The price of a good reputation

I have never practised tax avoidance myself. It’s not that I’m particularly virtuous: it’s just I’d rather pay a few thousand pounds to HMRC than spend an hour talking to an accountant. But I was fascinated by the Jimmy Carr affair for one reason. Why was Mr Carr, alone of the thousand or so participants, hounded to withdraw from the Jersey K2 scheme?

Innate decency aside, Carr had to withdraw because he is famous and a comedian. A comedian’s career is ‘reputationally fragile’. People need to like you before they’ll laugh at you. (Fatty Arbuckle and Woody Allen are two people who, once tainted by scandal, found themselves ‘just not so funny any more’). The other thousand people using the K2 scheme are neither famous nor amusing. They don’t rely on the assent of a wider public to earn their money. Many rich people, who in the modern world are highly mobile, and who can spend their entire lives surrounded only by other rich people, don’t suffer the reputational constraints that Jimmy Carr does. Or which a Victorian aristocrat once did.

Occupy protestors were criticised for buying their coffees from Starbucks. But there is a big difference between Starbucks and, say, a bank. Starbucks, like Jimmy Carr, is reputationally fragile. If we wished, we could run it out of town on a whim. Should it emerge that Starbucks is, say, running a Ponzi scheme, or cruelly mistreating its baristas, even a small customer boycott could dent its profits overnight. With a bank, however, camping outside the headquarters is all you can do.

Reputation acts as a kind of cashless deposit in human dealings. As any mafioso or game theorist knows, you can only trust people who have something to lose.