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.
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One issue that has always been of concern to me is the assumption that any monies evaded, avoided, delayed etc from HMRC will all disappear offshore or be kept in cash under the bed.
What if this money resulting from tax evasion is spent in the local economy, invested in a business or saved in a bank? Surely the economic effect from this extra money has some merit and the loss of this spending would reduce the advantage of collecting it in tax.
What if by evading a business is kept going saving jobs? A mortgage is paid keeping a house and preventing a housing benefit claim? Someone buys a new UK made car and adds jobs in manufacturing?
How do you reconcile the advantage to the state through its extra spending power after collecting this evaded tax against the loss of it being used in the economy?
Even if placed in a bank, it will increase profits (Corp Tax), improve Capital ratio’s (Stability) and perhaps increase lending in return.
Can it really be said that evasion is all bad if the evaded money is used in a productive way, ignoring the moral point and just concentrating on the practical?
This is just about the sickest argument for allowing tax evasion I know. Tim Worstall specialises in it.
What you are saying is that crime does not matter so long as the proceeds of crime are spent in the economy because how can we be worse off as a result?
Well how about because honest business can no longer pay because their tarde is being stolen by those undercutting them with the proceeds of crime?
And how about because we create a criminogenic environment in which trust and the state fails e.g. Greece? because reward crime and so no one bothers to pay tacx any more.
And let’s also be clear – every penny of tax paid is used in the economy – by people with legal right to it. None of it is lost. In fact it is used highly productively – to pay people or to provide for those in need – all of whom spend it. You ignore that.
But then – what you’re proposing is a world based on crime and the break down in society – so why would you think paying pensions or providing education or health care matters? In your world the cosh would rule and people would be left to die in the gutters. That’s what you’re really saying
Every penny of tax paid is used in the economy……….In fact it is used highly productively…….
Funniest thing I have read on here for a while……….UK Government spending……none of it is lost……
Please……I think I just fell off my chair…..
But then you’d rather have an economy based on crime so candidly any sane person places not a ha’porth of value on your opinion
Its absurd if those in authority believe the cash economy is only 4% – your 13% is far more realistic.
However employ 10,000 more inspectors and it would still be unlikely for the ‘cash will do nicely’ decorator or drug dealer in Norfolk to contribute fully either to income or corporate tax. What they should not be able to avoid is paying VAT when buying a van or a meal out.
In other words would HMRC get a bigger bang for their buck by making VAT simpler and dealing with VAT avoidance issues?
VAT definitely loses 13% now – on that same cash decorator
So it has to be across the board
That’s they way tax systems work
This may also amuse. From the blog of Austin Mitchell MP:
7th Nov 2011: Public Accounts Committee: Inglese (HMRC lawyer — no relation to Julio) has to be put on oath to stop him prevaricating. Dave Hartnett is contrite about losing £8 million of interest from Goldman Sachs (after another bigger sum from Vodaphone). It’s a crazy system SMEs are hounded to death over unpaid tax but the big boys who’re fiddling their profits through tax havens take Dave out for dinner and he goes along to any shake downs like a marriage guidance counsellor and lets them off millions. It’s called “relationships” HMRCs top brass have to cultivate a good relationship with the really big fiddlers who can pay for tax avoidance advice and for using tax havens. On the other hand smaller fry have tough love: cough or die. That was the deal under Labour it will be worse under the Tories.