The Laffa Curve!

The British government announced that Barclay’s PL C, one of Britain’s oldest and largest banks, was facing an $800 million penalty for engaging in a tax avoidance scheme. Barclay had been exploiting loopholes in legislation in order to avoid paying a higher tax rate, and the government is now drafting legislation to close these loopholes.

If the government has to pass legislation in order to ‘close the loopholes’, then the loopholes right now are obviously legitimate. Hence Barclay tax avoidance practices that were perfectly legal.

After all, that’s what tax avoidance is— legally avoiding taxes by exploiting loopholes and legitimate deductions in the tax code. Tax evasion, on the other hand, is willful misdirection or under reporting of income that violates tax code.

How is it that the Treasury can penalize Barclay’s for having done something that is perfectly legal? Technically, it can’t. That’s why the legislation being proposed to close these tax loopholes is going to be retroactive.

In other words, since the British government can’t legitimately penalize Barclay’s, they’re going back in time to change the law to make what Barclay’s did illegal… all to collect some extra dough.

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