2012 February » Tax Research UK

The 50p tax rate – let’s shatter the myths behind the Telegraph’s letter

Progressive Taxation, Uncategorized 20 Responses »

Feb 292012

The Telegraph is going to publish a latter tonight calling for the abolition of the 50p tax rate. I’ve now heard about it from so many sources it has to be one of the worst kept secrets in publishing history. This lot – whose funding is not known – are behind it.

So, let’s deal with some facts and not the allegations and aspersions which those seeking to abolish this tax rate usually peddle.

About 300,000 people will be affected by this tax in HMRC’s estimate. They have taxable income after allowances and reliefs of £150,000 a year. They represent about 1.0% of all taxpayers.

They’re expected to have total taxable income between them of about £47 billion. So the tax - which is an extra 10% over and above the 40% rate previously applying should raise nearly £5 billion a year. It may, because of the disallowance of personal allowances and pension contributions for this group for which we have no real impact data as yet, be higher than that in my opinion – closer to £6 billion in fact, but I stress that’s an estimate.

This is higher than HMRC have estimated – they’ve never gone above £3 billion. It is very obviously radically different from the claims made by opponents that this tax will cost the government money. But let’s be clear: to achieve that goal all these 42,000 people would have to voluntarily reduce their incomes to below £150,000, either by giving them up or finding massive avoidance schemes or all would have to leave the country.

I can’t see them giving up their incomes to save a relatively small amount in tax. So let’s ignore that possibility. They still have to pay the mortgage and the school fees after all.

They may also tax plan – if so the case for a general anti-avoidance principle and for abolishing the use of personal service companies or for abolishing most of the remaining allowances and reliefs this group enjoy increases considerably. It would be unacceptable that this sum be added to the tax gap. But remember – HMRC say total tax avoidance in the UK is only £5 billion a year. I say it’s £13 billion by individuals, but either way, to avoid more than £5 billion extra is pushing the limits of plausibility. They won’t avoid this liability because they can’t. And the claim that the income tax take in January went down because of the 50p tax rate is just absurd. That is an impossible extrapolation to make that has no basis in fact at all.

Nor they will all leave. Candidly – they’ve all said that time after time after time and there’s never been any evidence that more than a few people go. There’s good reason for that; their businesses are here for a start! So are their families. So let’s just treat this as the threat to throw toys out of the pram that it so obviously is.

In that case this tax can and will work, without a doubt and if it raises much less than I predict then action to tackle the avoidance is needed. So the first claim of this group, that this tax will not raise money is very obviously false.

It’s also untrue for the vast majority that they pay 50% of their tax in income – even including NIC. You have to have all your income from employment and earn more than about £1 million for total tax including NIC to exceed 50%. Very, very few are in that situation. Most who are are bankers, FTSE 100 directors or footballers. Let’s not cry too many tears. So the claim that these people are taxed at well above that is also completely untrue.

So what else is there to discuss? Well, when the verbiage is removed just one other thing, which is the claim that this tax will harm entrepreneurial activity in the UK. This is a ludicrous claim. It so happens I’ve seen the press release that accompanies this letter. As a result I know that every single business person supporting the cut runs their ‘entrepreneurial’ activity through a limited company. Corporation tax rates in the UK are 20% for the bast majority of companies – and 25% and falling for larger ones. Most pay somewhat less. And as many have reported - including the E & Y Item Club – the UK corporate sector is now sitting on cash of about £100 billion which it has not invested in productive activity because it can’t think what to do with it. That’s how good our entrepreneurs are! Those who can’t get hold of that money are the SMEs the banks won’t lend to. But whatever the situation, what is clear is that this tax rate will not in any way change the availability of capital to UK businesses – which are either awash with it or are being denied it by banks, but not by tax authorities. So the 50p tax rate will have no impact at all on jobs.

And as someone who has been an entrepreneur in my time – creating lots of jobs – I can tell you, tax never put someone off being one. Ever. Warren Buffett is one of the many real entrepreneurs who happens to agree with me. It may have an impact on salaried employees of companies (but I doubt it) – but entrepreneurs, not at all. That’s because entrepreneurs are born, and because it’s a fact that entrepreneurs who are really motivated by money either a) want capital gains or b) fail, because to be a really good entrepreneur you have to be passionate about your business, its products and its customers come what may – and the last thing that worries you in that case is a bit of tax. I respectfully suggest as a result those making this noise aren’t really very entrepreneurial at all.

So the second argument they make does not hold.

So let’s come to their true, unspoken, agenda. They’re greedy. They want this money. We have to consider that case too, even if it is not spoken.

Is giving these people – the 1% – a good use of money? The answer is no:

1) For reasons noted they will not create jobs with it: they’ll pay themselves with it.

2) If they pay themselves the evidence is they’ll save it e.g. by buying second homes. We already have a glut of saving in the economy. What we need is spending. These people save because they’re wealthy – that’s how you get to be wealthy. They also save because they already have more than enough income. That’s because they’re in the 1%. By definition they have more than 99% in the economy. But the result is that giving these people provides the exact opposite of what we need in the economy right now – which is people spending.

3) If the tax is paid though because the 50p rate continues then benefit will go to:

- pensioners

- those on benefits

- those for whom jobs will be created

- those who will not lose their jobs as a result of £6 billion of additional cuts.

All these people do spend and so keep the economy going, unlike those earning more than £150,000 who just save. So we get growth by giving these low paid people money; we don’t get it by giving tghe same money to the well off.

4) We reduce inequality in society by taxing – and all the evidence is that produces healthier, more vibrant and dynamic economies. So we should tax.

So I’ve considered all the evidence and what we come down to is the fact that there is no argument for cutting this tax unless:

a) You want to reward greed;

b) You want to make the economic situation worse, and cost the economy both jobs and entrepreneurial growth as a result of removing the stimulus from the additional spending of the least well off;

c) You believe in inequality.

I guess that’s what the authors are saying in that case.

But count me out then. I’m sticking with a 50p tax rate, with fairness, and with growth.

David Gauke and the tax gap – a man with his head firmly in the sand

HMRC, Tax gap 7 Responses »

Feb 292012

I was very amused to meet David Gauke in London today. He has long avoided such a meeting, but when we walked slap bang into each other in Millbank television studios his chance to avoid me had gone, hands were shaken and discussion began immediately. Not on Barclays as might have been expected, but on the tax gap.

This was fuelled by his comments, issued yesterday, attacking the implausibility, as he sees it, of my tax gap data. In a press release he said he could not recognise my £120 billion sum. He said it was based on ‘far fetched’ assumptions. So I raised that issue.

He agreed straight away that of course there was £25 billion of unpaid tax at any time and this is not in HMRC’s published estimate of the tax gap. It is in my estimate. He reduced my estimate to £95 billion as a result. I increased his from £35bn to £60bn since his methodology otherwise denied this was an issue needing addressing, which it clearly is. Either way, we were now in a position where his claim that he could not recognise the basis for my figures was already wrong: he’d agreed in seconds that £25 billion of my claim was right.

So we then discussed avoidance where my estimate for the TUC is £25 billion. In about a minute he agreed that the difference of view was the result of what we define as avoidance. HMRC take a very narrow view of this that defines it solely as relating to those issues they think they might be able to foreseeably tackle. I take a much broader view, including many issues not on HMRC’s current target list. He agreed that reasonably explained our different sums. So that was two of three issues dealt with. He could recognise that the assumptions were different, but not ‘far fetched’.

So we moved on to evasion, and this was really interesting. I estimate the gap here, based largely on HMRC VAT data, which I think reliably and appropriately calculated, is £70 billion a year. HMRC say it is £25 billion. This implies, VAT apart, they think evasion driven activity is, having allowed for bad debt and avoidance, about £15bn in all direct taxes and as a result the shadow economy is about 4% (or maybe somewhat less) of the UK economy. In itself that is both weird and utterly implausible when they admit over 13% of VAT – based on top line sales- is lost, mainly to evasion. But it would also make the UK way out the cleanest country in the world.

“We’re good, you know,” said Gauke to me.

“Oh, I agree,” I replied “at 13% we’re still very high in the league tables, but no one, ever, has been as good a your data implies.”

“But you have to be wrong,” said Gauke. “I can’t believe one pound in eight circulates in the cash economy,” he said. “I just can’t.”

“It does,” I replied, “just come down to Norfolk!”

He had the decency to laugh.

But the joke is not the point. The point is that this exchange revealed most of what needs to be known about this issue. I should note a little more was said – much of which revealed that Gauke really does not understand sampling – but the key point is he knows the data to contradict his position exists. I have, for example, shown that peer reviewed data for the UK from the World Bank by chance almost exactly replicates my result. Despite this fact Gauke just can’t accept the data. This is not because it’s wrong. It’s just, as he put it to me, he can’t believe one pound in eight in the UK is in the shadow economy. And that position on his part is despite the fact that HMRC admit about one pound in seven of VAT has been lost to that economy for about a decade. But he’d rather pretend this is not the case for income tax, corporation tax, NIC and CGT, where he’d rather think only on pound in 25 (at most) is lost.

Respectfully, this is a head in the sand approach to policy, aided and abetted by HMRC’s wholly irresponsible approach to assembling this data that is based very largely on the tax returns it receives and which ignores the obvious fact that many tax evaders simply do not submit returns at all.

This head in the sand approach does, of course, exactly replicate his reaction to my proof that less than 1.2 million companies out of 2.8 million submit tax returns – about 700,000 in the process ignoring a direct request to do so. He just said in response to that that “none of them can owe tax; that explains their failure.” Well, you can assume that if you want – but it’s a very wild assumption indeed that all law breakers break the law with innocent intent.

So what is actually clear is that it is not me but Gauke who is making the ‘far fetched’ assumptions on the tax gap. He has no rational reason for saying I’m wrong: he just does not want to think I might be right, even though all the evidence on evasion suggests I am. On avoidance I accept there’s a more nuanced difference.

The problem is that based on this absurd basis for decision-making he is deciding not to try to collect the £120 billion tax gap. We all pay the price for that in terms of cuts, unemployment, and a wasted generation of young people without hope.

It’s time Gauke stopped being so “nice” and saw through HMRC’s management who want to persuade him they have a level of competence they unfortunately do not have (as is now obvious to just about everyone) and that he did instead act reasonably and on the evidence and appoint an independent team to assess the true scale of the tax gap with the follow on job of then monitoring HMRC’s progress in collecting it. Call it OFFTAX if you like. But for all our sake’s, please do it.

No! No! No!

HMRC 2 Responses »

Feb 292012

Accountancy Age has reported:

THE NEW ”assurance commissioner” who will oversee big tax disputes should be appointed from outside HM Revenue and Customs (HMRC), tax experts have said, after the Treasury announced an overhaul of the way it deals with tax settlements.

No! No! No! I say.

We have enough abuse of our tax system from the private sector already. This would be quite absurd.

We cannot have a proper tax system unless it is run by civil servants who are not allowed any significant interaction with the private sector. Let’s stop this abuse from outside, right now. We have all seen where that leads already.

Why is the Sun prioritising benefit fraud when the tax gap is 100 times bigger?

Tax gap 14 Responses »

Feb 292012

Left Foot Forward has blogged that it would have been great to report today that:

The Sun has today launched its campaign against tax evasion, vilifying those, usually the very richest in society, whose scams cost the taxpayer a total of over £15 billion a year (pdf)

But as they instead report:

Hang on, sorry.

The Sun has today launched its campaign against benefit fraud, vilifying those, usually the very poorest in society, whose scams cost the taxpayer a total of over £1 billion a year (pdf).

Tom Newton Dunn, the paper’s political editor, writes:

THE SUN today calls on readers to help end the benefits frauds that cost the country a record £1.2 BILLION last year.

We urge Brits to shop the cheats stealing from honest taxpayers when the nation can least afford it.

Campaigning Iain Duncan Smith last night backed The Sun’s crusade to end the scandalous benefits fraud crippling the country…

The Sun’s first move is to hand over the evidence on Denise Knight, 44, who enjoyed a day on theme park white-knuckle rides despite claiming Disability Living Allowance for a bad back.

The Department for Work and Pensions will investigate whether the mum from Llangadog, Carmarthenshire — featured on our front page yesterday — is still entitled to her £50-a-week benefit.

The decision of the Sun to hone in on benefit fraud is an odd one. If, as they suggest, the £1.2 billion a year lost to deliberate fraud is ‘crippling the country’, then tax evasion, which costs the treasury over ten times that, must be outright killing it.

The annual fraud indicator (pdf) estimates a £15 billion loss through tax fraud – deliberate underpayment of taxes. And rather than their targets being people who are ill-placed to defend themselves against accusations, the archetypal tax avoider is rich, above the law, and with full knowledge of what they are doing.

But that’s the low end of the estimate. The Tax Justice Network reported that almost £70 billion were lost to what they call the ‘shadow economy’.

And when you count tax evasion – which includes everything from companies having PO box offices in the Cayman Islands to individuals, from leading businessmen to top-tier politicians, paying themselves as companies – the difference becomes staggering. The TJN estimate over £120 billion of taxes are undercollected through evasion and avoidance annually.

Of course, there may be a reason for their blind eye. As Left Foot Forward reported last year:

As far back as 1995, the Independent reported that in the previous ten years, Murdoch’s News International had paid “virtually no tax”.

While corporation tax was set at 33 per cent, NI paid £11.74m of its £979.4m profit - just 1.2 per cent.

As recently as 2009, News Corporation’s proprietor was being pursued by his homeland’s government after failing to pay the correct rate of corporation tax, both in Australia and the United States.

Earlier this year, Australian Capital Territory (ACT) treasury officials won a legal battle,which awarded them A$77m for avoided taxes and duties. The Guardian reported in 2005 that Murdoch’s family company was moved to Bermuda; the tax bill of A$1.2 billion had the potential to be avoided.

Of course, it may be Murdoch is unaware of his corporation’s tax-shy practice given how little he knows about other key operational issues at News International.

Quite so.

Reproduced with permission.

Post-Doctoral Research Fellowship available in political economy at Sheffield

Economics Comments Off

Feb 292012

I am posting this in case anyone is interested:

The Sheffield Political Economy Research Institute (SPERI) is seeking to appoint two exceptional Post-Doctoral Research Fellows to help shape, develop and lead SPERI’s research agenda over the next three years. We also have two funded PhD Studentships available. More information about SPERI and both opportunities can be found below in a form designed to make it easy for you to pass on.

About SPERI

The Sheffield Political Economy Research Institute (SPERI) aims to bring together leading international researchers in the social sciences, including policy-makers, journalists and opinion formers, to reassess and develop substantive proposals to respond to the political and economic challenges posed by the global financial crisis and its legacy.

At the heart of such challenges is the problem of growth – where it will come from, how it will be sustained and how it might be made both environmentally and institutionally sustainable. These are challenges for the world economy as a whole as they are for the local, regional and national economies which together comprise it.

SPERI’s research themes include:

· Thinking through the theoretical basis of a sustainable new model of political economy
· Understanding and resolving the British growth crisis
· Analysing the changing political architecture of the Eurozone
· Assessing the emerging role of the BRICs in the new world order
· Reflecting on the G20′s leadership and management of the global political economy

A fuller statement of SPERI’s research focus is available at: www.sheffield.ac.uk/speri.

About the Research Fellowships

You will hold a PhD in a relevant area (or have equivalent experience) and maintain research activity of a substantial external reputation. This will be achieved through: generating research income and direction for self and others, conducting high quality research, producing research publications of exceptional quality and impact, supervising research students and research staff, participating actively in the development and implementation of the department and the Faculty’s research strategy.

The posts are full time and fixed-term from 1^st August 2012 to 31 December 2014 at Grade 8.

Grade 8: £37,012 – £44,166 per annum with the expectation of annual incremental progression. Potential to progress to £49,689 through sustained exceptional contribution.

You can find more information about the posts on our website www.sheffield.ac.uk/speri and in the attached document.

How to apply

You can apply for the positions online at www.sheffield.ac.uk/jobs.

Applicants should include in their application a 3000 word (maximum) post-doctoral research fellowship application, indicating clearly its links to SPERI’s core research focus and at least one of the five research themes, as well as its potential to generate user and/or policy-maker impact.

Tackling the EU’s €1 trillion tax gap – my full report now available

Europe, Tax gap 3 Responses »

Feb 292012

My full report on why I think the EU has a €1 trillion tax gap, and how I suggest it should be tackled is now available, here.

I didn’t expect this report to alter my thinking, but the categorisations of avoidance and evasion by type in this report are new. Comments would be welcomed.

And the evidence is clear: unless Europe tackles the tax gap we’ll never get out of the mess we’re in.

I can live with being in at number 13 on the twitter financial ranking

Blogging 6 Responses »

Feb 292012

When I was a teenager the Top 20 was pretty important in my life. Well times, change, but it seems that I’m in at number 13 on the list of top financial influencers in the UK. The list has been prepared by new Institute of Chartered Accountants in England and Wales Economia, here.

The table is as follows:

Aut = authority, act = activity and aud = audience.

I reckon that’s not bad for one guy working from his back garden in Norfolk without a major media organisation, commercial organisation or official office to back me up. Hats off to Nouriel Roubini though: justly at #1.

The EU tax gap – new evidence shows there is €1 trillion of lost revenue to target to save our futures from despair

Europe, Tax gap Comments Off

Feb 292012

The Group of the Progressive Alliance of Socialists & Democrats in the European Parliament issued a report at their press release this morning, part of which dealt with the EU tax gap. This report, which is based on my work (the full report is now available – here), was as follows:

CLOSING THE TAX GAP AND RE-LAUNCHING THE ECONOMY AND JOB CREATION

TWO SIDES OF THE SAME COIN

1. The main finding of the study commissioned by the S&D Group from Tax Research London is that €1 trillion are lost in potential tax revenue every year (EU27).

2. This loss of public revenue plays a substantial part in the deficit and debt levels we are currently facing, which in turn is negatively affecting public investment levels, growth and employment.

3. A large part of this non-taxed liquidity is feeding into financial trading activity rather than private or public consumption, and investment.

Therefore, by forcefully addressing this “tax gap”, the EU could at the same time:

Contribute to the necessary stabilisation of financial markets and of the economy as a whole, by significantly reducing liquidity available for financial trading unrelated to real economic activity;

Increase available public revenue to accelerate necessary fiscal consolidation while reducing its austerity effect (thereby also alleviating current pressure on necessary public spending on education, health or social policy); the study shows that if the tax gap were to be totally closed, EU governments could repay all public debt within 8.8 years (see table below).

In particular, provide the necessary resources to increase public investment geared towards the strengthening of Europe’s international competitiveness and growth potential, despite of the consolidation agenda. By channelling an additional amount of about €200 billion from the reduced tax gap to public investment spending each year, the EU could lift that investment from the current 2.7%/GDP to a realistic target of 3.5% within a few years. This would notably provide essential funding for public investment in sustainable growth technologies.

This whole new strategy should be framed politically within a strengthened Europe2020 strategy, finally backed up by proper funding.

The governance of this strategy at EU level (as much is to be done directly at member states level) would need to be managed accordingly via the existing processes involving the annual national stability and growth programmes and the national reform programmes. Available information on the extent of tax avoidance and evasion in each member state must, in this context, be significantly improved in the public interest.

KEY RECOMMENDATIONS Continue reading »

Ireland prepares to say no. What then for the EU? A Courageous State?

Uncategorized 4 Responses »

Feb 292012

As is widely reported today, Ireland is to hold a referendum on the EU’s austerity and bailout plans that would lead to a lost generation in Ireland.

The Irish already know that austerity does not work. It does not solve economic problems. It does not solve the problem of zombie banks.

The pressure on the people of Ireland to accept austerity will be enormous.

They have to say no.

This crisis was not created by the people of Ireland. It was created by some politicians, the world’s economics profession and bankers with whom they were in cahoots. Now we need to sort out banking, sort out economics and sort out politics.

I call that the action of a Courageous State.

Might Ireland lead the way to a Courageous State?