Monday, July 30, 2007

Limits Of Taxation Update


Adaptation or disability?
News that some of Britain's paralympians are repaying all that tax-funded support they get by defrauding us out of even more:

"A BRITISH Paralympics squad has allegedly become embroiled in an multi-million-pound scam involving the tax-free sale of top of the range luxury cars.

Several members of the team are alleged to have purchased scores of cars each for their “own personal use”. The cars – including Range Rovers, Land Rover Discoveries, Bentleys and an Aston Martin – were bought Vat-free as part of a tax break to help the handicapped.

The vehicles were then resold to dealers who shared in the profits from the 17.5% Vat discount. In some cases the car never left the showroom as it was bought back by the dealer who sold it...

Two of the former internationals are alleged to have bought more than 100 cars each... 'He said he was going to stop when he got to a million,' said a source close to the deals."

Sweet as a nut. So sweet, you have to guess it's been going on all over.

What this case underlines once again is that high taxation imposes high costs. It isn't just the damage it inflicts on enterprise and effort: it also incentivises criminality and brings the law into disrepute.

Take tobacco. With just about the highest duties in Europe, smuggling into the UK has become a major industry. Even official estimates put the lost taxes at £3bn pa- nearly 1p on the standard rate of income tax- and others reckon the real scale is higher still (see previous blogs here and here).

VAT missing trader and carousel fraud is another huge problem, which according to the PAC has cost taxpayers £16bn since 1999 (see many previous blogs eg here and here, where we surmised the real numbers may well be much higher).

Then there's oil duty fraud (£800m pa), duty loss on smuggled spirits (£200m pa), tax credit fraud (£1.3bn), etc etc (see this blog).

But of course, it's actually much broader than that. High taxation drives the Black Economy. And most serious estimates of the Black Economy reckon it now accounts for at least 10% of national income (see here for Economic Journal article- its estimate of 10.6% was produced even before all those Polish plumbers came in).

Last year we had a go at estimating just how much overall we honest taxpayers are losing to tax fraud and evasion. We came up with a figure of £60-80bn pa, or about £3,000 per household.

That's a extraordinary amount. As we pointed out, it means that if HMRC was doing its job properly, they'd recover enough to fund some major tax cutting. In fact, we could abolish Stamp Duty, CGT, and IHT outright, and still have enough left over to cut the standard rate of income tax to 8p.

But although HMRC is pretty rubbish at doing its job (eg see this blog), let's not lose sight of the underlying message. High taxation encourages evasion and fraud. It turns even paralympians into criminals, and makes mugs of the rest for passively paying up.

PS They've been discussing this over at PistonHeads. To qualify for VAT exemption, the cars have to be "adapted" for use by a disabled driver. But that can be as little as a loosely fitted, easily removed, knob on the steering wheel. Although as one forum member asks "Is a steering wheel knob an adaptation or a disability?" (very good, Hendrie).

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