The tax gap cannot be calculated from micro-based data

Posted on

The Oxford University report on tax evasion and tax avoidance, to which I have already referred, makes a number of quite extraordinary claims.

One is that:

In general, micro approaches based on information from tax audits of randomly selected taxpayers are most likely to deliver reliable tax gap estimates. In contrast, methods to quantify the domestic tax gap based on macro indicators are less reliable and informative.

It uses this assumption to support its argument that the methods used by all nine of the significant papers to which the paper refers are flawed, precisely because they use a macro approach, despite the fact that it notes:

However, data to implement micro methods is seldom available for developing countries.

You might reasonably conclude from this that the authors are saying this work cannot be done, but in practice I seriously question their opinion that estimates of the tax gap must be based on micro approaches.

The authors assume that micro approaches work because, they claim:

methods which rely on tax audit information collected by the national tax authorities‚Ķ.deliver relatively reliable tax gap estimates [and secondly]  allow .. calculat[ion of the] individual components of the tax gap according to tax payer groups (e.g. corporations versus individuals, different income classes and sectors of activities) and the type of income which is evaded (e.g. income earned from international and national transactions). The latter provides important and valuable guidance for reforms of the tax administration and the tax system in a developing country.

This claim cannot be supported. It makes the enormous, and wholly unreasonable assumption that tax audit information collected by national tax authorities includes data on tax not declared. But it does not, of course. It may include some data on the tax collected by those who submit tax returns which subsequent audit proves to be defective, giving rise to additional tax liability. But that does give an estimate at all of the taxable income not declared on which a tax liability is therefore evaded by those who simply are not known to the national tax authorities.

How many such people are there? Who knows. But let’s take the UK as a start point for consideration. Using ONS data there were  believed to be 61.4 million people in the UK last year. 14.7 million were 19 or under and so unlikely to be tax payers. That leaves 46.7 million adults who could pay tax. But according to HM Revenue & Customs about 31 million actually did.

Of course some are on non taxable benefits. And some are maintained dependents. But are we really sure that there are 15.7 million such people?

I’m not sure. I don’t know how anyone can be. I think it’s entirely possible that there are 2 or 3 million unregistered people who should be taxpayers in the UK population. And not one of them would be picked up by tax audit information. That basically deals with data that is available, not data that is not available.

What is clear is that this means that the Oxford approach is to estimate the tax that the existing systems with the existing data might collect. But that’s not what people like the Tax Justice Network, Christian Aid, Oxfam and Global Financial Integrity (and we’re the big players in this field) have sought to collect. We want to show the capacity for collection if only data were available and systems improved in consequence. Of course we accept that not all such tax would be collected: we’re equally pragmatic. If just one third of the tax lost to transfer mispricing according to Christian Aid – a total of $160 billion – was collected then sufficient resources would have been recovered to pay for the Millennium Development Goals.

And then there’s the small problem that the paper is meant to be reviewing the loss of revenue in developing countries. It seems a small oversight on the part of the authors not to have noticed that the tax administrations in such places are often stretched beyond capacity and still have almost no chance at present of collecting a tiny proportion of the tax due. Alternatively, the loss arises from international flows on which they have no means of collecting data at all right now, meaning that in effect the data to undertake the necessary surveys they suggest necessary to identify the extent of the tax gap would only be available when the tax gap had been closed sufficiently to provide the resources to collect the necessary information to assess the scale of the problem which had then been solved.

Those of us working in this area have not chosen to use alternative, macro based data of the type we have used as a first option: in many cases we have done so out of necessity. But if we’re to tackle this issue that’s what we’ve had to do. To criticise us for using the only available data and the only available methods does seem extraordinary. What would the Oxford team have us do? Deny there is a problem, when it is very obviously true that there is one, or just have us ignore it because we cannot fit our data into their preferred models? In either case this seems like economists seeming to assume the world should fit their preferred models, not seeking to model the world as it is.

Those of us who have done this work have modelled the world as it is. And we’re not going to apologise for doing so. We’ve proven there is a problem. We’ve shown that more data derived from greater transparency would solve this at a macro-level, with greatest opportunity for therefore dragging most taxpayers into the tax system unlike the compliant only model Oxford proposes, and we’re going to defend the answers we come up with as a result until someone can show there is a better method of actually doing this work, rather than objecting to it.

And Oxford have not delivered that solution.