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.
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:
KEY RECOMMENDATIONS Continue reading »
The Group of the Progressive Alliance of Socialists & Democrats in the European Parliament are holding a press conference right now. The notice says:
Today S&D Leader Hannes Swoboda will present alternative proposals to exit the crisis in Europe, during a press conference in the European Parliament.The proposals include measures to fight tax evasion based on a study commissioned by the S&D Group. According to this report entitled “Closing the European Tax Gap” and prepared by an internationally recognised tax expert Richard Murphy (Director of Tax Research UK), EU governments lose as much as 1 trillion Euros in potential tax revenue every year.For the S&D Group, at a time of crisis and of massive pressure on public finances, the EU needs to take action.The Press Conference will take place Wednesday 29 February at 10:30 – Anna Politkovskaya – PHS OA50.
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Shamelessly inspired by the new fact sheets on the False Economy blog, here’s one of my own on the Tax Gap:
You can download it here.
All major sources can be found referenced here.
It’s been revealed that H M Revenue & Customs’ bad debt in 2009-10 was £10.9 billion.
According to HMRC’s accounts the provision was £10 billion in 2010-11 and £11.5 billion in 2009-10. They did not, as far as I can see (and I’ve searched) disclose a write off figure.
In earlier years write offs of about £4 billion a year were considered normal.
So why the increase? Well that’s easy to explain. If you sack your debt collectors your bad debt goes up, and that’s exactly what HMRC under the direction of Dave Hartnett has been doing. In 2005 HMRC had 100,000 staff. By 2015 it will be 50,000. Many of these were debt collectors.
Total HMRC staff costs in 2010-11 were just over £2.2 billion. Seeking to reduce that has cost many, many times that sum.
No wonder the tax profession, HMRC staff unions and anyone trying to deal with HMRC agree that HMRC is understaffed. Now we know the cost.
When will sanity prevail and more spending on staff at HMRC be sanctioned? It’s the only way to solve the tax gap.
It’s been revealed that the UK’s national accounts for 2009-10 include tax bad debt of £10.9 billion.
I found this interesting. That’s because, as regular readers will know, I’ve been writing about the ‘tax gap’ since 2006, and pretty much forced this issue onto HMRC’s agenda in 2008, as government papers at the time showed. The tax gap is made up of three parts. The first is tax avoidance (£25 billion in my estimate), the second tax evasion (£70 billion in my estimate) and the third tax paid late (£25 million according to HMRC of which they have said about £4 billion a year has been written off on average in previous years. This definition of the gap is not mine by the way: HMRC agree with it, except they ignore tax paid late and recovered in their numeric calculations despite including it in their definitions.
But if they do include bad debt of £10.9 billion then their latest estimates of the tax gap – supposedly for the same year, 2009-10 are even more wildly inaccurate than we thought, because they claim that in total the tax gap is just £35 billion that year. That would mean there was just £24 billion of tax avoided and evaded, and yet as I have shown using World Bank figures for the UK shadow economy, it’s implausible that we have a tax evasion gap of less than £70 billion (which so happens to agree with my estimate of the same gap based largely on VAT data). If the HMRC claim on the total tax gap were right tax evasion would be little more than £20 billion – and that’s just 3.6% of total overall tax revenues.
No country on earth has a tax evasion rate as low as that. Switzerland is supposedly the cleanest domestic economy on earth and has a shadow economy of 8.5%.
So what this data says is that not only do the national accounts have some surprises in them, but HMRC are lying about the scale of the tax gap. Sorry to use such language, but on this occasion it seems appropriate (and they can always sue me if they wish). But I don’t think they will. What this data reveals is that not only have they not previously told the truth on the scale of bad debts HMRC has been suffering, they’ve also been disguising that data in the figures on the tax gap they have been producing. As I’ve said all along.
The Telegraph reported yesterday that:
People who receive cash-in-hand payments for goods and services are harming the economy, according to HM Revenue & Customs (HMRC) most senior taxman Dave Hartnett.
Speaking to the Daily Telegraph, he criticised tradesmen and other workers who try to get out of paying tax by asking for their payment in cash and said there will be a crackdown to catch individuals who do so from April 2012 onwards.
Mr Hartnett claimed evading VAT or income tax is ‘diddling’ the economy and will lead to further cuts for things like hospitals and schools.
“Tax provides the funding to run the country: hospitals, schools and everything else. Every time someone pays cash in order not to pay VAT, the nation gets diddled,” he remarked.
David Callahan has written a blog under the above title on the Reuters web site.
As he notes, the simple fact is that around the world deficits are largely the result of the tax gap. The tax gap is the difference between the amount of tax that should be collected each year by a government using the laws it has passed and the actual amount it collects. As he notes:
The United States isn’t alone in facing an epidemic of tax evasion. Cheating is much worse elsewhere and is a major factor in the budget woes of European countries. A study released in November by the Tax Justice Network estimated that $3.1 trillion is lost worldwide every year to tax evasion, with Europe accounting for half that total. Few countries lose more revenue than Italy, where, the report said, over a quarter of all economic activity goes untaxed–or a staggering $238 billion a year in a country with an economy seven times smaller than that of the United States.
Global leaders are waking up fast to the need for aggressive cooperative efforts to shut down offshore havens. One outcome of the G-20 summit last fall in Cannes was an agreement to fight these havens using diplomatic and economic pressure. European leaders hope these and other initiatives will bring in tens of billions in revenues.
Making it harder to hide money in foreign banks will also mean new revenues for the U.S. Treasury. Ultimately, though, plugging the biggest leaks in the U.S. tax system will require far more disclosure and tracking of business income, along with a substantially stronger IRS–none of which is popular with Republicans on Capitol Hill.
The sting is in the tails there. Two tails, I should add. The first sting is the lack of willing to use real armoury (metaphorical I stress, but real none the less) against tax havens. The second is the lack of political will on the political right, and not just the Republicans in the USA but across the whole spectrum of the right, to invest in tax authorities to collect the money due to government by law.
It’s extraordinary that the right – who are natural conservatives and upholders of law and order – so consciously refuse to uphold the law when it comes to tax. Even more surprising is their desire - explicitly stated, very often – to allow those who commit the crimes to get away with them because that, they think, promotes growth. So bigoted are they about governemtn that crime against it is somehow acceptable.
And that’s why we’re in the mess we’re in.
One of the US readers of this blog, Kenneth Thomas, who writes the Middle Class Political Economist blog, wrote the following and I reproduce it with his permission as it is very apposite here:
As I reported last month, the Tax Justice Network estimated that global tax evasion was over $3 trillion annually. TJN’s estimate for the U.S. was $337 billion for 2010, less than the IRS figure of $385 billion for 2006 even though GDP was higher in 2010 than 2006. Thus, the IRS figures confirm the validity of the TJN estimates. Indeed, it is quite possible that Richard Murphy’s estimate in the TJN report actually understates the amount of tax evasion globally.
There are a number of eye-popping numbers in the IRS report, beyond simply the magnitude of tax evasion. Most evasion takes the form of underreporting and underpayment, not non-filing. The amount of dollars lost to underreporting rose by 32% between 2001 and 2006; one-third of that increase came in the corporate income tax.As another sign of growing inequality in the U.S., between 2001 and 2006 corporate income tax due doubled (meaning that profits approximately doubled), while individual income only rose by 15%.
Not surprising, but still striking, is what the report says about who cheats on their taxes. People subject to both information and withholding requirements only underreport 1% of their income; people or businesses subject to information reporting but not withholding misreport 8%, but entities subject to neither information or reporting requirement, “such as business income” [on the individual, not corporate, income tax] has a 56% misreporting ratio. Since middle class taxpayers mainly fall in the first group, it is obvious that most of the opportunities for cheating belong to the wealthy.
To put this in dollar terms, of the $450 billion gross tax gap, $376 billion of it comes from underreporting income. $235 billion is on individual income tax, of which $122 billion is business income (in addition, there is another $57 billion in self-employment tax that is underreported). Finally, $67 billion of corporate income tax due was underreported. (And this is only illegal tax evasion. Abusive corporate tax avoidance, some of which will be declared illegal retroactively, would add many billions more.)
What rich individuals and corporations don’t pay in taxes, shows up as higher taxes on the middle class, bigger budget deficits, program cuts, or some combination of the three. 2006′s $385 billion in net evasion of federal taxes would cover about 1/4 of the FY 2011 budget deficit (and, as Policy Shop notes, it exceeded the $248 billion budget deficit of 2006). As Policy Shop says, the case for giving the IRS further resources for enforcement is a strong one, but Republicans in Congress are actually trying to reduce enforcement resources.
That opposition needs to be overcome.
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