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Slashing the Deficit by “cutting tax evasion” – The sums do not add up

Tom Winnifrith
Thursday 8 November 2012

A decent man asks me why I do not focus on cutting tax evasion to slash the deficit and save the UK from bankruptcy? Fair point. But I am afraid that the sums do not add up. If only life was that simple. Deluded lefties often confuse tax evasion with tax minimization and that is the problem. The former means breaking the law. It is wrong. The latter means using the system to your maximum advantage in order to pay as little tax as possible and it is neither illegal nor wrong. Why should you pay more tax than you should on money you earn?

So, for example, many folk minimise tax by using an ISA. It is legal and there is nothing wrong with it. If the Government wishes to change the rules and scrap ISAs it can do so. But there are good reasons not to do so.

Tax evasion normally comes from the “cash in hand” economy, the black economy. Frankly we have all paid workmen in cash to avoid VAT and we al know that there are folks out their working for cash and not appearing “on the books.” We know that a vast percentage of cigarettes sold in the UK are sold “outside the system” in order to dodge penal excise duty. If it were possible to control this black economy that would raise a material sum. Estimates suggest that the black economy is worth c 5.5% of GDP so call it £86 billion. Generate a blended tax rate of 25% on that and you might raise £20 billion. But it is almost impossible to shut down a black economy altogether even in a police state so the most that can be squeezed from the black economy is perhaps a few billion quid.

I remind you that the Government is running a budget deficit (if it hits revenue forecasts which it will not) of c£120 billion.

What my decent friend is getting at, I think, is not the tax system for the middle class or even squeezing the black economy but how some of the very rich and also multinational corporations minimise tax. Okay. The point is that such folks do so by employing very clever accountants to keep the tax they pay to the lowest legal level. It is not illegal to minimise your tax or to hire smart accountants. If the Government wishes to change the tax laws it can but can you really blame folks for using the current laws as they are to pay less tax? There is no moral obligation anywhere to pay more than you are legally obliged to. If you are such a deluded leftie that you feel that compulsion just go write a bonus cheque to HMRC. I am sure it would be accepted. So…

Let’s start with the super rich. Those earning more than £150,000. On an inflation adjusted basis in 1978-9 these folks received c 6% of UK national taxable incomes and paid 11% of income tax receipts. Today they receive 12.6% of UK taxable incomes but pay 29% of all income tax receipts. That is right just over 1% of the population pay almost a third of all income tax paid. And they are already paying a far greater percentage of income tax receipts than they did when Lady Thatcher came to power. The rich have already been soaked. Now I imagine that the rich could pay more if they wanted by not using clever accountants to trim their tax bill, but what they do is legal and – as you can see – they are paying their way.

The Government will constantly close loopholes to squeeze a bit more from the rich. And clever accountants will constantly find new loopholes. It is an ongoing battle. But at some stage some of the rich inevitably find it cheaper and easier just to leave. When you are stinking rich you can often be pretty mobile and there are many places a lot more tax friendly (and warmer) than Britain. And we are only talking about c350, 000 individuals in this top tax bracket so you do not need that many to leave to start making a big dent in tax receipts. The Laffer curve (something that the prize loon Hollande who now runs France) does not understand, dictates that at a certain point if you raise tax rates you see lower receipts. Folks just bugger off and emigrate. That is why cracking down on tax minimization for the rich is not likely to help close that deficit.

So what about Starbucks, my new pals at Google, The Guardian and those other big companies that avoid tax by using offshore trusts, technical headquarters in Luxembourg etc in order to avoid paying UK Corporation tax? It is the same battle between their bean counters and the UK Government’s bean counters at play. The Corporations are merely playing by the rules as they stand.

But let us just imagine that the Government managed to close all the Corporate loopholes and that all the companies mentioned above suddenly faced a 24% UK tax bill – what happens next? Well for those that are service companies it is an easy call. They would simply move their European headquarters from London to a lower tax zone in Europe (Dublin at 12.5%, Tirana at 10%, Warsaw at 19% would all be in the running). Firms do not need to have European HQs in London – it is nicer than Tirana but money is money. And so some firms would leave. You lose the 2% tax they do pay at a Corporation tax level. You lose thousands of jobs (which all contribute PAYE, NI etc).

What about those firms which actually do operate in the UK like Starbucks? When Starbucks decides where it opens its next ghastly outfit it looks at its Return on Investment. Its ROI on a new store in the UK is compared with the ROI on a new store in China or Albania. If Starbucks suddenly faces a 24% tax bills on its next UK store rather than 2% that ROI equation changes. There will be fewer stores opened (perhaps some closed) in the UK and more elsewhere. So fewer jobs paying NI, PAYE etc.

So with the corporate it is hard to see the Government bean counters being smart enough to outwit the corporate expensive accountants and pushing up the tax they do pay. But if they succeed there is no guarantee at all that the overall Government tax take will actually go up. It may go down.

And that is why the issue of the budget deficit can ONLY be addressed by cutting Government Spending. The fact is that UK Government debt (if you ignore what we lent the banks) is at 1,065 billion quid, 67% of GDP. GDP is increasing only very slowly (if at all). That debt is increasing at £120 billion a year. When you get to 90% debt/GDP it starts to send your economy ex-Growth. You start the death spiral. At 120% you cannot borrow money any more. You are Greece. At current rates the UK will be at 90% within five years. By 2020 we will be knocking on the door of being the next Greece (except that France, etc will get there first).

So we can delude ourselves and talk about squeezing the rich a bit more. But it will make no difference. We can delude ourselves and say that scrapping foreign aid (£11 billion) or EU contributions ( £20 billion) will solve the problems. It would help but it is not enough. The sort of cuts needed to stave off bankruptcy within 10 years are on a scale few are yet prepared to contemplate.

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About Tom Winnifrith
Tom Winnifrith is the editor of When he is not harvesting olives in Greece, he is (planning to) raise goats in Wales.
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