Michael Meacher - Labour's Future

When the hole in public revenues is around £40bn and millions of people are being squeezed by the rising costs of food, energy, housing and tax, why isn't Alistair Darling clawing back the enormous sums of tax avoided (legal, but immoral) or evaded (illegal) in order to help balance the books without putting up taxes for the rest of the population?

There is plenty of scope. A recent TUC pamphlet written by the tax accountant expert Richard Murphy found that tax avoidance and tax planning (artificially designed to pay little or no tax) by very rich individuals now amounts to £13bn a year and by companies a further £12bn a year.

So why wasn't it done in the budget? It was because of the stranglehold now exerted by the City over New Labour which has been persuaded that this financial enclave is central to the economic interests of the UK as a whole. Yet it is nothing of the kind. By bending over backwards to encourage hedge funds and private equity firms through the most egregious tax liberality (most recently the absurdly low 18% tax rate on their income from their "carry" or share of the gains on mammoth deals, less than half the income tax rate payable by top earners), the government has turned the UK, and specifically the City, into a gigantic tax haven for the internationally mobile business elite.

But by sucking talent and capital from other parts of the economy, it has been bought at a very high price. As the credit crunch is exposing, City profits on invisibles cannot compensate for the steady, continuing decline of Britain as a manufacturing nation. The volatility and excesses of the finance sector are outweighed by the million jobs lost in manufacturing in the last decade, the stagnant industrial output, the £7bn-a-month trade deficit, the weakness of manufacturing investment, and a so-called "knowledge economy" R&D restricted to a very few sectors.
The UK has even refused to allow the deduction of tax from interest payments within the EU which would hugely restrict the effectiveness of tax havens because a basic rate tax (probably 20%) would already have been deducted from that income before it reached the tax haven.

There can be little doubt that this was stymied to preserve the UK as a tax haven with its City links to its overseas protectorates and crown dependencies. Equally, maintaining fiscal independence from Europe may be a populist move, but in reality it enables the international corporations to play off the EU and other countries against each other in constantly bargaining for the lowest tax rates.

The fact is, the UK can no longer afford either the prohibitive cost of the tax privileges of the City cuckoo-in-the-nest or the collateral manufacturing damage inflicted on Britain as an industrial nation. The NGO Tax Justice Network calculate that the total assets held by the wealthiest people in the world in tax havens amounts to some $11.5tn, at a potential tax cost to world governments of about $255bn.

To put that in context, it is more than two times total global aid flows last year. In the UK alone, the tax amnesty for those holding bank accounts with the offshore branches of some UK high street banks in the main Crown Dependencies - Jersey, Guernsey and the Isle of Man - is expected to yield recovery of £500m tax from 60,000 people admitting to undeclared income in these places.

Instead of occasional amnesties, all these UK dependencies and protectorates, including particularly the Cayman Islands, should be required to use the same standards of disclosure and accountability as the UK itself. And the UK standard itself should be tightened by requiring all UK-registered companies to report annually on all their overseas subsidiaries, including their revenues and numbers employed.

It would also be reasonable to phase out all allowances from those earning over £100,000, which would save more than £8bn. If the domicile rule, which is indefensible, were abolished, it would recoup £4.3bn in lost taxation. So-called "capital gains" on all assets held for less than a year should be subject to income tax, which would save perhaps £1-2 bn a year in otherwise lost tax. Investment income, like earned income, should be subject to national insurance charges, which would produce additional revenue of some £1.7bn a year.

The UK should also co-operate with other countries, particularly in Europe, to ensure that tax was paid where the taxable economic activity actually occurred, which would largely stop misallocation of profit to tax havens. More complex tax avoidance should be tackled by enshrining in law the general principle that wherever an otherwise commercial transaction is added to by any arrangement for the sole or main purpose of reducing tax liability, HMRC should disregard the latter and tax the transaction accordingly.

And so that both corporations and super-rich individuals understand that tax avoidance does not pay, HMRC, which is counter-productively being run down by 25% in the five years to 2010, should instead be built up substantially since at present each member of staff recovers 96 times their full cost of employment.