The riddle of tax morality

There is a very old riddle that starts by stating that someone has built a house where all 4 walls face south. A bear walks past. What colour it is? Just in case you don't know the answer, I won't spoil it for you, and least for now. However, what is clear is that this riddle assumes that there’s either something rather odd about the building or the compass. But which?

The concept of the Tax Gap has been around for a long time. There have been many debates about exactly what it represents, how it might best be measured, and even who should have the responsibility for measuring it (see Richard Murphy’s blog). But there is little doubt it exists in one form or another. It is clear that the UK government is not collecting the amount of tax is could, if every amount of income, profit or transaction was taxed in line with the law. Whatever one might think about tax avoidance, tax planning and the use of tax incentives, one thing is certain. There always has been, is, and probably always will be tax evasion.

So often the current debate is about morality in the context of tax avoidance, but is this the only place where morality is relevant to the tax gap? Is morality actually also relevant to tax evasion?

Tax evasion comes in many guises, but ultimately it results from breaking the law. It’s usually portrayed as multi-national businesses failing to pay the tax correctly due under the law, and we are right to be critical of this behavior. However, it equally applies to the small trader providing services to individuals, and suggesting that there might be a “discount for cash”. In some cases this might be a bona fide incentive to improve cash flow. Small businesses are heavily reliant on effective collection of debts. However, it can also often reflect the intention to under-declare income.

So here is the problem. In this country we tend to think of small businesses or the self employed who deliberately look to under declare income as loveable rogues. We have grown up with Arthur Daley and Del Boy on UK television. We seem to have a soft spot for individuals who cheat the system, so we don’t look quite so closely at the moral compass when considering whether to pay that lower cash amount.

I wonder how many of us would balk at the suggestion from a large multi-national that we pay for their goods in cash, so they can keep it off the books.

It appears that we as a nation are rather prone to looking at the moral compass in different ways depending on the circumstances. If we choose to have a moral compass when it comes to tax, surely it should apply equally whichever direction you are facing.

The significant challenge facing policy makers is how to change this culture, and effectively tackle the under declaration of income. It is perhaps the difficulty of this talk that has resulted in the moral compass being so firmly pointed at multi-nationals.

Going back to the riddle, there is nothing wrong with that compass. And the bear? It’s white.