As the Guardian note this morning:
The UK economy has doubled in size since the early 1980s — yet the number of those suffering below-minimum living standards has grown by more than twice, a study claims.
The report refers to an Economic and Social Research Council funded study led by Bristol University into poverty in the UK that defines poverty as going without three or more "basic necessities of life", such as being able to adequately feed and clothe themselves and their children, and to heat and insure their homes. The report suggests that one in three households fail this test. In the early 1980s, the comparable figure was 14%.
I have not reviewed the work. What I can say is that the criteria appear inherently reasonable. It is also, and right-wingers usually like this, not a relative measure, but an absolute measure.
But what worried me was a response from Charlie Elphicke - a Conservative MP:
The Daily Mail article is here, for the record. The main criticism from the government appears to be 'you did not use our methodology' and for this reason a Conservative MP issues what looks like a rather nasty veiled threat against a funding body suggesting it has acted politically in funding research that looks at the findings that alternative methodologies might offer.
This is worrying. It's a reaction in the same style as that which HMRC offered to my work on the size of the shadow economy when they suggested my methodology was seriously flawed, but have never said why. The suggestion is that there is just one way of thinking that is allowed. In democracies that is very worrying, especially when linked to threats to funders.
Plurality is the lifeblood of democracy - and academic and social thinking. If it is suppressed then we destroy democracy itself. I do not think that impossible. Remember, neoliberal thinking has destroyed almost all diversity in economic thinking - which is precisely why Thomas Piketty is so unusual. Now it would seem they want to achieve the same goal elsewhere.
I happen to think that the research to which the Guardian refers is credible. But in the eyes of the hegemonic thinker that is its precise fault. We need to worry.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
“but have never said why”
I thought they specifically answered why they thought your work on the tax gap and size of the shadow economy was flawed?
Not the latest work
And candidly, not really with regard to any of it
I’ve seen quite a lot of different people making points as to why your work is wrong, specifically through your methodology. Your answer to them tends to revolve around the statement “I’m right, they’re wrong” and sometimes involves smearing them as some part of a neoliberal cabal, paid to hide the truth you are professing to tell.
Aren’t you also paid to write your reports (quite well, I understand) and isn’t it the case that if you can attack people’s work as propaganda for their sources of funding (such as the Oxford Centre for Business Taxation) then other people, like Charlie Elphicke, are entitled to do the same?
I cannot have been clearer about my methodology and how I get to my results
All my workings are in my latest report
The same cannot be said for HMRC, for example
In that case I am entitled to say ‘show us your workings’ or your attack is rhetoric alone
I never hide that I am paid. I never claim to be without bias
“The same cannot be said for HMRC, for example”
How so? Their tax gap calculations are pretty comprehensively documented, along with their methodology. You even use their number for the VAT gap as a starting point for your latest piece.
They also had a fairly comprehensive piece published regarding what they saw as the failures in your tax gap calculations are.
“I never hide that I am paid. I never claim to be without bias”
I didn’t say that. I asked why you feel it is acceptable to attack ostensibly “right-wing” authors and organisiations and their work because of the source of their funding, then defend “left-wing” organisations when they come under attack for the same reasons.
Please show me the workings for HMRC’s figures
I bet you can’t
Blocked?
No that I am aware of
Must have been some internet error. Let me try again:
https://www.gov.uk/government/publications/measuring-tax-gaps
https://www.gov.uk/government/publications/measuring-tax-gaps-tables
http://www.publications.parliament.uk/pa/cm201213/cmselect/cmtreasy/124/12405.htm#a1
I trust this is enough evidence of HMRC’s data and calculation methods.
But show me how they actually worked out the VAT gap
Or the figure for moonlighters
It’s there under the first link. The data they use is under the second.
At high level yes
But give me the calculations
DWW
Have you found the calculations yet?
I’ll show you mine and you show me yours – transparency – whats wrong with that?
If the Right or their supporters have all the winning arguments, then they have nothing to fear? We’ll all learn from the process.
On the other hand perhaps they can’t back up their case and their figures are pulled from …..I’ll let you finish that sentence!
@ Richard Murphy
HMRC give all the data they use to calculate the tax gaps in excel format, and the methodology they have used in the annexes. I’m not sure what more they could give you. Indeed, you use HMRC data as a starting point for your “In the shade” piece.
On the other hand, your work does not include a lot of the background data, and the some of the methodology you use is distinctly suspect according to HMRC and various others. Briefly looking over the same “In the shade” document I can spot a couple of very serious errors – not least in applying an average tax rate on the number of sales required to generate the VAT gap. It’s a heroic assumption that sales = profits. I also understand you are rather unwilling to divulge who “peer-reviewed” your paper.
@ Theremustbeanotherway
Like I said, HMRC lay out all the data they use, the methodology and the assumptions they use. They even attempt to estimate the error function in their work. It’s all there in the links I provided, if you bother to look.
In terms of pulling numbers out of thin air – what is more likely? HMRC, with a small army of people working on the data using government, ONS and their own data sources using methods generally accepted in the field (by organisations such as the IMF and OECD) or Richard Murphy, whose work has been found to contain various errors and assumptions?
Oh come on now: let’s stop being silly here. All those tables do is reproduce the data that is in the actual report: the spreadsheet provides not one single piece of additional information or any indication as to how the calculations were made. It is ridiculous to suggest in that case that this is HMRC showing their workings. It is only showing their conclusions.
I on the other hand do provide my background data, and I also disclose my methodology.
I did not assume sales were profits. You will see that that is quite clearly not the case, and if you think I argued that, then you have very obviously mis read the report. Since when did PAYE, for example, apply to profits?
I did not arrange the peer review. Nor will I disclose the names of those who I think undertook it, because I think that in one case, at least, this would compromise the person in question.
The annexures I linked to give details of the methodology HMRC used and applied to their data. They have been very transparent on how they get to their numbers.
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/249541/131009_MTG_2013_Annex.pdf
In your work “In the shade” you say:
The inevitable consequence of this is that by not recording the sale on which VAT has been evaded the fraudulent trader also evades all the other taxes due on that sales income as well as the VAT itself.
You go on to argue that the VAT gap represents 100bn of sales, and that overall about 36% of national income was paid in tax. You have now directly equated sales to income – like I said, a truly heroic assumption.
You then argue that this 36% level is too low, as it “is likely” that these sales represent the top part of many peoples incomes. Another assumption. You then simply assign a 40% tax rate to this 100bn of sales, which you have now called income, apply this 40% to the 100bn of missing sales and state that the tax gap is 40bn.
This is your methodology, written plainly and for all to see.
Whilst you do provide your background data (which you get from HMRC) the calculation and treatment of it is incredibly simplistic, with a variety of assumptions and no treatment of potential errors. You may as well have picked a number out of thin air.
It would certainly have been quicker for you to have simply taken UK GDP, assumed a given % tax rate and then measured the difference of what you think the total tax take should be against the actual amount. The number would have about the same level of credibility without having to bother with all the typing.
First, those annexes do not show the workings
Second – what you are claiming is simply wrong
I explain at length in what I have done why that is wrong so I will not repeat it here
You are guilty of doing what you suggest I have done: I am certainly not
Your methodology is this:
1. Take a estimate for the VAT gap.
2. Use that number to calculate total sales needed to generate that VAT gap (by taking the VAT rate and the percentage of VATable sales).
3. Re-label that total sales number as income.
4. Apply the UK average tax rate to that “income”.
5. Increase the estimate by an arbitrary amount.
Steps 2,4 and 5 require massive assumptions – assumptions which you do not give any mathematical, statistical or economic treatment to. You just boldly assert them.
Step 3 is a sleight of hand trick you have to use to inflate the tax gap number and is obviously incorrect. Sales do not directly equal profits.
In fact, the only part of your methodology that is correct is the first part – where you take HMRC’s estimate for the VAT gap.
I have read your piece through a few times now, and the methodology you use to get your tax gap is as simple as I have described above. Compare and contrast that with HMRC’s work, and yet you still argue that your work is somehow more detailed and more credible than HMRCs.
If you wish to misrepresent my work this way, that’s fine
It does not mean you are right
You are clearly intent in ignoring all my explanations and as I have said before, in that case there is not point repeating them here
And I have not said my work is more credible than HMRC’s. I have accepted much of the logic of the VAT gap. What I have said – and you ignore this – is that they ignore the implications of that gap
There is strong corroborating evidence that the shadow economy is of the size I indicate – which I reference. You are assuming that is all taxed. As heroic assumptions go that’s extraordinary
“You are clearly intent in ignoring all my explanations”
I’ve gone through all your explanations. It still boils down to the same thing – you are treating sales as income/profit and then assuming a total tax take on those profits. In reality, those sales might have no more tax due on them than the VAT gap, which HMRC account for. HMRC account for other implications of the tax gap elsewhere.
“And I have not said my work is more credible than HMRC’s.”
You have repeatedly said that HMRC are wrong and are dramatically underestimating the tax gap. You also have said their criticism of your work is also wrong. By inference, you are saying your work is more credible than theirs.
“is that they ignore the implications of that gap”
I’m not sure this is true. They account for each part of the overall tax gap. What other implications they ignoring, which they are not covering elsewhere?
“There is strong corroborating evidence that the shadow economy is of the size I indicate — which I reference. You are assuming that is all taxed. As heroic assumptions go that’s extraordinary”
The whole idea is that the shadow economy isn’t taxed. Therefore I am making no assumptions. HMRC assume that parts of the shadow economy should be taxable, and account for that in their estimate of the tax gap. They however also understand that taxing that economic activity would have feedback effects on the shadow economy itself. Some of it would cease altogether, some would cease to be profitable and various other effects. The point being that you cannot simply apply an average tax rate to the size of the shadow economy and expect to get a sensible answer.
Which is where you go wrong. What you assume, is that it would *all* be taxed at the prevailing rate, with no effect on the shadow economy. Which is a hopeless assumption.
Respectfully, every one of these questions has been comprehensively answered in detail in what I have written
I do not need to repeat myself here
“Respectfully, every one of these questions has been comprehensively answered in detail in what I have written”
You’ve given wordy, verbose descriptions of why *you* think your methodology is correct. What you haven’t done is provide any analytical evidence to support it. In scientific terms you have gone from hypothesis to conclusion without any testing or results.
Specifically, your claims that missing sales = missing income, and that an average tax rate can be applied directly to that missing income.
It’s basic, pre-GCSE level science that you have to provide evidence and results to back up a hypothesis, and I can find no such thing in your work. Instead, you use a hypothesis to justify your results without any validity.
The government says in the tax gap that there are purchases for which there are no matching sales on which VAT has been charged
So there must be missing sales
My only assumption is that the rate of evasion is similar in zero rate and exempt supplies as it is on chargeable supplies. But as this includes non-registered businesses I think that fair
I remain baffled by your claim that sales are missing. They aren’t
And I have explained already, at length, why in this case sales = value added. At a national accounting level this has to be true.
“So there must be missing sales”
“I remain baffled by your claim that sales are missing. They aren’t”
I am now truly baffled – not least by the contradiction above.
I have never said that sales aren’t missing. HMRC also says this, and hence get to their VAT gap, which you also use.
What I do say is that you can’t simply make assumptions about the sales as income. Value added means just that – it does NOT mean that that value is subject to tax at the rates you suggest.
As I say though, you have argued a hypothesis, which you then use to leap to conclusions with no testing or results.
For example, you could have done a simple test on your hypothesis. You could easily have found the total sales in the economy, using the same methodology you used for missing sales. Then you could have applied the same 36-40% tax rate to it and compared to actual HMRC tax reciept results. Problem is you would see massive discrepancies between the theoretical result from your method and the reality. Why? Because you simply can’t apply uniform taxes to value added numbers and get a sensible result – rather poking a hole in your argument.
Missing sales at this level does mean missing value added – precisely because it cannot mean anything else in a national accounting sense
I explain this in my work
You are applying micro thinking to macro data and I am sorry – but that just does not work
And this is macro data – which is what I also explain
I cannot keep explaining it because you don’t get it
Pretty sure I do get it, and you are just filibustering to cover the holes in your argument.
If you treat the “missing” sales as pure value added, which you then apply average tax rates to, you have to do the same to the recorded sales. It’s nonsense to suggest otherwise. Which if you had tested it gives you a number far out from actual recorded tax receipts.
Indeed, using your sales derived methodology, you don’t even get a decent estimate for GDP – which should set alarm bells ringing.
More importantly though, as I have said before, there is no analytical treatment of your methodology, no testing the statements you make, and no attempt to quantify possible errors. You just assume you are correct and move swiftly on.
A great example is when you bump the effective tax rate from 36% to 40%. You basically just say “I think it should be higher, therefore I shall use the higher number.” You make no attempt to quantify or test this hypothesis. Indeed, the evidence available suggests that any effective tax rate for the shadow economy would be quite low – your assumption that those in the shadow economy are the high paid and this shadow activity represents the top part of people’s incomes is pretty ludicrous.
That is nonsense and I have explained why
All the purchases have been accounted for in the GDP calculations that form the basis for the VAT gap
Therefore there can only be value added left
How hard is it to get that. The hint is in the name by the way: it’s a value added tax, not a sales tax
And of course you can disagree with my 36% to 40%. But that does not mean I am wrong. I am explicit. If you want to downgrade for that reason it’s fine. But on value added, I’m right
“And of course you can disagree with my 36% to 40%. But that does not mean I am wrong.”
Yet you offer no evidence to show you are right. The available evidence suggests that you are wrong – and that the shadow economy would likely be taxed at the lowest marginal rates. Yet you arbitrarily use one of the highest rates!
“Therefore there can only be value added left How hard is it to get that. The hint is in the name by the way: it’s a value added tax, not a sales tax”
Whoops. This is where you are wrong. VAT is a sales tax by any other name (VAT came into force when the UK joined the EEC, and replaced the purchase tax). It is determinant on the sale price, not the profit/value added of the sale itself. You are confusing value added in GDP terms (true or gross value added) with value added in cost of sale terms. They are distinct.
A sale of value 100 is subject to VAT of 20, but from that limited information you cannot determine the costs associated with the sale, or the components thereof. Without that information you cannot determine the true tax due.
To be clear, without further information you cannot break the 100 down into profit (corp tax), wages (NI and IT) and input costs (not taxable).
You are treating VAT as a “net profit added tax”, which it simply isn’t.
You could, as I suggested, also have run a simple test, using your own methodology. Using VTTL for 2011/12 of 109.8, then multiplying up to account for VAT (20%) and VATable sales (53%) you get a “total sales” figure of 1036bn – which you are equating directly to GDP and then applying a tax rate to. Using your logic total tax revenues should be then 414bn.
Problem is, we know 2011/12 Nominal GDP was 1549bn and tax receipts were 576bn, or 544bn only including taxes you claim are directly dependent on sales.
Rather a large discrepancy. If nothing else, that should put great doubt into your mind regarding the numbers you get. VAT numbers cannot easily be used to deduce GDP, and therefore cannot be sued in the manner you suggest.
You are getting tedious
I offer all my assumptions and my reasons for choosing them
And at macro level VAT is just that – a value added tax – I am sorry – this fundamental lack of understanding on your part is your problem
And for that reason I ma not posting any further comments from you on this issue
You also reveal that you do not understand the composition of GDP – again, an issue I have addressed.
So thanks for your comments – but you have now more than adequatly proven that you do not have the knowledge to make the claims that you have made
“It is also, and right-wingers usually like this, not a relative measure, but an absolute measure.”
I’m afraid not, it’s a relative measure. From the actual report:
“The number of people falling below the minimum standards of the day has
doubled since 1983”
The important part is that “standards of the day”.
Unless you want to benchmark in 1830 that is wholly relevant
And consistent with modern psychological thinking
Thoroughly agreed.
Readers of your blog might like to have a look at the International Student Initiative for Pluralism in Economics -www.isipe.net- calls for economic teaching which gives more than the neo-liberal view. (not that many members in the USA).
On the other hand there has just been an item on BBC Breakfast. Lord Young wants children to study ‘business’ from the time they start school. Education or indoctrination?
Indoctrination, I fear
The shameful thing (although entirely predictable) is that ‘left-wing’ is used as a slur – as though it’s not just as valid an opinion as right-wing ones, that go to make up a plural democracy, as you say.
What about all the think tanks, funded by tobacco firms or finance institutions, who try and keep their funding hidden, who churn out right wing nonsense? Or even his own party, 50% funded by banks and hedge-funds?
Surely focused, government (public) funding, distributed via a public committee (ESRC), to researchers based on the peer-reviewed merit (the RAE and Grant systems) should be considered a reliable source?
Not is it challenges the prevailing hegemony, it seems
I notice that the same Tory MP as you cite in your blog has now written to the Charity Commission to “report” the IPPR for their work for Labour. He should watch what he wishes for given the number of Tory supporting think tanks.
What, Elphicke has?
That’s crazy
Got a link anywhere: I have searched web without joy
Mention of the action taken by Elphike re Charity Commissioners is here, Richard. In the full report it gave his name but I cannot find that now (it’ll be in Sparrow’s blog somewhere):
http://www.theguardian.com/politics/blog/2014/jun/19/nick-clegg-hosts-his-call-clegg-phone-in-politics-live-blog#block-53a2ff9de4b0187f0bbd96de
Worrying
They have a case
But then there is also a case against Policy Exchange every day of the week
If the ESRC funded the work then the methodology will be sound, Richard, I can assure you of that. In my experience (and that of many academics) you don’t get funding from that source – or any other funding body, including the EC or sources such as Leverhulme – without a soundly constructed and robust methodology. There are plenty of people on the vetting/approvals panels of all those bodies who make sure that’s so.
But beyond that it hardly matters as very few organisations – and particularly not government – pays much attention to academic research these days unless it supports mainstream (i.e. the conservative and/or neoliberal) values and agendas. The exception to some extent would be science, but as the story of graphene shows, even there support is pretty halfhearted, whatever various PR and media units may claim.
Ultimately I think state funding of academic research continues largely because it’s necessary to maintain a facade to the outside world. But in reality – and in particular in respect of the social sciences – increasingly over the last decade what governments and political parties prefer is to commission a commercial research organisation, often one of the big four, or from the plethora of think tanks, who can be relied upon to produce “results” that suit the particular “needs” of the commissioning organisation. A bit like audits, really!
Only 11% of all bids get ESRC funding, I am told (I am involved with one, right now)
I am sure the work is sound
And our conclusions are right
Yes, Nick. I could have dispensed with the !, but to be on the safe side replaced it with a ? 🙂
Good luck with the bid then, Richard.
Oh, dear. Typos. At least one spelling mistake, and not enough punctuation. I should have had another cup of tea before I wrote my comment 🙁
Ivan, a bit like audits, really!
Charlie Elphicke — a Conservative MP
Perhaps the response should be Police discover Time Portal at Tory Central Office, after yet another 19th century Factory Owner arrives in the 21st Century to deny that poverty exists..ZZZZZZZZZZZ! 😉
Elphicke realy needs to try harder if he wishes to get on Dr Clarke’s following top 10 list:-
http://www.greenbenchesuk.com/2014/01/10-appalling-comments-by-tory.html
Elphicke is clearly an inhabitant of Aristophanes’ Cloud Cuckoo Land. By every measure poverty is falling-which is why food bank use travelled, energy bills are unaffordable and housing unreachable. Ye Gods! Even in double digit inflation days this was not happening.
Simon
You’re too kind to him – let’s call him out – he’s a sociopath with absolutely no empathy for someone who is not within his “social stratum” or a higher one. In case Ironman is reading I’d better sign off.
Class Warrior 😉
So a well researched, academically produced report is rubbished by a politician with a tweet. I know who I would trust in that scenario!