The morality of taxation is a taxing issue

The economic news in the UK before this week’s Autumn Statement was about the morality of tax avoidance by companies.    Chair of the Public Accounts Committee, Margaret Hodge, was widely quoted, coming down particularly hard on what she called ‘completely and utterly immoral’  tax avoidance schemes.

As a seasoned politician Hodge is well aware of the value of a sound bite, but her full comments were measured and realistic, suggesting that Government should be more aggressive in testing the law, negotiate harder where this was called for, simplify the tax laws and make sure there is more transparency in the tax dealings of companies.

Nevertheless the idea of the ‘moral company’ is worth reflecting upon.      

After all, the limited liability joint stock company is not an institution that has well conceived if morality is the goal. The whole principle of the beast is that people get to take risks with other people’s money while limiting their personal liability, while the investors in the business get to take a morally ambiguous arms length position in relation to the decisions of its management. 

Allow for the fact that the shareholders in most traded companies are largely other companies and it isn’t hard to see why moral judgements as part of company decision making might be hard to achieve.

On the question of tax avoidance, a company’s management has a duty to optimise shareholder value, so it is hardly going to volunteer to pay taxes if it doesn’t need to pay them.  At the same time, shareholders, if they choose, can turn a blind eye to what the management may be doing.

But let’s put it another way.  Let’s say a Finance Director of a major listed company is in his private life a deeply moral man; he aims always to do the best thing, fastidiously teaches his children right from wrong, does a lot of work for charity, may even by a pillar of his religious community.   Let’s say that he does not leave his morality at the door when he comes to work but he also tries to live by his personal standards in all his professional dealings.

Let’s also assume that he has a simple choice – a certain amount of the revenue his firm makes either goes to government in taxes or it is paid to shareholders as a dividend. 

Which is the moral choice?  Pay the money to the Government where, let us say, it will go entirely towards building a better society for us all, or repay the investors for the risk they have taken – some would say the faith they have shown- in financing the company?  On the face of it are they not both deserving causes? 

Of course I realise there will be plenty of people who take exception to this over-simplification but what I think it demonstrates is that what is moral in relation to commercial decision-making probably depends on your point of view.  Do we have a shared view of morality in relation to these complicated issues?

Margaret Hodge is right when she imputes responsibility for resolving the puzzle to the Government.  The Government is elected among other things to reflect society’s view of moral boundaries and its job is to make the case for taxing large corporations,  to make the tax laws as watertight as possible and to demonstrate transparently that the tax revenues raised- along with all other tax revenues – are used, if you like, for ‘moral’ purposes.

But companies also need to demonstrate that they work to high moral standards as most people would recognise them, and perhaps a bit more transparency in the dealings of public companies – an extension of the Freedom of Information Act in relation to the private sector's dealings with the public sector,  for example- would not be a bad thing.