was the mechanism by which ‘the state’ was brought into existence. He distinguished this from ‘the sovereign’ which is the collective of individuals entering the social contract.

Rousseau advocated that the social contract was freely entered. I believe this to be an essential part of the social contract for it to be valid. However, I do believe that we can accept the social contract passively by accepting the status quo.

So how does this relate to the rule of law? Well, this is the basis of the existence of the state and the legislator appointed to codify and safeguard the law. I think that the distinction between the state and the sovereign here is of extreme importance.

Although the law is codified by the legislator, its ultimate authority derives from the sovereign, ie the democracy that endorses the legislator. The sovereign dictates the general principles of the law and the legislator basically tries to implement these in detail.

This is one of the reasons I think  an independent judiciary is so integral to our justice system. The law exists independently of the legislator and must not be open to their retrospective interpretation. There are basic principles of law which cannot be compromised.

Also, it is worth considering that the failure of law is not the same thing as the failure of the rule of law. The failure of law is the failure of the legislator. And in some respects, the failure of the legislator is the failure of the sovereign to impose itself on the legislator.

Most of the moral arguments I have read against “tax avoidance” fail to acknowledge the concept of the rule of law or ignore it deliberately so as to excuse arguments that undermine it. I am thinking in particular of the discussions regarding multinationals where most of the popular stories are clearly within the intention of the law.

Yes, there are cases of actual tax avoidance around, cases which are deliberate attempts to subvert the intention of law. But these are distinct from the cases where the law is implemented as intended, despite it being to the detriment of tax revenues in the UK.

In this latter situation, such as Starbucks for example, I don’t believe it is right that the individuals can be called immoral. They appear to have  observed the intention of the law in good faith.

There is no moral imperative to pay more tax than legally due. The moral imperative in paying tax at all derives from observing the rule of law and nothing else. If the rule of law is observed faithfully, there is no moral argument for paying more.

There is nothing inherently good or bad about tax in itself. It is not moral in character. It is an action wholly defined by its context. And its context is the rule of law.

About Ben Saunders

I'm a Chartered Tax Adviser and a freelance writer. This is my personal blog about, well, mainly taxation. I might put other stuff in. Who knows.
This entry was posted in being pretentious, Ranting, Rule of law, Talking Tax, Trains of thought from a train. Bookmark the permalink.

4 Responses to Rule of law

  1. botzarelli says:

    Regarding Starbucks I think you’ve fallen into the trap of taking part of the critics’ definition of tax avoidance to assume that its actions were just as a result of legal interpretation of the applicable tax laws.

    Starbucks will have engaged in some planning to minimise its tax liabilities in this way but taking a broad look at its business my conclusion is that the structures it used were actually perfectly sensible from a business perspective even if no tax planning was involved. Any avoidance was therefore more likely to have been as a result of tweaking what a business of that sort would normally be expected to have done rather than the caricature that it devised an avoidance structure and built its business around it (which is the thrust of the argument from the PAC et al).

    • I broadly agree with your point (I haven’t had a chance to read your post in full yet, just a quick scan, but will after work).

      Purely from a tax perspective, the tax law supports the OECD transfer pricing principles which aim to implement an arms length value to the transaction. I think that’s clearly what Starbucks did in light of their other licensing arrangements with unconnected third parties. I don’t think there was much tax consideration in it at all either.

      Thanks for the comment.

  2. Andrew Jackson says:

    I agree entirely.

    I think it just comes down to the Duke of Westminster principle.

    The criticisms at the moment are largely that multnationals are making profits in places which are not the UK.

    Multinationals can establish themselves wherever they like, just as individuals can. It’s a bit harder for an individual to up sticks and move than for a company to create a new person to live somewhere else, but the option is still there.

    So given that a company can operate anywhere, why should it choose the UK? Duke of Westminster says there’s no reason it should.

    After that it all comes down to transfer pricing, which even in half-way informed debate seems to be people saying “hey, this sort of thing should be regulated” – which of course it is.

    The main problem with transfer pricing, I think, is that it works well on income flows but the capital transfers of the nuderlying assets tend to be discounted very heavily for the alleged risk that income won’t flow. If every bit of IP transferred from the UK to Bermuda gave rise to a capital gain in the UK that bore some relationship to the income actually received (rather than saying “well, in theory we could stop using it at 6 months’ notice so the value is only on 6 months’ worth of revenue”) the playing field would be levelled a bit. I have no problem with people making £1bn a year tax-free in Bermuda, if they paid CGT on say £10bn for the privilege upfront; I do mind if they only paid CGT on £1bn because the contract was – in theory but not in any practical likelihood – terminable at short notice.

    The analogy I’m using at the moment in pub conversations is supermarkets. One way to characterise the criticisms is that if profit generated in Ireland had been generated in the UK, the UK would get the tax on it; so by basing yourself in Ireland you make profits without paying tax to the UK and so you’re depriving the UK of its rightful income. But if I choose to shop in Sainsbury’s instead of Morrison’s, I get goods without paying anything to Morrison’s. Am I wrong to deprive Morrison’s of its rightful income? Not if I think I can get what I want better and cheaper in Sainsbury’s; and anyway, if I think Morrison’s is actually better but just want to boycott them for some reason, then that’s my privilege: Mr Morrison has no claim to my custom.

    Actually, put in Starbucks and Costa instead of supermarkets and I think you turn things around quite nicely. Former Starbucks customers who boycott Starbucks and go to Costa instead are, if the UK/Ireland tax argument has any merit, stealing from Starbucks 😉

    Sorry, ended up being rather a digression there 🙂

  3. Pingback: The immorality of ISAs | Ben Saunders CTA

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