Do small businesses evade tax?

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Dennis Howlett has written some very confused articles on tax evasion over the last few days: so confused that I am not sure where Dennis thinks he's heading.

His latest is worth reading. Because it's the most recent it might suggest that he's been working out his own confusion, because the earlier ones are much harder to fathom, making confusing claims (and quite unusually for Dennis) what appear to be errors of logic.

Take the first. In this he takes issue with me on numerous fronts. Too numerous to worry about. But one of his key contentions is that I should not have said:

Everyone knows that large numbers (but I accept not all) of these [micro] businesses do suppress receipts to pay less tax.

I did this here. Simon Sweetman also questioned my claim, saying this was no longer Revenue thinking. I apologise to Dennis, but not Simon. Dennis rightly picked me up for not referencing my claim. So I'll correct that now. The latest research literature on this is, as far as I know to be found here. The authors, Per Engstr??m and Bertil Holmlund of Uppsala University in Sweden wrote a paper in 2006 called 'Tax Evasion and Self-Employment in a High-Tax Country:Evidence from Sweden'. It's a good paper and adds to the literature in this area. As they note in their abstract:

Self-employed individuals have arguably greater opportunities than wage earners to under-report their incomes. The incentives for underreporting should be especially strong in an economy with generally high taxes. This paper uses recent income and expenditure data to examine the extent of underreporting of income among self-employed individuals in Sweden. A key hypothesis is that underreporting of incomes among the self-employed would be visible in the data as "excess food consumption", for a given level of observed income. Our results confirm the underreporting hypothesis. In particular, we estimate that households with at least one self-employed member under-report their total incomes by around 30 percent. Underreporting appears to be twice as prevalent among self-employed people with unincorporated businesses as among those with incorporated businesses.

That's pretty clear evidence of systematic abuse of the sort I suggest to be a matter of public knowledge. It's also why I hope Simon is wrong about the Revenue not presuming the self employed understate income systematically. All the evidence is that they do. As Lyssiotou, P, P Pashardes and T Stengos noted in 'Estimates of the Black Economy Based on Consumer Demand Approaches' in the Economic Journal 114 reported, in the UK the true income for blue collar self-employed people is more than 100 percent greater than reported income, whereas true income for white-collar self-employed people exceeds reported income by 64 percent.

I'm satisfied that every informed person could have known this, and I note that following his blog in which he made the accusation against me Dennis delved into the academic literature of tax for the first time that I recall, so maybe he realised how I'd respond.

I do, by the way, instinctively believe that Lyssiotou et al overstate the case. But, I also have no problem believing the findings of Engstr??m and Holmlund. Sorry Simon, this is the reality.

PS I've struggled to determine what else Dennis was trying to say in the rest of his post or that which follows on tax evasion. I've asked him directly and have only received cryptic answers. So I'm afraid I've given up the struggle and am presuming that his third article shows where he got to. If so, he seems to agree that the profession is a key supplier of services that at least assist taxation abuse and that greed is the motivator for this. But it's darned difficult to work out his thought pattern on the way.

If you elucidate Dennis I'll engage. If not, I'll stay on the sidelines.