Tax & Inequality
By Dr Sheila Killian, Assistant Dean of Research at Kemmy Business School
Tax has an enormous, sometimes hidden, effect on our daily lives. It affects what we buy, how we buy it, if we order online or shop in the local town.
It impacts the services on offer locally, what the government can afford to supply, what private businesses are incentivised to offer. It shapes our savings options, the size and security of our pensions, our children’s educational opportunities, the health services we can avail of. It redistributes wealth and can also concentrate it in the hands of a privileged few. It can strengthen or undermine entire industries through specialised incentives. The tax system both funds and forms services that, depending on their reach and availability, can either create opportunity for social change, or widen the gap between rich and poor.
So, the design and effectiveness of the system really matters for the sort of society we want to live in.
Most of us don’t see it like that. Workers look at tax as that part of their payslip they never get to see – the wedge between “gross income” and the important part that gets lodged to our bank accounts. Businesses tend to see tax as a cost, to be managed like other costs, minimised and avoided if possible. If you only see tax as a cost, avoiding it can seem rational, even sensible. But tax avoidance is not cost minimisation in the same win-win way as switching off the lights or using less paper might be. In fact, tax avoidance contributes directly to inequality, both nationally and internationally. For that reason, the European Union has funded a €5 million research project to address the problem. A team of researchers from the Kemmy Business School at UL, working as part of this consortium, will focus on the role of tax expert networks.
Longer term, however – and this is where the sustainability argument comes in – widespread tax avoidance means fewer libraries, reduced funding to education, a less functional health service and poorer public transport. All of which makes a country less open and equal.
There are two intertwining lines of argument against aggressive tax avoidance: the moral argument and the sustainability perspective. Morally, tax avoidance diminishes the ability of the state to tackle problems of inequality, poverty and homelessness, while multinational tax avoidance also undermines the capacity of developing countries to provide basic services for their people. The common good, funded by tax revenue, is undermined and, critically, this is usually done in a way that will not directly impact the avoiding business in the short term. Services like financial infrastructure, telecommunications and policing tend not to be on the frontline for government cutbacks in the same way as social services. The employees of a business may not even be directly affected, unless they have a child with special needs, or an elderly relative depending on state services. Even then, they are unlikely to connect the reduced services that they are experiencing with the tax decisions of the business.
Longer term, however – and this is where the sustainability argument comes in – widespread tax avoidance means fewer libraries, reduced funding to education, a less functional health service and poorer public transport. All of which makes a country less open and equal. That inequality, in turn, creates instability, making the country less attractive to live in and less functional as a place in which to do business.
It is important that professional experts are aware of the long-term impact of their tax decisions, even when that impact is initially remote from the business. Tax avoidance is not just cost minimisation and tax is more than a technical issue. The short-term victims of tax avoidance are often out of the line of sight of tax avoiders; the long-term victims are all of us.