I note, with curiosity, the following report in the Guardian this morning:
Britain's shadow economy is now worth £150bn a year — but it is smaller than in most other western nations and last year fell to its lowest level in almost a quarter of a century, according to a report released on Tuesday.
A study by a free-market thinktank, the Institute for Economic Affairs, estimated that paid work not declared to the taxman was worth 10% of national income in 2012, half the level in Italy, Greece and Spain.
Part of my curiosity is that the data source is the same as I use for some of my work on this issue. As the Guardian says:
The report, by economists Friedrich Schneider and Colin Williams, found that the UK's shadow economy was smaller than the 13.4% average for the 34 developed nations in the Organisation for Economic Cooperation and Development. The UK rate peaked at 13% in 1997-98.
Previous work by Schneider, referenced here, has suggested the UK shadow economy to be 12.5% of GDP: I have no idea why the figure has been reduced.
But let's follow this logic. GDP is now, near enough, £1,550 billion. So the loss is now, according to Schneider £155 billion. And the UK total government income this year is estimated to be £612 billion. That's near enough 40% of GDP.
This means the tax lost on £150 billion may, by reasonably extrapolating this IEA survey, be £60 billion a year. Which happens to be remarkably close to my estimate of £70 billion - certainly well within the parameters of statistical error. And if Schneider's previous estimate of 12.5% was used - with the difference indicating the spread of estimation - the loss would be more than £70 billion to tax evasion.
I'll take that as an endorsement by the IEA for my tax gap work from now on.
And whilst the IEA are undoubtedly right in part about this:
The authors said the most important factor determining the size of the informal economy was the tax and benefits system, and much of the shadow employment in Britain could be blamed on the loss of benefits and tax credits for low-paid workers as they earned more.
the solution is not flat taxes; it is, as Howard Reed and I have suggested, a radical reform of taxes and beenfits. And it is also measures to tackle business evasion - which is a major part of this that it is just ridiculous for the IEA to ignore.
So refreshingly, the real right wing of UK politics endorses my sources and estimates by implication. But tehy have the solutions wrong.
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Let’s use that £60billion figure. By definition the shadow economy is the lower end of the turnover scale, the individual, often if not always cash-in-hand, unincorporated. This is absolutely nothing to do with large corporate avoidance.
So let’s also say HMRC takes your advice and accepts this is the tax gap, which of course is only the tax gap at that lower end. Well this is evasion; not avoidance isn’t it. And this very often, as the report highlights, involves false claims for benefits, benefits fraud if you will.
Well then, what do you want HMRC to do with with report? What should it’s response be?
Let me repeat myself; this has nothing to do with large corporate avoidance. So this reads to me like a call to crack down on benefit fraudsters.
No – tax fraudsters
That’s what’s been lost
As far as I know benefits, overall are UNDERCLAIMED!
You are right – and by many, many billions
Speaking of revenue services, nothing on these pages regarding the chicanery at the US Internal Revenue Service. Bug or feature?
Was it as you describe it?
Both, according to the report: “and much of the shadow employment in Britain could be blamed on the loss of benefits and tax credits for low-paid workers as they earned more”.
So the report declares quite categorically – and you yourself have highlighted this point – that these are low-paid workers who do not declare their earning for tax because to do so would cause them to lose means-tested benefits. So, by definition, the report is – and you are – talking of tax AND benefit fraudsters.
So may I repeat my question to you?
May I also suggest that, by highlighting this one single cause of this tax gap of £60-70 billion, you are suggesting that it is a major contributory driver of the behaviour. Well, you don’t evade £70 billion tax to save a small amount of benefit, not if it is a major cause of the tax loss. So the national scale of benefit fraud, following your logic, must be much higher than previously estimated.
But they do evade the tax
That is indisputable
And my work with Howard Reed shows how to tackle that
Yet another attack on “labour” by “capital” trying to shift attention away from tax avoidance by the wealthy and large corporations.
The IEA would appear to be full of either thoroughly dishonest or incredibly naive cranks that believe that unadulterated Austrian economic principles would work in the real world.
Yes they do indeed evade tax, I was quite clear about that. Your figure is between £60-70billion. They ALSO defraud the benefit system. Again, your report highlights this. They do so to the tune of many billions, following the logic of your own post. Tax evasion is immoral and criminal, as is benefit fraud.
So, may I put my question to you for a third time: having demanded HMRC accepts your tax gap figure – which of course has nothing to do with large corporate avoidance – what do you wish HMRC to do with it?
Oh, and a truly Courageous State would post this comment and genuinely engage with the point at issue. It would not hide behind a moderation policy to avoid embarrassment or behind its acolytes screaming “neo-liberal”.
I want the systems out in place, and the staff to tackle this abuse
And reform of the tax and benefits system to remove the incentive for it
That is what I said
What’s your problem with accepting that?
Ironman, I don’t know why you are labouring a point – tax evasion and benefit fraud are illegal.
Tax avoidance by Multinationals is also morally repugnant as is the sophistry that surrounds it.
The vast majority of ordinary people don’t have ciphers within Government that write nice rules for them to ensure that their tax cheating doesn’t become illegal.
Agreed!
Well it took three attempts to get you to say it Richard. And let’s refocus on the fact that we are talking here strictly about the shadow economy, affecting the low-paid. To be clear, you would support an increase in resource by HMRC to tackle this abuse, that is people evding tax and defrauding the benefit system. This fraud is, following your logic, much larger than previously understood by most people reading this post.
I do have a slight problem with this. Not an objection in principle; fraud is fraud. I am concerned, however, at the lengths the state should go to, the heavy intrusion into society’s life, in order to tackle what is, at the the level of the individual, small-scale fraud. It strikes me a persecution of the poor.
Anyway, that’s my view of it; it’s your blog.
We will never eliminate all fraud
But there are real wins to be had by better design
You seem to be ignoring what I am saying
Just so we know we are talking about the same thing, your report with Howard Reed (I read it this morining) never linked the tax and benefits system to tax evasion or its reduction at all. So I look forward to your analysis of how a better design will achieve this, what the incentives for tax evasion are, how they translate across income brackets and indeed into corporate taxes.
I note you simply refuse to engage on discussion on what the true level of benefit fraud is likely to be; I have only been following your logic here.
I am also fascinated by the language used by Theremustbeanotherway (who seems to think you need his help): “evasion and benefit fraud are illegal. Tax avoidance by Multinationals is also morally repugnant as is the sophistry that surrounds it” You sounded your approval of this.
So avoidance is morally repugnant; evasion is merely illegal. it seems to me you and he would write different laws for different people and hold them up to differnet standards depending on whether you like them or not.
So we didn’t say that was a result
But it would be
And re benefit fraud – I engage with what the government says it is – which is valid in this case because the population of claims is what is relevant here
I also note about £15 billion a year is not claimed – some ten times (approximately) the fraud level
And that’s engagement enough
Ironman
Just for the record evasion and avoidance are both morally repugnant!
Perhaps you would let all us know where you stand on tax? Perhaps it’s all theft to you? May I have a 10,000 word dissertation from you by Monday next. I shall be “fascinated” to read this.
No I’m sorry, following your logic benefit fraud cannot, simply cannot be only £1.5 billion, not if it is “the most important factor determining the size of the informal economy”. There cannot be £60-70 billion of tax evasion driven by the desire not to lose benefits if that loss would only be £1.5 billion.
And you cannot claim with regard to the level of benefit fraud “I engage with what the government says it is” when you make it quite clear over many years that you do not believe the gov’t’s figures on the tax gap etc.
For what it’s worth I wholly share (as do you) the report’s analysis that the high effective marginal rates suffered by the low paid is driving much if not most of the shadow economy. So reducing these would increase tax compliance, as it would for higher income individuals, non-doms, corporates, everyone in fact.
I do not accept the IEA analysis that this is beenfits related
I do not think it is
Not for one minute
The vast majority will be done by people vastly better off
Their claim is conjecture and wrong
As is your extrapolation of it
That does not invalidate my analysis
But that is analysis, yours isn’t, and nor is the IEAs
“I do not accept the IEA analysis that this is beenfits related
I do not think it is
Not for one minute”
In the original blog posting, you said you accepted it!
Look in part it must be – a bit
But to extrapolate to the whole is absurd
That was my point
OK, you started off by saying very strongly (“undoubtedly”) that at least part is benefits related – and the quote you endorsed talked about “the most important factor”, which suggests that it’s the major part.
Then you said very strongly (“Not for one minute”) that it is not benefits related at all.
Now you say that part is and part isn’t.
I’m left very confused as to what you actually think.
I never think there are absolutes
Sure benefits play a part – but I am saying a small part
And I am saying the IEA have pushed way beyond the boundaries of credibility
For the fascination of Theremustbeanotherway: no tax is not theft, tax is necessary for a government to fund itself. A government is the single largest instrument of society, though by no means the only such instrument. Tax is therefore important to the fabric of society. Tax evasion is illegal; tax avoidance is not. So we must discuss the possibility of a massive tax loss through the shadow economy with great seriousness. This we are not doing if we start to argue against ourselves when our own logic leads to conclusions that don’t sit neatly with our prejudices. This is what I amsuggesting Richard is now doing.
So come on Richard, Courageous State and all that. No hiding behind the moderator, post my comments.
Finally your demand for for a 10,000 word dissertation: are you able to contribute to this discussion, or is name calling as good as it gets for you? Richard doesn’t need your help!
I am posting this comment – but they’re nonsense
So enough is now enough
I’m confused.Is this £150+bn evaded income all taxable at 40% to give £60bn lost tax?
No
I refer to the total tax take on the shadow economy
The loss will also embrace NIC, VAT and other taxes e.g. duties – so to extrapolate the total tax recovery rate is fair
A large part of the lost VAT is neither fraud nor evasion – it due to the exemption for businesses too small for Customs and Excise to want to bother with them. It has now soared to the point that I could be paying higher rate tax without being registered for VAT. There are hundreds of thousands of perfectly legitimate small businesses that pay their income/corporation tax but not VAT. So extrapolation from HMRC’s estimate of the “VAT gap” is unsound and systematically overstates the “tax gap”.
The VAT gap calculation allows for that fact
Not in reality
Although they seem not to have taken account of the mushroom growth in self-employment in the over-50s in the last decade, that is a minor problem. Their adjustment method is incomprehensibly incompetent: by taking an average of smaller businesses from HMRC data it suffers a distortion from VAT-registered businesses having turnover 20% greater than identical non-registered ones, it assumes that all small businesses below the compulsory registration threshold are unregistered and so suffer loss of unreclaimed VAT: I can tell you that some do not – all my UK outputs are to VAT-registered businesses so I (and people like me) should have to be very stupid to de-register, their formula takes no account of flat-rate VAT which is chosen only by those who expect to benefit from it; this may be small beer compared to their assumption that no smuggled tobacco is sold through legitimate CNT shops who have purchased it unsuspectingly: it is beyond belief that so many pensioners travel to the East End of London to buy hand-rolling tobacco from spivs.