by Simon Black: Guess
Who Folded Now?
week, the British government announced that Barclays PLC, one of
Britain’s oldest and largest banks, was facing an $800 million
penalty for engaging in a tax avoidance scheme. Barclays had been
exploiting loopholes in legislation in order to avoid paying a higher
tax rate, and the government is now drafting legislation to close
Hang on a sec.
If the government
has to pass legislation in order to ‘close the loopholes’,
then the loopholes right now are obviously legitimate. Hence Barclays
tax avoidance practices that were perfectly legal.
that’s what tax avoidance is – legally avoiding
taxes by exploiting loopholes and legitimate deductions in the tax
code. Tax evasion, on the other hand, is willful misdirection or
underreporting of income that violates tax code. Barclays engaged
in the former.
How is it that
the Treasury can penalize Barclays for having done something that
is perfectly legal? Technically, it can’t. That’s why
the legislation being proposed to close these tax loopholes is going
to be RETROACTIVE.
In other words,
since the British government can’t legitimately penalize
Barclays, they’re going back in time to change the law to make
what Barclays did illegal… all to collect some extra dough.
news, the Treasury also announced that recent tax receipts have
failed to meet expectations. Despite Britain’s constantly increasing
tax rates (now as much as 50%), income tax revenues dropped by $810
million from a year ago, a 4.68% decrease.
meet the Laffer Curve. Even the guy flinging spitballs in the back
of a high school economics class can tell you that raising tax rates
often decreases overall tax revenue.
with a 0% tax rate, government revenue would be zero. Similarly,
at a 100% tax rate in which people didn’t keep a single penny
of what they earned, government revenue would also be zero because
nobody would have an incentive to work!
from 0, and backward from 100, would yield similar results. At 1%
tax rate, the government would collect a bit of revenue. At a 99%
tax rate, a small handful of people might work, also generating
some revenue for the government.
Laffer is credited with describing this relationship between tax
rates and government revenue, however philosophers going back to
the 14th century also examined the idea.
point was to show that there’s an equalization between the
government taking a small piece of a big pie (low tax rates, huge
incentive for economic productivity), and a big piece of a small
pie (high tax rates, very little incentive for economic productivity).