Posted by Christie Malry on December 18, 2014 at 1:24 pm
the Tories have realised, rather late in the day, that cutting taxes does not in any way end tax avoidance.
This is obviously untrue.
Imagine a country with a tax rate of 20%. And suppose companies are very, very badly behaved. So bad, they use no end of (legal) tax avoidance techniques to dodge half the taxes due. Suppose the cost of this is 1% of their taxable profits.
If the government of that country cut the tax rate to 10%, there would no longer be any need to avoid taxes. Companies would be better off sacking their tax advisors and simply paying the tax due. Because the net cost of doing this would be 10% of (pre avoidance) taxable profits, not the current 11% (yet don't lose sight of the fact that they *should* be paying 21%: the 20% statutory rate plus the 1% they've decided to spend on advisors).
But suppose they keep on paying their advisors to dodge even more tax. Suppose those devilish lawyers manage to produce a 5% effective rate of tax in return for their 1% fee. Then the company would be paying 6% instead of 10% so it would continue to avoid. But the amount avoided is only 5% of taxable profits, not the 10% when taxes were higher.
Lowering the tax rate necessarily reduces tax avoidance because of these two effects. Firstly because it reduces incentives to avoid in the first place. Secondly because it reduces, arithmetically, the level of any avoidance that does taken place.
Making it utterly ludicrous to suggest that cutting taxes doesn't reduce tax avoidance "in any way".