One of the people to suffer fallout from the Panama Papers leak is David Cameron, Britain’s prime minister. After a few days of equivocation, he was forced to admit that he had personally benefited from offshore financial arrangements that had been put in place by his father.
The publicly available evidence does not suggest that he did anything illegal. Nonetheless, this has led to political debate in Britain about the fairness of a tax system in which the rich and privileged are able to take advantage of offshore tax shelters and the like to limit their tax liability.
Janan Ganesh, a prominent U.K. columnist writing for the Financial Times, suggests that this whole debate is misconceived. He claims that the whole idea that a tax system ought to be fair is nonsense, given the many different ways we might define fairness. Instead, we should just rely on the regulations as they are written. Here’s why the political science says that he’s wrong.
Taxes depend on social trust
Ganesh doesn’t like perceptions of fairness, which he attacks as being vague and fuzzy. Instead, he advocates attention to the rules. If someone is acting within the rules, then that’s all we ought to care about. He says that it simply isn’t politicians’ business to change the ‘culture’ around taxpaying.
The problem is that the rules don’t work on their own. Tax systems can’t simply rely on the threat of enforcement. Tax authorities just don’t have enough resources to investigate everyone to ensure that they are paying their taxes. This is especially true in the United States, where the Internal Revenue Service has been systematically starved of resources for enforcement over the last decade, but it is also true in countries such as the U.K. If people were purely self-interested rational actors, their best course of action would probably be to cheat on their taxes, because the expected benefits are high, and the likelihood of punishment is low.
Read the full piece at The Washington Post.
- Publication Type:Other Writing
- Publication Date:04/12/2016