Special tax incentives lead to tax 'avoidance'

A recent hot issue in the UK is that of tax avoidance (which I am informed is legal and different from tax evasion which is not) practised by practically anyone with a reasonable income - http://www.thetimes.co.uk/tto/money/tax/article3453189.ece - an article in London Times lists " From dentists to doctors and financiers to footballers, through lawyers, dressmakers and an award-winning baker: investors in tax-efficient schemes read like an A to Z of working Britain."

The reason most of these tax avoidance schemes work is because of complex tax legislation that from time to time favours investments in one activity or another.  Over the years these range from encouraging investments in forests (green!) to films and music (culture and arts?) and so forth.

These schemes seem worthwhile and important at the time, but the legislators obviously know little about the Law Of Unintended Consequences.

UK 'no win, no fee' lawyers

In 1999 the UK enacted a law that allowed lawyers to offer what is commonly called 'no win, no fee' services. The intention was to reduce legal aid being paid to people who could not afford legal fees and to enable the less economically able to file law suits.


Guess what, in a little over 10 years the situation has given rise to what is called 'ambulance chasing' by law firms, many of whom advertise themselves as mainly or solely 'no win, no fee' firms. 


As reported in Wikipedia -  http://en.wikipedia.org/wiki/Contingent_fee  - "On 29 March 2011, Justice Secretary Kenneth Clarke announced plans to reform contingent fee arrangements, as part of reforms to the justice system prompted by a review of civil litigation costs carried out by Lord Justice Jackson.^[7] The changes were prompted by large rises in litigation costs and the proliferation of ambulance-chasing advertisements and claim farmers.^[8] The National Health Service has been forced to pay out hundreds of millions of pounds in recent years.^[8]"

^{And as reported in the Guardian -  http://www.guardian.co.uk/business/2012/may/01/lloyds-boss-hits-out-fraudulent-ppi-claims  - "}The chief executive of Lloyds Banking Group hit out at fraudulent claims for payment protection insurance compensation on Tuesday as the bailed out bank increased its provision for mis-selling the controversial product by 12% to £3.6bn.

António Horta-Osório said the £375m additional provision was a "minor adjustment" when asked if it would require the bank to pursue any additional clawback of bonuses from former and current directors. Some £1.5m was clawed back following the £3.2bn provision taken last year.

<sup>But he criticised the claims management companies that submitted 45% of the claims the bank received in February and March, from customers who typically bought the insurance when taking out a loan, to cover themselves for illness or other hindrances to paying it back. Of the claims submitted by these firms, 25% were from people without Lloyds products."


Yet again, the Law of Unintended Consequences strikes.</sup>