Thursday, February 05, 2009

Tax Fax Gap

We name the man responsible for our tax gap

As you may know, the Grauniad is currently running a two week campaign on the Tax Gap, "exposing" big corporate tax avoiders. They say:

"Big businesses, the super-rich and an entire industry of consultants - many based in the City of London - devote huge amounts of time and money to paying the taxman as little as possible...

Like the credit boom, the tax-avoidance game represents the triumph of technical proficiency over social responsibility... the behaviour of these companies has a pernicious knock-on effect on others. Socially responsible companies find their "good" behaviour punished by being at a competitive disadvantage to more ruthless companies who price in their avoidance to the consumer."

Now, we have some sympathy with the G's campaign. Indeed, we have blogged the so-called Tax Gap several times (eg here and here), noting how much it costs us poor schmucks who dutifully pay up every last penny of tax HMG decides to stick on us.

Our solution is simple: first, cut the incentive for tax avoidance by cutting expensive Big Government back down to size; second, drastically simplify the tax codes so there is much less scope for avoidance.

Oh yes, and the Major would add a third measure - the reintroduction of drawing, quartering, and burning at the stake for anyone caught evading taxes.

Unfortunately, it's most unlikely the Gran will adopt our solution. For one thing, under its government, public spending has mushroomed to pay for all those public sector non-jobs advertised at huge cost in the G every week. And also, under its government, Stalinist micro-management has made our tax code the longest and most complex in the developed world.

So our hopes for its campaign are not high, and we were not intending to blog it.

But then on Tuesday, somebody called Derek Draper (Mrs T reckons he might be one of those fat blokes they have on breakfast TV) used the Garn series to assault the TaxPayers' Alliance. You can read exactly what happened here - real handbags at dawn stuff.

So far as I can follow what he's saying - and it's a bit tricky - Droper reckons that because big companies use Brown's monstrous tax code to avoid UK taxation, and because Brown's monstrous public spending cannot be cut, that means the TPA wants hard-working British families to starve to death in a snow-filled ditch. You know, because they have to pay even higher taxes to balance the books. Kind of idea.

So what are facts? How big is this Tax Gap (ie the shortfall between what HMRC would collect in tax if everyone "played the game", and what they actually collect)?

For years, nobody really had a clue. But last year, as we blogged here, HMRC finally published some estimates - at least for direct taxes. Here's their summary table (click on it to enlarge):

So for 2003-04, HMRC estimated the total Tax Gap on Income Tax, CGT, National Insurance, Corporation Tax, IHT, and Stamp Duty was in the range of £11bn to £41bn, with a point estimate of £22bn. Since receipts in that year were £246bn, that implies losses in the range 5-15% (point estimate 8%).

But take a closer look at how that breaks down between the various direct taxes. And look in particular at Corporation Tax avoidance - which is the focus of the Grun's campaign and the basis of Darren Drooper's handbagging. The estimated Tax Gap was £2.1bn to £6.6bn, with a point estimate of £4.4bn. Which, given that Corporation Tax revenue that year was £28.6bn, implies a CT gap in the range 7-23%, with a point estimate of 15%.

Now, a CT Tax Gap amounting to 15% of CT revenue is serious money. No doubt about it. But £5-6bn (which is what it would be this year) is nothing compared to the disastrous state of our public finances. In particular, even if we stopped all of that avoidance tomorrow, it is nowhere near enough to save hard-working British families having to pay much higher taxes post the next election.

And remember this - tax avoidance is completely legal. These big companies are doing nothing that our tax codes don't permit.

Indeed, you could say it's yet another example of the unintended consequences we blog so often on BOM: the commissars devise some highly complex set of rules to achieve a "targeted outcome", and then fly into an apoplexy when real people out in the real world respond by changing their behaviour in some perfectly rational but "socially irresponsible" manner (cf the poor but rational young women who respond to welfare payments aimed at"abolishing" child poverty by producing even more poor children).

One other thing - just take another look at that HMRC table. The biggest gap by far is not in Corporation Tax. It's in Income Tax/National Insurance/CGT. And that is nothing to do with evil capitalist mega-corporations laundering their ill-gotten gains through the Dutch Antilles. It's the good old black economy here at home.

It may even be Mr Dripper's window cleaner.

1 comment:

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