The Tax Gap methodology is valid

Posted on

There's a chap called Tim Worstall who writes a blog and who seems pretty fixated on what I write.

The difficulty for Tim Worstall (who, I believe considers himself a libertarian right winger and so carries with him all the baggage that goes with those labels) is that he seem to have little understanding of the issues about which he comments, at least where I am involved.

In his latest diatribe to seeks to dismiss my work on the Tax Gap. His logic is three fold:

1. I start my analysis using company accounts;
2. I recognise that there are flaws in company reporting which limit their usefulness for this purpose, and
3. I recognise that there are differences between accounting and taxable profits in the work that I do, but only a limited number of those differences can be identified and so adjusted for in the analysis I undertake.

As a result he declares that my work cannot form the basis for any credible policy recommendations.

So let me compare my approach with that Mike Devereux uses in his paper on tax incidence, which arguments Tim Worstall believes absolutely correct. Mike Devereux:

1. Starts his analysis using company accounts;
2. Does not explicitly recognise that there are flaws in company reporting which limit their usefulness for this purpose, and
3. Does not seek to adjust reported company data to allow for those necessary adjustments, such as excluding non tax allowable goodwill charges and adding back unpaid deferred taxation that will undoubtedly produce an estimate of the effective tax rate closer to that actually suffered than that declared on the face of the profit and loss account, which is he figure he uses.

Despite these flaws in the approach to the data he uses Mike Devereux does draw conclusions which others are using as the basis of policy recommendations, even if Mike is not. In fact, most academic tax papers on tax rates use the approach Mike Devereux uses.

Now, ask yourself. If you were going to suggest who was seeking greater objectivity who would you choose? The person who explicitly accepts the limitations in his data, and seeks to adjust for it, or the person who just ignores the issue? And which set of data is likely to produce the more objective result? I'm biased, of course, but I know my answer.

What's yours Tim Worstall, and why?

And what would you do better?