2010 August » Tax Research UK

We need to cut the deficit – but we don’t need cuts

Aug 232010

I was in discussion with a group of economist yesterday. Left of centre economist, but all the better for it.

We agreed there was a need for cuts now – but not cuts in government spending. There is no proven need for that at all.

Don’t get us wrong. We know we have a financial crisis. But it’s this graph that tells the story:

The data is from budget statements for each of the years in question. and yes of course that shows expectation – but that’s important. Planned spending is based on planned income.

And do remember these figures are unadjusted for growth and inflation.

It’s very obvious that a deficit was run from 2002 to 2008. That was largely explained by net investment in new assets though, by the time lag between growth and government picking up the benefit of that growth in the economy. Don’t underestimate that growth. It looked like this:

Planned income and spending as a percentage of GDP therefore looked like this, to eliminate this distortion:

So yes, there was a small and upward forecast in spending from 2002 onwards – as there was also in revenue to match, with as noted investment being broadly covered by borrowing. It was the collapse in GDP and tax revenues that utterly changed things. That’s where the faultlines have arisen in the graphs shown. None of what has happened has anything at all to do with government spending. That’s been under control, and the only reason that it has risen in proportion to GDP is because GDP collapsed.

Let’s also be clear about borrowing and it’s cause. This graph shows budget outcomes (i.e. final data) for 1997/98 t0 2008/09 and estimate for 2009/10, all from Budget reports:

Borrowing appears to match current surpluses and deficits. But note 2006/07 and 2007/08 – where borrowing was almost entirely for investment – a pattern also true in largest part from 2001/02 onwards. Now I am well aware that PFI is not included – and that is an issue where I have no truck with what New Labour did – but this is not a government recklessly over spending in the environment of the period. The transformation in borrowing is again shown to be the consequence of the crash in income. Comparisons of the outturn data on current government income and spending (as opposed to expectation) also makes this very clear:

The conclusion is obvious: the crash was not caused by government spending. And it was not spending that was out of control.

The crash was caused by a collapse in government income.

In that case the means to overcome the current crisis is to restore income, not to cut spending.

And therefore the whole basis of the government’s economic policy is wrong.

What did tax do for you today? #1 – providing nature reserves

Joy of Tax 6 Responses »

Aug 222010

It irritates me that people don’t appreciate what tax does for them.

So I’m going to write about what tax does for me. And ask others to do the same. Twitter it using #TheJoyofTax

What did tax do for me today? It paid for the Willows nature reserve in Downham Market (page 16) which my family visited this morning.

No, the earth did not move as a result. But we enjoyed it. And it could not have happened without a public authority to provide and preserve that space in this town. And I appreciate that. And don’t want to lose it. That is the Joy of Tax.

Petty, pedantic – and also wrong

Blogging 17 Responses »

Aug 222010

Tim Worstall made it a new year’s resolution this year to seek to annoy me. It’s pretty sad that anyone could make it a goal in life to seek to annoy someone he’s never met. It’s also pretty indicative of his petty, pedantic and rather nasty right wing politics. He has in the process inspired those who have, it seems, been trying to find dirt on me this year – and now he thinks he’s found some. Not that he had to search hard – it’s in my Observer archive and has been on public record for a long time as a result. But since, no doubt, the matter will now revolve around the right wing blogosphere let me address it head on, for what it’s worth. His blog says:

Fascinating stuff from Richard Murphy

Our intrepid campaigner against tax avoidance: you know, working the tax laws to your own benefit?

Lovely series of articles in which Ritchie seems to be advocating:

Turn your nanny into a personal services company and save £2, 530 a year.

Use the stakeholder pension to save up to 20% of income that you won’t have to pay in national insurance.

Reduce your tax bill by claiming all of your allowances.

We should change the law so we don’t worry about fiddles under £1,000.

Save 10% of your income by incorporating.

It’s all very different from what he says now, isn’t it?

And as I said on this blog:

Crikey it took you a long time to find them, didn’t it Tim?

The first was written because I could think of no better way of killing a scheme then being promoted on the professional lecture circuit than to give it publicity. I didn’t have blogs etc in those days. It worked. I call that a success.

The second fell into the same category – it did not work.

The third is about tax compliance. I stand by it.

The fourth is about tax simplification. I stand by it.

The fifth follows the logic of 1 and 2 – and was the way I thought I could seeking to highlight an abuse to draw attention to it.

Would I use that method now? No! I don’t need to. Was it the best I could do at the time? Yes, I thought so.

Do I apologise for using the Observer in that way? No!

But keep whistling if you want to find dirt Tim – because you won’t

Not least because a) years before you’ll find articles from me arguing against incorporation b) I never used a nanny scheme and never sold one c) I never advised clients to buy pensions for the reasons noted

So all you’ve discovered is methods have changed over time.

And some maybe weren’t terribly transparent

Big deal

Now tackle the real issues – like the abuse I was seeking to stop then, and now.

To add a little more colour. I well remember Tim Good of PTP – a colourful tax lecturer if ever there was one – telling of the nanny scheme on a course I went on in autumn 2000. I was shocked by it. I was equally as shocked that the story had attached to it the advice (and obviously I can’t recall the exact wording) that one shouldn’t shout about it too loudly or the scheme would be closed down. This was, of course, well before the days of the Tax Avoidance Disclosure scheme and such things. It was also well before the days of the Tax Justice Network and the change in awareness of tax avoidance in the UK. I also did not have my own blog and so on available to me at the time. So I decided to use an outlet I had available to me to achieve the objective Tim did not want – to attract publicity to a scheme that needed closing down and which I hoped would be if enough sought to use it. It worked! The scheme was shut – in 2003, I think.

I was annoyed too by the change in pension law that allowed absurd amounts of relief – and still does.

As for the company one – I well remember doing all the calculations on this for a client at about this time – as I still felt duty bound to do so. He refused take any action and stayed self employed, calling incorporation a scam. In many cases it was – with only the accountant winning (as I hint at in the article), and in general I’ve always been troubled about how many people are inappropriately advised to put their businesses into companies – something I’d written about several times before since the early 90s (if I recall correctly – it was in Accountancy Age at the time, I think). So the article fits again into the ‚Äòdrawing attention to it’ and then saying in this case ‚Äòdon’t do it’ in most cases, which was the best method I thought I had available to me at the time. And I bet you you’d be hard pushed to find anyone else at the time saying the list of people who should not incorporate was longer than those who should.

Did continuing to highlight the incorporation abuse work? Yes, I think it did. The Revenue tried the Arctic Systems case to end it – and I wrote about the aftermath of that proposing alternatives where I thought substance and form could be made to coincide in 2007.

Of course you can say quite validly that my methods changed radically in the period in between early 2003 ad 2007. They did! the Tax Justice Network had started; the environment of campaigning on this issue had changed radically, the internet had let direct campaigning happen in a way it could not before; I was blogging in 2007 and not in 2003, and on and on. So most certainly my methods changed radically. But I can assure you my motives did not.

In other words, you’re wasting your time Tim.

And it’s also amusing to note that on the same day Tim wrote I am being criticised for risking losing my credibility by Mark Lee – formerly chair of the Institute of Chartered Accountants in England and Wales tax faculty – because he says I’m too direct with HMRC at the risk of now being mischievous in suggesting it has gone soft on tax avoidance. I’ll accept the suggestion I was being mischievous in my use of the Observer in earlier times. The direct approach simply was not, in my judgement, available to me then. But mischievous now? No, sorry: I don’t need that now. The cold reality of HMRC telling its staff to be commercial in the application of the law at a time when it is to be ruthless in its attack on benefit fraud is not an issue where I need be anything but direct: HMRC have got this wrong. Badly wrong. And if you think otherwise Mark then I’m sorry, on this occasion it is you who is being naive, not me.

It seems I can’t win with the far right or the tax profession today.

You could call that a sign of success.

Ed Miliband turns the heat on Clegg

ConDems, Tax gap 6 Responses »

Aug 202010

Left Foot Forward has reported that Ed Miliband has written to Nick Clegg saying:

During the election campaign you made much of the Liberal Democrat commitment to tackle tax avoidance. You said, if in government, you would raise £2.4bn by attacking income tax avoidance, £1.4bn by halting abuse of corporation tax and a further £750m from stamp duty through tackling offshore registration by non-doms. You claimed that your plans to clamp down on tax avoidance meant that you would not need to raise VAT.

However, since the election you have had a very different message for the country. You have claimed that there is no alternative to the VAT rise, produced no credible plan to make progress on tackling tax avoidance, and we now hear from the Financial Times that HM Revenue & Customs is to soften its stance on avoidance in order to make cuts to its legal budget

Will you explain to the country why you no longer feel it necessary to tackle tax avoidance? And will you publish a detailed timetable showing the timescales on which you expect to make progress? Those who hear you say there is ‚Äò”no alternative” to your proposed tax rises on poor and middle income earners and to deep spending cuts beyond those you supported during the election campaign, expect nothing less.

Spot on.

Let’s tackle the tax gap once and for all

Tax gap 17 Responses »

Aug 202010

This article by me has just been published on Comment is Free:

We have a financial crisis in the UK. It was not caused by the government; the crisis was caused by a collapse in our national income. That was, in turn, caused by the collapse of the banking sector. That crisis then resulted in the income of the government collapsing. Government spending continued, however, much as planned – except for two things: unemployment has risen and a bit more interest is being paid to government debt.

Neither of these issues created a government spending crisis, because what we have is a government income crisis. The budget for 2008-09 forecast that government income in 2009-10 would be £608bn.The budget for 2009-10 forecast that same income to be £496bn. That difference in anticipated income for that one year – £112bn – is what made up most of the borrowing requirement in 2009-10.

The rest was entirely reasonable borrowing to pay for the £44bn of net new investment by the government in that year. In combination, making good lost government income and paying for investment cost a total of £156bn in 2009-10. Total borrowing was £161.9bn in that year. If income had fulfilled expectations there would, therefore, have been no deficit to cause any concern at all.

Any deficit reduction policy aimed at cutting spending is wholly misdirected. What we need is a deficit cutting policy aimed at increasing government income, and there are three ways to achieve this.

The first is for the government to stimulate a moribund economy by encouraging investment. This is the Keynesian solution that is proven to work. The second is to raise selective new taxes on those best able to pay them. This is possible. The third option is to tackle the tax gap.

The tax gap has three parts. The first is tax avoidance, which I estimate to be about £25bn a year. This arises from the exploitation of loopholes in UK tax law and between UK tax law and that of other states – especially tax havens. The second part is tax evasion – that is breaking the law. I estimate this to be £70bn a year. HM Revenue & Customs claims it is much less, but their methodology for estimating anything but VAT evasion is very weak. Last, there is unpaid and late-paid tax – currently evaluated by HMRC to be at least £26bn.

Put these figures together and they come to more than £120bn. Enough, at least in principle, to close the whole current government deficit. Of course, no one will ever collect all tax theoretically owed – that’s just not possible. Serious measures could be taken to tackle the tax gap, and yet there is no evidence that the coalition government is adopting any.

The current government is continuing the policy of cutting staff at HMRC – a policy initiated by New Labour. Almost 26,000 jobs have gone since 2005. Last year 5,000 frontline staff went and more still are to go. This makes no sense: each frontline member of staff brings in on average 30 times in tax what it costs to employ them. The result is that tax that is so badly needed to keep services going is being given away.

Second, strong measures are needed to tackle tax abuse – something the coalition has little to say about. They just claim that:

‚Ä¢ We will make every effort to tackle tax avoidance, including detailed development of Liberal Democrat proposals.
‚Ä¢ We will review the taxation of non-domiciled individuals.

Interesting that while the Tories had nothing to say at all, the Lib Dem manifesto stated that they would:

‚Ä¢ Tackle tax avoidance and evasion, with new powers for HMRC and a law to ensure properties can’t avoid stamp duty if they are put into an offshore trust.
‚Ä¢ Crack down on tax havens, which allow individuals and corporations to avoid paying taxes to developing countries.
‚Ä¢ Propose specific policies to restrict pension tax relief and relief for charitable donations to the basic tax rate – both now seemingly abandoned – and a pledge to increase the capital gains tax rate to the income tax rate, also now abandoned.

Sadly, the weakness of these proposals within the coalition list of priorities has been amply demonstrated. On the several occasions on which my work on the tax gap has been debated in parliament since the election, the Tory ministers who have responded have gone out of their way to make clear that they do not think this an issue of consequence. This is not just chance: a crisis in the nation’s income which created a crisis in the government’s income is being addressed by cutting spending – which was (by and large) under control. That makes no economic sense at all and does suggest that the spending cuts agenda is purely political.

But there is opportunity in that: for those who are looking to the world after the time that Osbornomics has failed (as it surely will) addressing the tax gap and raising new taxes have to be two parts of the agenda for rebalancing the equation in the government’s income. The rest will have to come from something else more important still – and that will be getting people to work again.

Conservative fiascos

Tax avoidance Comments Off

Aug 202010

The Conservatives do really know how to slip over tax avoidance banana skins.

First this morning they get Dave Hartnett of HMRC to tell Nick Clegg, Deputy Prime Minister they have no intention of doing anything about tax avoidance, even though Clegg says they will.

Now the new Tory Treasurer – a former Guernsey tax exile not photographed in public for thirty years – has quit to spend more time with his businesses before even taking up his appointment.

And the Sir Philip Green saga runs and runs. As Michael White says in the Guardian:

[Green] is the coalition’s first own goal. Tory newspapers were offended, City eyebrows raised and backbench Lib Dem MPs scandalised. Green is a brilliantly successful British entrepreneur, but his family tax arrangements are very complicated and he would not get elected to the kind of Tory club to which David Cameron once belonged.

Tax avoidance really does not pay.

I know I say that, often. But it also happens to be true.

When will they learn?

HMRC goes soft on tax avoidance

HMRC, Tax avoidance, Tax management 8 Responses »

Aug 202010

The FT has reported:

Revenue & Customs will adopt a less combative approach to resolving tax disputes with businesses in a move designed to cut a mounting legal logjam and unlock billions of pounds tied up in court battles over avoidance.

Dave Hartnett, permanent secretary for tax at HMRC, said there had been examples of officials being too “tough” in disputes over tax assessments. “HMRC is packed full of very intelligent people, but we are sometimes too black-and-white about the law,” he told the Financial Times.

The move, part of a drive for greater efficiency on the part of the cash-strapped department, could produce what Mr Hartnett called a “surge” in revenue over a couple of years, on top of extra money being collected in cases of individual tax evasion.

So Hartnett, the man who just a few years ago said that he’d make sure tax avoidance was ‚Äòno longer worthwhile’ is now going soft on it in the week Nick Clegg said that the coalition is considering the introduction of a new rule “to ensure that wealthy individuals pay their fair share of tax” and a week or so after Cameron says he’s going to make the fight on benefit fraud his number one priority.

Have no doubt, Hartnett could not have said this without Osborne’s permission. Have no doubt too he’s being used as the answer to Nick Clegg – telling him totally unsubtly that there’s not a hope that Osborne is buying any measures to crack down on avoidance at all.

Of course Hartnett has to be pragmatic – he’s one of the Board of HMRC who got rid of one in eight of their front line staff last year who were likely to tackle tax avoidance. Of course he has to be pragmatic. The carelessness of losing the people who could have collected the tax leaves him no other option.

But the messaging is dire. What this says is the Coalition is happy for the rich to abuse, will be soft on their abuse, will not be seeking to enforce tax law (that’s explicitly what Hartnett has instructed his staff not to do) and does not care that it was a lack of tax income, not a loss of control of spending, which gave rise to this crisis.

And the Treasury is also using a senior civil servant to snub the deputy prime minister.

As fiascos makers go this mob are proving themselves masters of the art.

Did I say that?

Tax avoidance Comments Off

Aug 202010

The FT says this morning:

Richard Murphy, a tax campaigner who has influenced Liberal Democrat thinking on avoidance, said the tax planning arrangements used by Sir Philip should be tackled by changing the rules on residency.

Did I say that? Apparently so.

From blog to FT sometimes doesn’t take very long.

Extraordinary

Banking, Corruption 10 Responses »

Aug 202010

On Tuesday I wrote a brief note about Barclays being fined for breaches of US sanctions legislation.

I asked a simple question:

Does banking have any ethics at all?

The right wing reaction was furious and hostile. It was suggested I was out of my depth, unrealistic and poor old Barclays had been caught napping because people in Poole in the UK had no idea that US law might apply to them. I did not agree, at all.

And then I read this (and like the judge I’m furious so I’m quoting at length):

A judge has attacked the US government for striking a "sweetheart deal" with Barclays to settle criminal charges that the British bank flouted international sanctions by doing clandestine business with Iran, Cuba, Libya, Sudan and Burma.

At a court hearing in Washington yesterday, judge Emmet Sullivan refused to rubber-stamp an agreement under which Barclays consented to pay $298m to settle charges that its staff deliberately concealed transactions with financial institutions in regimes frozen out by US foreign policy.

"Why isn’t the government getting tough with the banks?" Sullivan asked, pointing out that no individuals were being charged or sent to prison over the breaches. The judge’s unexpected resistance threw the settlement into doubt pending a more detailed hearing, scheduled for Wednesday.

Barclays is anxious to move beyond a scandal in which it owned up to sanctions-busting between 1995 and 2006. The bank has joined Lloyds TSB, Credit Suisse and ABN Amro among overseas financial institutions caught by US rules which cover them because they have branch operations in New York.

Plea bargains to settle criminal charges are common in the US and are often nodded through by the bench. But in the latest of several shows of judicial scepticism towards hasty settlements of Wall Street misdemeanours, Sullivan described the agreement as "an accommodation to a foreign bank" and pointed out that the average American caught robbing a bank is not given a deferred prosecution deal or an opportunity to refund the proceeds from crime.

Prosecutors say Barclays staff stripped identifying names from payment information in a deliberate ruse to defy US sanctions against repressive regimes, including countries accused of being state sponsors of terrorism.

Court documents say much of the subterfuge took place at a payment centre in Poole, Dorset, where an "interdiction filter" was installed to spot mentions of countries covered by sanctions. Once spotted, the wording on payments was changed to blur the source or direction of funds.

Among the challenged transactions are 46 fund transfers worth $490,000 involving Burma, 61 transactions worth $6.71m concerning Cuba, three payments amounting to $60,000 involving Iran and 1,175 transfers of $105m benefiting individuals or government entities in Sudan.

Lloyds TSB settled similar sanctions-busting charges in January last year by paying fines of $350m. Credit Suisse faced penalties of $536m and ABN Amro, now owned by RBS, forfeited $500m in May.

Let’s be blunt: this was not a mistake. This was organised abuse.

My question stands: