LESSON - Web viewTaxes collected by Her Majesty’s Revenue and Customs (HMRC) are used to...

LESSON 1: Ethics and Government. Richard Sharp, 2016

Contents

LESSON 1: Ethics and Government. ,

1. Objectives and Activities. Page 1,

2. Overview of individual and corporate taxation. Page 2,

3. Defining tax avoidance. Page 3,

3.1. Activity. Page 4,

4. Should corporations be treated like individuals? Page 5,


5. Utilitarianism. Page 6,


6. Governmental focus on business. Page 7,


7. What are the aims of corporate business? Page 8,

8. Can there be an economic measurement of Utility? Page 10,



References: Page 12,

1. Objectives and Activities.

Students completing this lesson will:

Reflect on the UK Government’s attitude to individual and corporate taxation.

Relate Utilitarian ethical theory to the operation of government.

Consider whether nationally aggregated economic statistics such as Gross Domestic

Product (GDP) are a useful measure of governmental success or benefit to society.

Complete the discussion activities listed throughout the document. Record your

views and reasoning when completing any discussion activity.

Perform an independent research activity.

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2. Overview of individual and corporate taxation.

Taxes collected by Her Majesty’s Revenue and Customs (HMRC) are used to fund the

resources of the state, with which the Government can serve society and its citizens. The

democratic process facilitates collective acceptance of the principle of taxation, whereby

members of society pay their fair contribution to the upkeep of the state. Income Tax for

individuals is progressive, using thresholds and bandings. The progression built into income

tax allows the Government to distribute the tax burden fairly and with consideration of

individuals’ ability to pay.

Table 1: Tax Rates for individuals (HMRC, 2016a)

Taxable income 2016 to 2017 Tax Rate Tax band descriptionUp to £32,000 20% Basic rate£32,001 to £150,000 40% Higher rateOver £150,001 45% Additional rate

Table 2: Tax Rates for corporations (HMRC, 2016b)

Taxable profits 2016 to 2017 Tax RateUp to any amount 20%

Currently, for individuals, basic tax of 20% is due on income between £11,000 and £43,000

(UK Government, 2016b). The most current published HMRC percentile statistics for before-

tax income are for 2013/14. The statistics show that the median before-tax income of tax

payers was £21,900 (the 50th percentile), 6% of the tax-paying population had incomes

which fell below £11,000, and 85% had incomes which fell below £42,500 (UK Government,

2016c).

These percentile statistics are available in spreadsheet format from the GOV.UK National

Statistics website: percentile statistics for total income. NOTE: the website includes

provision for users of assistive technology to request alternative formats.

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https://www.gov.uk/government/statistics/percentile-points-from-1-to-99-for-total-income-before-and-after-tax

From April 2015 Corporation Tax was set at a flat rate of 20% for all businesses excluding the

oil industry. This removed forms of tax banding and progression for corporations. This

action also reduced the tax rate for multinationals and large corporations to what had

previously been called the “small profits rate” (UK Government, 2015). In the 2016 Budget,

the then Chancellor of the Exchequer George Osborne proudly announced that by 2020,

corporation tax would be reduced further to 17% (UK Government, 2016a). However, an

article in the Independent newspaper dated 24th of October 2016 (Kentish, 2016) suggested

that government ministers are now considering halving corporation tax to 10%, in order to

strengthen the UK’s position in EU exit negotiations.

In terms of the UK’s tax liability, the Institute for Fiscal Studies (2014) said that, for the 2014-

15 tax year, 11% of total receipt forecasts came from Company Taxes. The bulk of the rest

were taxation methods linked to the activity of individuals (Institute for Fiscal Studies, 2014,

p. 5).

3. Defining tax avoidance.

Politicians, commentators, and tax experts, when discussing the avoidance and evasion of

tax, use terminology found in ethical arguments such as morality, good-faith, bad-faith, and

by referring to outcomes as separate from intentions. In his 2012 Budget Speech,

Chancellor of the Exchequer, George Osborne said that he regarded both tax evasion and

aggressive tax avoidance to be “morally repugnant” (Osborne, 2012, p. 16).

Tax evasion is the offence committed when individuals or businesses deliberately, and

knowingly, act illegally in order not to pay tax that is due. Tax avoidance, according to many

is more difficult to define. In a House of Lords debate on the 24th of May 2006, asked

whether the Government would clarify definitions of avoidance and evasion, Lord McKenzie

replied that “these terms lack any single or universally applied legal definition [and] depend

upon the context in which they are used” (UK Parliament, 2006). However, many of the

accepted definitions of avoidance are like the one given by David Gauke, 2010 Exchequer

Secretary, who explained it as “compliance with the letter but not the spirit of the law” (UK

Parliament, 2010). A further definition was supplied by Graham Aaronson QC who, on

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giving evidence to the Lords Economic Affairs Committee in January 2013, said that the term

avoidance is unhelpful and that the matter for consideration is tax planning. He explained

that it may be good or bad, it may also be performed in good faith or deceitfully, but these

distinctions are entirely dependent on the viewpoint and intention of the individual (Seeley,

2015).

Complications arise in the grey areas between evasion and avoidance, and then for those

who recognise a further distinction: between legitimate avoidance, sometimes called tax

planning, and aggressive or abusive tax avoidance. Jamieson (2015) coined the phrase “tax

avoision” to represent the indistinctness between avoidance and evasion.

For many years UK tax law, has been “specifically targeted rather than purposive” (Seeley,

2015, p. 3), with laws which cover specific situations. This creates room for inventive

navigation of the tax system for those who have the resources to act to reduce their tax bill.

There has been extensive coverage in the media of multinationals such as Google, Amazon,

and Starbucks who have used various practices to avoid corporate tax liability. Later

investigations have often resulted in a mutually acceptable deal between the multinational

and HMRC, with the company agreeing to pay back far less than the original debt in a so

called sweetheart deal. In 2011 the Public Accounts Committee (PAC) released its summary

on tax disputes with HMRC, saying that “large companies appear to receive preferential

treatment compared to small businesses and individuals” (Public Accounts Committee,

2011). Former tax inspector Richard Brooks explained differences in attitude by HMRC

when pursuing tax investigations and prosecutions, by saying that “the poor make easier

targets than the rich” (Brooks, 2014, p. 13).

3.1 Activity.

Discussion 1: Do you think that it is necessary for corporation tax to be lower than

the basic rate for individuals, and to be a flat-rate?

Discussion 2: Do you feel that the Government treats individuals and businesses

differently as sources of tax revenue?

Pause to answer or discuss before returning to the lesson material [End of activity].

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4. Should corporations be treated like individuals?

When a business registers as a company it acquires the attributes of a legal person. The

corporation gains legal and operational benefits from its classification as an individual entity,

and becomes subject to law and regulations relating to its actions and responsibilities. The

Crown Prosecution Service (CPS) website states that in terms of its legal responsibilities, a

company “should not be treated differently from an individual because of its artificial

personality” (Crown Prosecution Service, n.d.).

The Government expects, and enforces, that people meet their legal obligations in relation

to tax due on their earnings. However incorporated businesses often argue that when

pursuing aggressive tax avoidance strategies, they are meeting their obligations to their

shareholders, whilst also meeting their legal obligations to the Government.

4.1 Activity.

Discussion: Corporations, like individuals, are required to pay their taxes. However,

some corporations justify aggressive tax avoidance strategies because of the

obligation to act on behalf of their shareholders. Do you agree with this logic?

Could you create a similar argument for individuals and the responsibilities that they

may have? Do you think that your argument would be accepted by HMRC?


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5. Utilitarianism.

Utilitarianism measures social institutions by how practical and useful they are. This ethical

theory is often summarised by the slogan to do the greatest good for the greatest number.

Bentham (1781) said that utility, in consideration of an action, is the measure of producing

benefit or good, and reducing or preventing the opposite. Utility is considered from the

perspective of the individual and of the wider community. An action affecting society, such

as an action of government, is Utilitarian “when the tendency it has to augment the

happiness of the community is greater than any it has to diminish it” (Bentham, 1781, pp.

ebook location 266-268).

Mill (1879) asserted the importance of the individual in the Utilitarian argument with the

identification of a hierarchy of moral rules including “the moral rules which forbid mankind

to hurt one another” (Mill, 1879, p. 67). He also said that utility is not only the pursuit of

happiness but also the prevention of unhappiness: where happiness is difficult to define, or

achieve overall, then there is more need to focus on the minimisation of unhappiness.

5.1 Activity.

Discussion 1: Does this picture of Utilitarianism fit with your view of how a

government should act to serve society?

Discussion 2: When seeking to achieve a Utilitarian benefit for the greatest number,

do you think that it would be acceptable for a government to sacrifice the needs of a

part of society to achieve that overall aim?


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6. Governmental focus on business.

A Government is elected to serve the public interest. The question is: is public interest best

served by an impersonal focus on the economy to the exclusion of other considerations?

Corporations have argued, as Friedman (1970) proposed, that it is not their responsibility to

regulate or concern themselves with society; and that the only logical goal of business is to

pursue the self-interest of generating profit. Campbell and Kitson say that business

organisations are outside the moral realm. They suggest that it is “[as] absurd to require an

organisation to act justly or to behave charitably as it would to expect the sea to be

responsible in deciding which bits of the coastline to erode” (Campbell & Kitson, 2008, p. 4).

De Mooij & Keen (2015), from the International Monetary Fund’s Fiscal Affairs Department,

suggested that corporation tax can be a deciding factor in businesses moving from or to, a

country. They argue that disadvantageous corporate tax rates could cause a business to

move its base of operations elsewhere, and that while that action would help the business’

shareholders, it would disadvantage the workers, economy, and society of the country

vacated. They offer this justification of low corporation tax rates as having logic in a

Utilitarian sense.

It is often stated as a general concept of free-market economics, as well as in defence of low

corporate taxation, that improving the lot of large businesses and the rich, will lead to the

improvement of the general economy and therefore the rest of the population. Friedman

(1970) and like-minded free-market economists and politicians say that the way a business

helps society is to provide employment and investment which in turn fuels the economy and

wider society. This benefit is said to occur in a trickle-down manner where wealthy

individuals and businesses re-invest their profits in a way that produces growth and a

spreading of wealth. However, Dr Ha-Joon Chang, economics tutor at Cambridge University,

disagrees with the idea that making the rich wealthier automatically makes the poor better

off. He says that for this to work to any degree, “the rich have to be made to deliver higher

investment and thus higher growth through [conditional] policy measures” and then the

benefits of this growth need to be distributed through state mechanisms (Chang, 2010, p.

147).

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Brooks (2014) argues that Government’s focus on the profits and operation of big business

has reinforced and legitimised tax avoidance practices, which makes an ethical discussion of

tax avoidance more complex since the UK Government now views corporation tax from the

point of view of large business and the tax avoidance industry (Brooks, 2014, p. 180).

Successful companies consider the customer in all aspects of their operation, since there is a

direct link between the customer and their measurement of the business’ success. A

government which measures its success in terms of aggregate economic figures will

necessarily view those who contribute directly to that measure as their key stakeholders.

6.1 Activity.

Discussion: Does a focus on aggregate economic statistics as a measure of

governmental success lead to a disproportionate consideration for the interests of

corporate business; i.e. those entities thought to contribute most directly towards

this measure?


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7. What are the aims of corporate business?

Although Friedman (1970) asserted that business has no responsibility to be ethical and only

needs to concern itself with the pursuit of profit, Fleming and Jones (2013) point out that

the logical extreme to this argument is that businesses are irresponsible if they act upon

ethical motives. This view was indirectly expressed by Google CEO Eric Schmidt in 2012

when he said that they pay their taxes “in the legally prescribed ways” and that in their

shareholders’ interests they could not pay more tax than they were legally obliged to do,

adding “there is probably some law against doing that” (Kumar & Wright, 2012).

Google Chairman Eric Schmidt (Kumar & Wright, 2012).

Businesses are achieving success if they grow and become more profitable. The

Government has stated its intention to support business in these aims, saying that

“businesses are the lifeblood of the economy, and it is enterprise and innovation by British

business which will deliver growth and opportunity for the next generation” (HM Treasury,

2016). However, any societal goals are incidental to the aims of business. Those controlling

corporate businesses aim to grow, to improve their share price, to meet shareholder

expectations and pay dividends, and to reward themselves appropriately. In their

employment of workers, as with other resources and raw materials, their aim is to reduce

costs and pay as little as possible.

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8. Can there be an economic measurement of Utility?

Governments running on free-market, capitalist lines may assume that when the country is

better off in terms of aggregate economic measures, then the entire population is also

better off. However, can this position accurately reflect a measurement of utility for the

individual members of society, or the whole of society?

8.1 Activity.

Research: Perform research to find support of the view that capitalism and free-

market policies are the best method for delivering benefit to society. Summarise

and comment on the views expressed. (For example, see Milton Friedman).


Data from the Office for National Statistics website (2015a) shows that between July 2012

and June 2014 in the UK “the wealthiest 10% of households owned 45% of aggregate total

wealth [and] the least wealthy half of households owned 9% of total aggregate household

wealth” (Office for National Statistics, 2015a).

Figure 1 below, demonstrates the percentages described. It shows the aggregate total

wealth grouped by deciles. “Deciles divide the data, sorted in ascending order, into ten

equal parts so that each part contains 10% (or one-tenth) of the wealth distribution – from

the least wealthy households in the first decile to the wealthiest in the 10th decile” (Office

for National Statistics, 2015b).

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Figure 1: Aggregate total wealth July 2012 to June 2014, grouped by deciles and

components (Office for National Statistics, 2015b). The components of aggregate wealth

measured are: property, financial, physical, and pension wealth.

Further analysis of the data accompanying the aggregate wealth graph (CSV format) shows

that while the wealthiest 10% owned 45% of aggregate total wealth; in terms of the

individual components they owned: 40% of property wealth, 23% of physical wealth, 48% of

pension wealth, and 65% of financial wealth (Office for National Statistics, 2015b).

8.2 Activity.

Discussion 1: Can utility for all members of society be assessed by measuring the

aggregate worth of the country?

Discussion 2: Can you suggest other definitions or variables which could be used to

measure Utilitarian benefit for the whole of society?


[End of Lesson].

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References.

Bentham, J., 1781. An Introduction to the Principles of Morals and Legislation. 1st ed. Kindle

Edition ebook: White Dog Publishing.

Brooks, R., 2014. The Great Tax Robbery: How Britain became a Tax Haven for Fat Cats and

Big Business. 2nd ed. London: Oneworld Publications.

Campbell, R. & Kitson, A., 2008. The Ethical Organisation. 2nd ed. Basingstoke: Palgrave

Macmillan.

Chang, H.-J., 2010. 23 Things They Don't Tell You About Capitalism. 1st ed. London (ebook):

Penguin Group.

Crown Prosecution Service, n.d. Corporate Prosecutions. [Online]

Available at: http://www.cps.gov.uk/legal/a_to_c/corporate_prosecutions/

[Accessed 20 November 2015].

De Mooij, R. & Keen, M., 2015. Taxes in practice: it is hard to design a fair and efficient

revenue system. Finance & Development, Vol. 52(No. 1), p. 48.

Fleming, P. & Jones, M. T., 2013. The End of Corporate Social Responsibility. 1st ed. London:

Sage Publications Ltd.

Friedman, M., 1970. The Social Responsibility of Business is to Increase its Profits. New York

Times Magazine, 13 September.

HM Treasury, 2016. Budget 2016. [Online]

Available at:

https://www.gov.uk/government/publications/budget-2016-documents/budget-2016

[Accessed 27 October 2016].

HMRC, 2016a. Income Tax rates and allowances: current and past. [Online]

Available at: https://www.gov.uk/government/publications/rates-and-allowances-income-

tax/income-tax-rates-and-allowances-current-and-past


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HMRC, 2016b. Rates and allowances: Corporation Tax. [Online]

Available at: https://www.gov.uk/government/publications/rates-and-allowances-

corporation-tax/rates-and-allowances-corporation-tax


Institute for Fiscal Studies, 2014. A survey of the UK tax system [IFS Briefing Note BN09],

London: Institute for Fiscal Studies.

Jamieson, B., 2015. Comment: Tax avoidance a grey area with 50 shades?. [Online]

Available at: http://www.scotsman.com/news/comment-tax-avoidance-a-grey-area-with-

50-shades-1-3691108


Kentish, B., 2016. Brexit: Government 'may have to slash corporation tax' to put pressure on

EU in negotiations [The Independent]. [Online]

Available at: http://www.independent.co.uk/news/uk/politics/brexit-latest-business-

corporation-tax-eu-referendum-article-50-a7376816.html


Kumar, N. & Wright, O., 2012. Google boss: I'm very proud of our tax avoidance scheme [The

Independent]. [Online]

Available at: http://www.independent.co.uk/news/uk/home-news/google-boss-im-very-

proud-of-our-tax-avoidance-scheme-8411974.html

[Accessed 22 April 2016].

Mill, J. S., 1879. Utilitarianism. 7th ed. London: Kindle Edition.

Office for National Statistics, 2015a. Main results from the Wealth and Assets Survey: July

2012 to June 2014. [Online]

Available at:

https://www.ons.gov.uk/peoplepopulationandcommunity/personalandhouseholdfinances/

incomeandwealth/compendium/wealthingreatbritainwave4/2012to2014/

mainresultsfromthewealthandassetssurveyjuly2012tojune2014


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Office for National Statistics, 2015b. Chapter 2: Total wealth, Wealth in Great Britain 2012 to

2014. [Online]

Available at:

https://www.ons.gov.uk/peoplepopulationandcommunity/personalandhouseholdfinances/

incomeandwealth/compendium/wealthingreatbritainwave4/2012to2014/

chapter2totalwealthwealthingreatbritain2012to2014


Osborne, G., 2012. Budget 2012. [Online]

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http://webarchive.nationalarchives.gov.uk/20120404102922/http://www.direct.gov.uk/

prod_consum_dg/groups/dg_digitalassets/@dg/@en/documents/digitalasset/

dg_201480.pdf


Public Accounts Committee, 2011. HM Revenue & Customs 2010-11 Accounts: tax disputes -

Public Accounts Committee. [Online]

Available at: http://www.publications.parliament.uk/pa/cm201012/cmselect/cmpubacc/

1531/153103.htm


Seeley, A., 2015. Tax Avoidance: a General Anti-Abuse Rule (Briefing paper 06265), London:

House of Commons Library.

UK Government, 2015. Rates and allowances: Corporation Tax. [Online]

Available at: https://www.gov.uk/government/publications/rates-and-allowances-

corporation-tax/rates-and-allowances-corporation-tax


UK Government, 2016a. Budget 2016: some of the things we've announced. [Online]

Available at: https://www.gov.uk/government/news/budget-2016-some-of-the-things-

weve-announced


UK Government, 2016b. Income Tax rates and Personal Allowances. [Online]

Available at: https://www.gov.uk/income-tax-rates/current-rates-and-allowances

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UK Government, 2016c. Percentile points from 1 to 99 for total income before and after tax.

[Online]

Available at: https://www.gov.uk/government/uploads/system/uploads/attachment_data/

file/503396/Table_3_1a_14.xlsx


UK Parliament, 2006. Publications and records. Taxation: Avoidance and Evasion. [Online]

Available at: http://www.publications.parliament.uk/pa/ld200506/ldhansrd/vo060524/

text/60524w03.htm#60524w03_sbhd4


UK Parliament, 2010. Publications & records. Finance Bill 12 Jul. [Online]

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debtext/100712-0002.htm#10071224000032


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