Blogging from the Highlands of Scotland
'From fanaticism to barbarism is only one step' - Diderot

Tuesday 12 April 2016

"Morality" and the law as it relates to investment and taxation

Over recent days and the past few weeks a frenzy has developed in the UK about the "morality" of investing money outside of the UK; at least some of this frenzy has been as the result of a headline- and circulation-seeking media. Much of this relates, in my opinion, to base political point-scoring, with little regard paid to the likely economic implications for the national economy if some of the wilder ideas were to be carried forward into legislation. The article which follows is largely the text of a comment I placed this evening in another blog, but I think it merits being placed here too.

If a government, any government, wants to make what is currently legal, illegal, then all that needs to happen is for a majority to vote for it in Parliament. I really don't want differing views of what is "moral" or "immoral" to have any part of this. Tax evasion is a crime and if identified can/should result in punishment. So-called "tax avoidance" (whether "aggressive", or not, although I think attempts to classify some kinds of investment thus are completely spurious) has no legal status. Something is either illegal, or it is not. A government, this one or the previous one or the next one, could easily make various things which are currently legal, illegal, if it thought it worthwhile and it could command a majority for such measures in Parliament. Obviously, current notions of "morality", not to mention "easily malleable" "public opinion" will have at least some bearing on what tax legislation may be considered feasible and/or desirable.

Tax policy is however designed primarily to raise funds for government expenditure, not as some kind of "punishment" or "moral enforcement"; it has no other purpose. Having an ISA or owning Premium Bonds, for example, is no more (nor less) "moral" than having an investment in an overseas investment vehicle, although governments have often used legislation to encourage or discourage some behaviour or other. What were formerly PEPs, now ISAs, or savings bonds, premium bonds, etc, have traditionally been used as mechanisms to encourage the "habit" of saving amongst the general population, for example. What is crucial is that if one is a UK resident subject to UK taxation that one declares all taxable income to HMRC; not to do so is to "evade" tax and that is a crime. The UK (that's to say UK-resident individuals, organisations and companies registered in the UK) is amongst the largest overseas investors in various foreign countries and has been so for many decades and probably a few centuries; this is what helps to make the UK's "invisible earnings" so crucial in balancing the national accounts in the face of a long-standing (over at least many decades) trade deficit.

Some of the talk in recent days seems to want legitimate deployment of assets of UK-resident persons/organisations/companies outside the UK to be reclassified as somehow unacceptable or actually illegal. This is to display extreme ignorance of what makes an economy function and how the UK, somehow or other (with a fair bit of "borrowing" added into the mix) "balances the books".

Most people in the UK have traditionally had either a company pension or more recently a privately-organised pension plan, unions have such mechanisms too for pensionable employees, as of course do employees of public bodies. Most such pension plans have some of their funds invested outside of the UK (although pensions of public service employees, employed in the past, are generally paid out of current government tax revenue, just as those currently employed in public service will generally have their pensions paid from future current government tax revenue rather than investment income, when they retire). Is this wrong, or "immoral"? Merely to ask this question highlights just how juvenile has been much of the commentary on "financial planning", using perfectly legal mechanisms, in recent days.

The UK economy is closely integrated into the world economy, so unless it is being proposed that exchange controls be re-established and that a “protectionist” economy is reinstalled, the idea that the restriction of investment of assets outside the home country (in this case the UK) is in any way viable is “for the birds”. Not if we in the UK wish to be able to continue to buy goods and services abroad (for example an annual holiday abroad, just as one minor example). Such a society was accurately portrayed in the dystopian nightmare world of the novel "1984". That's where the current leadership of the Labour Party (and some other ideological bedfellows, eg the SNP, the Greens and the various 'socialist' parties, not to mention "Momentum") seem to be wanting to lead us, if their rhetoric is any guide. I hope calmer heads, able to see beyond the next headline, will prevail and help us avoid the abyss these economic ignoramuses seem to want to lead us towards.

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