Jolyon Maugham wrote a blog with the first part of the above title yesterday afternoon. It was quite explicitly an attack on Jeremy Corbyn's use of my tax gap data to support what now seems to be called Corbynomics, although Jolyon (who I know well, call a friend and with whom I have discussed his article) chose not to name me. Well friendship or not, I have to say that on this one Jolyon has let his politics get well ahead of him. That may be his right as he is a member of the Labour party, and no doubt has his own preferences for leader, but I am not a member and will not be voting so let me offer what I hope is a reasoned response to Jolyon's claims.
First, to summarise those claims they are:
1) The Coalition did a good job in closing the tax gap
2) HMRC is doing a good job in measuring it
3) My estimate of the tax gap is too big to be credible
4) There is no conspiracy to understate the tax gap
5) The tax gap will be extremely difficult to close
6) My estimate includes tax that would be due if the law was changed by creating new taxes e.g a window tax
7) In summary, the tax gap is just, according to Jolyon:
a sophisticated performance metric for HMRC. It measures how well they're doing and where they should target their resources.
The Tax Gap is not a serious tool for making broader economic policy. It is no magical pot of gold that will obviate the need for close engagement with the choices inherent in being in government. And it's not a basis upon which you can pitch to a sentient electorate. It just isn't.
I have to admit I am struggling to comprehend how someone as bright as Jolyon can be quite so wrong in so many ways. To show why let me work it through in the easy bite size chunks Jolyon tried to use, using the order of points Jolyon has raised.
First, as has so often been the case, the Coalition did not tackle this issue. They continually redefined the way that the tax gap was measured during their time in office. As anyone reading the annual reports on the issue from year to year will have noted, a continuing theme has been that changes in definition have provided a constant downward trend in its measurement. That is how the tax gap improved over the last five years.
Whether this is appropriate or not is hard to say. As the National Audit Office has said:
Around two-thirds of the tax gap is estimated using established methodologies, with the remainder estimated using developing and experimental methodologies.
And:
HMRC is not able to estimate the scale of uncertainty around its best estimate of the tax gap. For around 60% of the value of the tax gap, it has not made any estimate of the scale of uncertainty.
All of which provides ample room for mis-statement if management has been set, or has set itself the number one task of reducing the tax gap, which it has.
Second, I very strongly dispute that HMRC is doing a good job in measuring the tax gap. There are several reasons for saying so of which the most obvious is that the NAO and IMF agree with me. I have already noted the NAO reiterating recommendation from the IMF so I guess they endorse it:
The IMF recommended that HMRC improve its measurement and reporting of the tax gap, such as by combining ‘bottom-up' and ‘top-down' approaches for those taxes where this is possible, including direct taxes.
I have long said the same. The NAO also add:
It also recommended that HMRC improve its estimates of undetected non-compliance by replacing uplift factors derived from US evidence with those produced from UK data.
In other words, HMRC should try to use reliable data. I do not think those are ringing endorsements. As the NAO also says:
Other commentators have published estimates of the tax gap in the UK which rely on macroeconomic data to make ‘top-down' estimates. Without access to the range of data held by HMRC, it is necessary to infer relationships from aggregated data in order to produce such estimates. They also define the tax gap differently, such as by using a much broader definition of tax avoidance than that employed by HMRC. Such approaches typically lead to much higher estimates. HMRC argues that top-down approaches are not possible for direct taxes. Instead it uses the data it has from sources such as random enquiries, risk registers and data matching, to produce ‘bottom-up' estimates for direct taxes.
Let's be clear: the other commentator is me (there is no one else it can be) and if the NAO or IMF believed what HMRC had to say on the impossibility of top down approaches they would not have recommended HMRC try using them. The fact is they did suggest that they should: I take that as endorsement that HMRC have not tried as well as they might to calculate the tax gap.
Third, let's get down to basics on my estimate of the tax gap. I go back to an argument I have long used, which relies upon the one top down part of the tax gap that HMRC estimate, which is that for VAT. It's important to note that the EU does not think the UK has estimated this correctly. The HMRC estimate for this gap was, for example, 10.4% in 2011-12 but the EU thought it 13% in the same year in their authoritative study (page 20, here). That being noted, and averaging the EU and HMRC estimates, and discounting VAT lost to criminal attacks, a loss rate of about 10% of total VAT due is likely for this tax, almost all of which, HMRC admit, is due to evasion. This implies 10% of the UK trading economy is unrecorded. The ONS confirmed to me some time ago that no more than 1% of the GDP estimate relates to the shadow economy so at least 9% of GDP is unrecorded on this basis. Recorded GDP is currently about £1.7 trillion. This is then about 91% of the true figure, implying £168 billion is unrecorded. I have assumed a tax rate of 40% applies to this: higher than the overall rate of tax due as tax evaded is the top part of people's incomes. I explain this here (page 21). That suggests £67 billion is lost to the shadow economy. I then add to that tax lost in transactions that do not contribute to GDP, such as CGT and Inheritance Tax fraud as well as criminal attacks as recorded by HMRC, and come to total over £80 billion. Jolyon Maugham says this is not plausible. I would like to know why not? In particular I would like to know why if someone evades VAT they do declare the income for all other taxes as HMRC assume, which is utterly implausible? I believe my figures remain well and truly in the right area.
Fourth, is there a conspiracy to understate the tax gap? Yes of course there is! HMRC have stated closing the tax gap to be their number one objective so they are desperate to say they have succeeded. And as I have shown, the NAO do not think that they have tried hard enough to prove their case. I rest my own case until they rise to the challenge of doing top down calculations.
Fifth, closing the tax gap as defined by HMRC may be hard, largely because they use such narrow definitions of what tax avoidance (by excluding the behaviour of Google, Amazon and Starbucks, for example) and tax evasion (where they come to their conclusions on the basis of a tiny number of tax enquiries for which they have decided they do not need additional resources to do more) might be that of course closing the tax gap that they identify will be hard given their desire to request no real new resources to do so (the latest announced new funds simply represent the cancelation of cuts). But, if you really want to close the tax gap Jeremy Corbyn's programme, largely inspired by my work (as he said on Channel 4 News last night) is a good place to start. And I outline a great deal more that could be done here and here (the latter being the de facto semi-official estimate of the EU tax gap). This claim by Jolyon is just nonsense and is typical of the chosen blind eye that many tax practitioners and politicians use when looking at this issue.
Sixth, Jolyon's claim is disingenuous in the kindest interpretation that I can offer of it, but worse than that, it simply implies that Jolyon has not bothered to read my work. I have to say, friend or not, I would have expected better of him than suggest I just made things up without even bothering to check his facts first. The claim is emphatically untrue.
So let's come to point 7. The first thing to say is that HMRC flatly contradict Jolyon here: they say that closing the tax gap is their highest priority. It's odd that Jolyon ignores that fact.
Second, if macro-economic data, which is what the tax gap data I have prepared is, does not constitute the basis for broader economic policy I do wonder what Jolyon thinks might be?
Third, if 9% or more of GDP being untaxed does not represent a pot of gold I wonder, again, what Jolyon thinks such a thing might be?
Fourth, whilst I do accept that tackling the tax gap is not an alternative to other decision making (because that is obviously true) to deny it is an issue to the electorate is to suggest that we simply accept that it is acceptable that at least 9% of GDP goes unrecorded, and rather more of the tax take, with all the resulting distortions that flow from that fact. That is, I think, a completely inappropriate act for any government to take.
Or, to put it another way, I would suggest that Jolyon's view on this issue is as irresponsible and reckless in its negligence as the approach to the issue adopted by Chris Leslie. And I welcome Jeremy Corbyn's willingness to embrace it as a key issue to be addressed by any future government that believes in social justice, the creation of a level playing field for business, balancing the books and building the economy we need.
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In September 2004, Daily Mail had a an article with the headline “TAX evasion and benefit fraud is costing the British taxpayer about £111bn a year”. It was written by a former World Bank advisor and is available here http://www.standard.co.uk/news/honest-victims-of-tax-dodgers-6967124.html
The author took the data from a an academic study published here – Lyssiotou, P., Pashardes, P., and Stengos, T., (2004). Estimates of the Black Economy
Based on Consumer Demand Approaches, Economic Journal, July, pp. 622-640.
I can’t recall anyone querying the Daily Mail article or the research methodology of the Lyssiotou et al. paper, which is not too dissimilar to the one used by Richard. The defenders of status-quo have not challenged the HMRC methods either.
Thanks Prem
I forgot that one
Others have done not dissimilar work since
Typical of the “Daily Fail” to lump together benefit fraud (estimated at £1.7billion or 0.7% of spend) with tax evasion, of, presumably, £109.3 billion per year, to come up with a shock figure of £111 billion of evasion and benefit fraud, knowing their readers will imagine at least half that £111 billion is benefit fraud. Talk about manipulating the evidence.
Prem,
You do realise that the 111bn number was the estimated size of the shadow economy in the UK (in 2004), not the amount of tax avoided by it? The Daily Mail have managed to conflate the shadow economy with lost tax directly…which is of course wrong.
a) The data was 2002
b) £111bn was 10.6% of GDP in 2002
c) But total losses are not restricted to unrecorded GDP or even tax on it, as my work shows
@ Richard
So you are saying that the tax gap in 2002 was larger than the whole shadow economy? Even though in your previous work you use the (already high) estimate of 40%?
No, I was pointing out that your extrapolation was not right
I say the tax gap now is £120 bn
As I note in the article that is by no means all from tax evasion
Please read what I say and not impute other meaning
“In particular I would like to know why if someone evades VAT they do declare the income for all other taxes as HMRC assume, which is utterly implausible?”
Yet that is what you assume they do by assuming that all their income is taxed at 40% (i.e. you assume that they have already declared income equal to the basic rate band).
This is macro data
The aggregate UK tax rate is 36%. I could have used that overall but used a higher rate for the reasons I have noted
But it is immaterial to the conclusion – evasion is still about £80 billion
Why not deal with that fact?
“Second, I very strongly dispute that HMRC is doing a good job in measuring the tax gap. There are several reasons for saying so of which the most obvious is that the NAO and IMF agree with me.”
This is rather selective when quoting the IMF.
https://www.imf.org/external/pubs/ft/scr/2013/cr13314.pdf
The IMF rates HMRC’s tax gap estimates as one of the most thorough in the world, using established methodologies. I quote:
“HMRC produces one of the most comprehensive studies of tax gap estimates
internationally.”
The IMF say that certain improvements could still be made, but you are making this paper to be a criticism of HMRC by the IMF (which it clearly isn’t) and a ringing endorsement of your methodology – which it isn’t either.
Takes a certain cheek to twist the IMF’s word’s to this extent. Maybe you were hoping no-one would bother to read what they actually said?
No cheek at all
I just noted what they and NAO said and drew the only possible conclusion
If the IMF think that the HMRC methods are “sound” then how can you conclude that they agree with you when you dispute that HMRC are doing a good job with their estimates?
Easily explained using a financial auditing analogy which is pretty appropriate
At one time audit focussed very heavily on checking the financial data you were presented with. So lots of ticking of documents was done. That’s exactoly what HMRC do now, and the IMF say they do it just fine.
Then it was realised that this could wholly miss the point if the financial data presented was incomplete. And that’s where auditing went next and where HMRC have not gone, as the IMF say by asking them to do top down checks.
It’s really not hard to work this out, is it?
Using that analogy, I would not describe the box ticking approach as “sound”. I would describe it as “inadequate”.
The IMF went with “sound”.
This is a pointless discussion
If you have no understanding of the type of language the IMF and consultants use to convey messages that is your problem
My interpretation is for the reasons I have given, I am certain, 100% right
This correspondence with you is at a close
I assume Jolyon’s “analysis” was inspired by similar concerns/beliefs to those expressed by Polly Toynbee’s ‘Free to dream’ piece in The Guardian, today Richard (which must also be a response to Owen Jones’s excellent critique of the centre left yesterday).
As Chris Leslie’s attack on so called Corbynomics illustrated, the anti Corbyn movement within the Labour has now plunged to levels of misrepresentation/misinformation taken straight from George Osborne’s playbook – how else to explain the appalling ignorance of how QE – and thus PQE – actually works, or indeed the importance of some degree of inflation, and so on. The again, Osborne and co have taken the fact that most peoples’ are ignorant of anything much about economics – and thus if you repeat a lie often enough, or reduce an argument to comparisons with household budgets, then you can pretty much get away with anything – particularly when you can rely on most of the mainstream media to parrot and promote exactly the same line.
But going back to the Owen Jones article I thought this passage said it all when it comes to the so called centre left and illustrates why they clearly see the future of Labour as simply a neoliberal “lite” version of the Tory party:
‘The thoughtful Blairite blogger Stephen Bush was asked on Twitter: “Have we reached a point where the purposes for which the Labour party was created have largely been achieved?” His response — and not to damn him, because he implicitly challenges New Labourites to come up with a reason to exist — summed up why his fellow travellers have rendered themselves politically superfluous: “Arguably.” We may have experienced the longest period of falling real pay since the 19th century, hundreds of thousands of the citizens of one of the world’s richest economies driven to food banks, a housing crisis that increasingly consumes the ambitions of the next generation, growing insecurity marking the work lives of middle-income and low-income Britons alike. But no, the very founding basis of Labour is “arguably” redundant, according to this prominent Blairite writer.’
The full article is here and well worth a read: http://www.theguardian.com/commentisfree/2015/aug/03/jeremy-corbyn-new-labour-centre-left
Ivan
I thought that an excellent piece by Owen
But then he’s a pretty bright guy
And I was disappointed by Polly Toynbee’s timidity. I have no clue how she can rail so much and then support the status quo
Best
Richard
Indeed, Richard. And I find the whole ‘if you’re not in power you can’t do anything’ excuse for simply being (or having to be, would be more accurate) a neoliberal-lite opposition party – and thus free of pretty much any progressive policy ideas – particularly pathetic when even Hilary Clinton is making speeches about the failings of “quarterly capitalism”, as she tellingly put it.
Furthermore, Neal Lawson’s insightful article on the road to Labour’s election defeat clearly illustrates that one of the fundamental failings – probably the most fundamental – was not challenging the Tory narrative that Labour overspending and management of the economy was responsible for the economic downturn, and thus making little attempt to establish a distinctive narrative of their own until it was too late/ever. And yet all the leadership contenders apart from Corbyn appear to be following exactly the same pathway. Thus, what they come up with is both neoliberal-lite and therefore easily stolen/co-opted in a variant form by the Tories as soon as they think Labour might be posing a threat (e.g. as with Miliband’s promises on the minimum wage). If nothing else, that’s strategically unsound.
Agreed
Perhaps it has to do with the recent change of editor at the ‘Grauniad’. Toynbee seems a different woman just lately.
Hi Richard
Your explanation does not explain why previous Govts left and right have thought it was better to tax the compliant rather than the easy targets to get their hands on an additional £120bn. That’s the incredible part of your story and why Corbyn (and your views) are dangerous. It excites people to believe the Govt can provide so much more without it impacting on the amount of income the Govt leaves them with every week.
I have no clue what you are talking about
Well it seems that the IMF and NAO are endorsing HMRCs method. Here’s the NAO – last month:
“The IMF has concluded that HMRC one of the most comprehensive studies of the tax gap available internationallly, but made some recommendations on how HMRC’s methodology could be strengthened”
That doesn’t sound like the NAO and IMF are saying that HMRC does a bad job measuring the tax gap. Indeed, it sounds like the opposite – they are doing a good job in difficult circumstances.
You are claiming that the IMF and NAO are saying that HMRCs work is incorrect and by inference your work is better. Following that, you are making the logical leap that the IMF and NAO are endorsing your methodology and your tax gap number of 120bn.
Which is stretching the truth well past breaking point.
Has the IMF or NAO, or indeed any independent third party reviewed your tax gap calculation and published their response to it? If so, please provide links.
I have already answered these points
They have asked HMRC to try my methods
What more can I say than that?
And no, my methods have not been reviewed by the IMF. But the EU seem pretty happy with them
They ask HMRC to incorporate more methods, not use your method – which seems to be basic in the extreme.
All you do is take the VAT gap, from that extrapolate the size of the shadow economy then multiply by 40% – then add a few more terms in for good measure. Very little hard analysis.
The EU support HMRC:
http://ec.europa.eu/taxation_customs/resources/documents/common/publications/studies/vat_gap2012.pdf
I quote:
“These estimates are very close to and consistent with those produced by the United Kingdom tax agency (HMRC 2014).”
Does *any* third party report out there verify your calculation for any tax gap?
Just go and read what I have written in total before offering such trite comment
I am sorry if you wish to criticise at least have the decency to engage with what I have done
And yes – the EU does use my tax gap estimates
The EU endorse HMRCs calculation and their methodology. I have provided a link. So does the IMF. So does the NAO.
If the EU endorse your calculation, you must be able to provide evidence of the review they did of your methods and results.
It seems the NAO do not endorse your work, and have made a statement to the effect.
The NAO acknowledge my work and encourage HMRC to replicate it as do the IMF
The EU use it
What is the pint of your argument other than time wasting?
Can you prove a single link to any review of your work by the IMF, NAO or EU, or even any other independent body which endorses your work? I can’t even find mention of your work from any of those three bodies.
The NAO have, just today, specifically stated that the only tax gap they have examined and endorsed is that of HMRC.
https://twitter.com/NAOorguk/status/625590442923544576
If the NAO endorses HMRC’s numbers, it means they are NOT endorsing your numbers or your work.
It seems that you are claiming that because some top down analysis might improve tax gap methodologies, and your work also uses top down analysis (if one can call your work true analysis), by inference NAO/IMF are endorsing your work.
As far as I can tell, you are fraudulently claiming endorsement from the NAO and IMF, and there is not a shred of evidence to support your claims, or any review of the work you have done to claim a 120bn tax gap. Your only claim of verification is you yourself asserting you are correct.
How absurd!
I have not claimed any endorsement from anyone although I have said the EU use my data
I have correctly said that the NAO and IMF say a top down approach should be tried and the NAO noted I use one – which is true
Everything else is made up by you
The govt can and should be doing precisely that. Money is simply stuff that’s made up from nothing, it isn’t some scarce resource as you seem to be suggesting. The govt could easily create a lot more money into the economy without impacting most wages or salaries in any way. Moving along, I would imagine govts tax the compliant rather than the ‘easy targets’ because the compliant actually are the easy targets. If people have got their money stuck in some far away haven, you aren’t going to be able to tax it without the co-operation of that haven, which they may well not be inclined to give. People on PAYE, which I recall was introduced as a temporary measure to, er, pay for the war which I further recall we’re supposed to have recently paid off on (:-)), don’t have a lot of choice about how much tax they pay since it’s deducted before they even see their money. You can’t get a much easier target than that!
“I very strongly dispute that HMRC is doing a good job in measuring the tax gap. There are several reasons for saying so of which the most obvious is that the NAO and IMF agree with me.”
Interesting spin.
In their main mindings the IMF think that HMRC’s approach to the tax gap is “sound and consistent with other countries”.
I doubt they would find the HMRC approach “sound” if they thought it was out by 400% as you think they are?
Consistent means with about two countries
Whoopee
And they were not asked to check my analysis: HMRC used them as a consultant and set the terms of engagement. For heaven’s sake realise they tried to buy a whitewash and the IMF did not deliver it
Richard. I’m not sure what we can conclude if the IMF say the HMRC methods are “sound” other than they think they do a decent job.
Sound (adjective) – “based on valid reason or good judgement”
I have answered the point in its entirety already
Reading this blog and the comments below it, I conclude that you are a deeply disingenuous person, Mr Murphy.
Richard,
We can all differ on how to interpret the language of bureaucrats.
But on a more narrow and specific point,
“It’s important to note that the EU does not think the UK has estimated this correctly. The HMRC estimate for this gap was, for example, 10.4% in 2011-12 but the EU thought it 13% in the same year in their authoritative study (page 20, here).”
I presume the link is to
http://ec.europa.eu/taxation_customs/resources/documents/common/publications/studies/vat-gap.pdf
But does that study not account for the difference(p89)?
“UK’s HMRC has published for a number of years estimates of the VAT Gap following a broadly similar methodology to the one used in this report. Published estimates are somewhat lower than the ones in this report (by about 2 percentage point, with the exception of a larger difference in 2011), but have been reconciled through a number of factors: (i) the use of fiscal vs calendar year; (ii) netting out of litigation repayments; (iii) slight differences in data revisions and calculation of rates applicable to product groupings.”
Yes it does
And consistently the answer is higher
So I allow for that
As any reasonable person should
“And yes — the EU does use my tax gap estimates”
That wasn’t the question. The question was:
“Does *any* third party report out there verify your calculation for any tax gap?”
No is the answer
So?
Nor does the IMF verify HMRCs as such