The Public Accounts Committee has published a report this morning on HM Revenue & Customs' approach to estimating the U.K. tax gap. It is pretty damning. The kindest possible interpretation of the PAC's opinion is that they are not convinced that HMRC has got the tax gap estimate anywhere near right.
The biggest criticism made is that HMRC has not, after all the time it has been preparing tax gaps, made enough progress with its statistical basis for doing so. As a result much of the methodology is still described as ‘experimental', with at least 20% of the tax gap being subject to such methods. As the FT once out it, HMRC might as well say that they made these parts up.
Another 40% (approximately, because everything about this estimate is approximate) is so uncertain as to its basis of calculation that HMRC can provide no estimate of the confidence limits on its calculation.
And, on those parts of the tax gap where confidence limits can be given (inevitably, the easier bits) those limits are as big as some of the reported gaps. In other words, the confidence that should be placed in the data is low.
All this is before the fundamental error in methodology in HMRC's tax gap approach that I have already noted this morning that emerged from the hearings on these issues, but which I have been highlighting for years, which the PAC chose not to emphasise is taken into account. This is the result of HMRC using a US methodology that assumes all taxpayers are required to submit tax returns when in the U.K. only about one third of taxpayers do so. This, I believe dramatically underestimates the tax gap.
The errors made by HMRC also include, as the PAC note, HMRC's failure to include tax avoidance that is abusive but about which they feel there is little they can do. This includes most of the abuse of international tax by large companies and much of the tax planning of the wealthy. One could, of course, accuse HMRC of replicating much of the class bias already apparent in their treatment of tax abusers in their tax gap estimates as a result, because it is undoubtedly true in the U.K. that only the ‘little people' get prosecuted for their tax abuse. It could also simply be said that this systemically understates the tax gap and had always done so, again as I have long emphasised.
The committee also notes another issue to which I have given attention in recent years, which is the ‘tax policy' gap, which is the amount of tax is not collected because changes to tax law are not made to ensure tax policy is delivered, leaving loopholes to be exploited by those inclined to do so. They are right to make this point, and we are entitled to ask why such bias (which always favours the wealthy) is allowed to persist.
But perhaps the greatest criticism of HMRC made by the committee is that HMRC should not have continually referred to their tax gap estimates as if they were right when there is no evidence to support that claim. That is particularly damning.
The message is abundantly clear. The PAC do not believe HMRC, and they are pretty sure that the tax gap is a lot bigger than HMRC say it is. Join the club, I say: I've been saying this ever since HMRC published their absurd data.
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“HMRC’s failure to include tax avoidance that is abusive but about which they feel there is little they can do.”
How can that possibly be an error? HMRC do not collect tax they are not entitled to collect. It’s the government that sets out the law and HMRC have to abide by it. It’s absurd to include tax that HMRC cannot legally collect as part of the tax gap. You might as well include the amount of tax that could be collected if all tax rates were doubled as part of the tax gap. It’s ridiculous.
HMRC feel “there is little they can do” because there is nothing they can do. For politicians to criticise HMRC for not collecting tax because the laws that politicians have put in place don’t allow them to collect it is laughable. If they want to find someone to criticise for the ‘tax policy’ gap, members of PAC should look in the mirror.
“absurd data” Like including £25bn of tax debt in your 2010 calculation when HMRC actually collected it at a later date completely missing the point that there is always and obviously an amount owing at any one time. You added in £28bn of tax debt to your figure as part of the tax gap when £25bn of it was collected. Now that’s absurd.
Two issues
Of course the power to collect the tax policy gap is within HMRC’s control. They can change the law. You are talking nonsense.
The same is true on your bizarre claim re my estimates. Tax paid late is explicitly part of the tax gap
“Of course the power to collect the tax policy gap is within HMRC’s control. They can change the law.”
…but I thought changing the law was the responsibility of our elected representatives in Parliament??
The Finance Bill is presented to parliament for approval
Politicians do not write it
Most is written by HMRC
Parliament decides whether to approve it or not
It always does
So it was HMRC’s idea to introduce a 50% top tax rate just weeks before the last Labour government left office? And HMRC’s idea to reduce it to 45% later? Government’s have no particular tax policies? They just sit their waiting for HMRC to come up with them? And then accept whatever HMRC say? So why do you criticise the Conservatives for their tax policies if they are all the idea of HMRC?
You really are talking nonsense.
“Tax paid late is explicitly part of the tax gap”
So tax collected by HMRC can be included as tax not collected by HMRC? Unsurprisingly, in the real world the Treasury seems to have a different view….
“The Tax Research estimate of tax debt is £28 billion. That is a snapshot figure of all tax owed to HMRC on 31 March 2009,
which does not represent the actual losses to the Exchequer from non-payment. Almost all tax owed to HMRC is eventually paid,
sometimes within days of becoming due. A proportion of debts outstanding are in staged repayment plans, such as those covered
by the business payment support service. Only the tax debt written off as uncollectable by HMRC is an actual loss to the
Exchequer from debt. That is therefore the amount that HMRC uses in its estimate of the tax gap, which in the 2007-08 tax gap
figures was not £28 billion but £3 billion …” Treasury Minister statement, HoC 16 June 2010.
I have answered the nonsense you are writing in tax legislation already – it us one nonsense
Tax paid late was specifically in HMRC’s tax gap in 2010 and still is
“The Finance Bill is presented to parliament for approval
Politicians do not write it
Most is written by HMRC”
That is sophistry. Politicians say “we want to tax this” or “we don’t want to tax that” and then ask experts to write the laws that achieve those ends. The guiding hand is that of the politician. To suggest otherwise is laughable.
With respect, you refer to maybe 5% of law
Anti-avoidance is civil servant driven
“…the power to collect the tax policy gap is within HMRC’s control. They can change the law.”
So if HMRC decided to end (say) domicile tax rules and the government of the day didn’t want to, HMRC could achieve its objective?
Or if HMRC decided to abolish the higher and additional rates of tax to make life easier for themselves, the government would simply agree?
Is that really what you are claiming?
You clearly have no idea how government works
I have already addressed the issue today
Does the tax gap include instances, for example, where someone may deliberately not declare the existence of a property to dodge council tax?
Also with such a deliberate tax dodge I can’t see how it would not be an example of tax evasion and hence money laundering?
It does not
Council tax is not included
I’ve got a few points here:
1. I’ve just read the PAC report you refer to. At no point in the document do the PAC “not believe” HMRC’s figures, or is the document in any way “pretty damming”. You have chosen to read criticism into the report, where none exists.
2. HMRC does not make tax law, as you claim to Janet above. They have no power to change it, only power to enforce existing law.
3. having watched your video on the subject, your argument boils down to the idea that because HMRC only have a sample of tax returns (33% of the population) they only capture 33% of the tax gap. Hence their estimate is only 33% of what it should be. This is mind blowingly stupid, and shows you don’t understand basic statistics.
You don’t need to measure the whole population to arrive at a good estimate. You only need to sample a statistically large enough one, which HMRC do. Then you are able to scale, which HMRC also do.
4. Having looked up your papers on the subject, your method for arriving at a tax gap is to take whole economy GDP (a fairly uncertain number), take a percentage value for the shadow economy (a very uncertain number) then just assign a tax rate to them (which you always come up with 40%). Then you multiply them together. That is the sum extent of your analysis. You criticize HMRC for not getting enough data, or for using estimates, but to get your own numbers you are using very little, highly uncertain data and massive assumptions. The basic method you use is highly unsound.
5. In your own tax gap measurements, you do not provide error estimates. How big are they?
1) If you can’t read a damning report written in parliamentary language then that’s your problem, not mine.
2) I promise you, HMRC does make the law: I have seen how this works from the inside.
3) You can’t extrapolate a result over a sample you have not sampled. Get your facts right. HMRC adit they have got this wrong. The error is all yours.
4) You can disagree with my analysis: Based on publicly available data it may be as good as it gets, and I have the decency to explain all my assumptions.
5) My work is based on GDP: the error range rate is that in GDP, in essence. I have always made clear there are ranges in my estimates. I have always eliminated estimates when there has been the slightest risk of double counting.
1. That is your interpretation – there is no language to that effect in the report. You are deliberately misleading your readers.
2. HMRC categorically does not make law. Parliament does.
3. HMRC take a large sample of tax returns. They state this in their tax gap report.
What is quite an amazing error is that you, in your video, think that by only sampling 33% of returns means HMRC simply ignore the other 67%. That is how you get to the idea that HMRC’s estimate is only 1/3rd the size it should be.
You do realize that this very same sampling method is used to calculate GDP and the size of the shadow economy, which you use in your own work? Don’t you?
4. Explaining your assumptions doesn’t make them correct. For example, you assume a tax rate of 40%. Then you write a long “explanation” for it, though it looks very much like you arrive at the answer first and then try to justify it.
It is pretty obvious though that you have not tested this assumption or have any evidence to back up your explanation. It is nothing more than a guess. For example, you have assumed that the entire shadow economy should paying a top rate of tax, completely ignoring marginal tax rates, and the evidence that the rest of the economy (by the same percentage of GDP method) does not approach this level. It is obvious that you have very extreme assumption here, and the error on it is going to be very large.
5. Once more you are displaying your lack of understanding and ability here. You say there is an error on the size of GDP, but you fail to actually mention this in your work. However, there is also a larger error on estimates on the size of shadow economies – which you ignore both in your work and here. How big is that error?
To top it all off, as alluded to above, there will also be a very large error on the tax rate you apply to the whole shadow economy. Studies that do exist show that marginal tax rates in the shadow economy will be much lower than you suggest. Most studies seem to have an equivalent marginal tax rates around (or even below) 20% for the shadow economy, not least because a large portion of the shadow economy, almost 50% of it in the UK, is populated by people with very low income. You have also treated the whole of the shadow economy as income, rather than other forms of taxation.
So what are the errors on your tax gap?
It is pretty amazing you can criticize HMRC for their “absurd” data and methods, when yours amount to nothing more than taking three numbers, of which two of them are extremely uncertain, then multiplying them together.
I have already answered all these points
Posting them again does not create a different answer
And sometime multiplying a few n umbers together can be highly effective
But you also are talking nonsense: it’[s clear you have not read my work
“And sometime multiplying a few n umbers together can be highly effective“
Well yes if the underlying problem is straightforward and the numbers you are multiplying are accurate. Neither is the case here. You rely on peoples ignorance for your argument and calculations in this area to carry any weight. Beyond that your work is “back of the envelope stuff” and is now treated as such by people with knowledge and experience in this field.
Roy, or whoever you are…you do realise I know you are posting here under multiple identities, I assume?
Please go and troll elsewhere
Sounds much like GERS ….
CRAp, you mean?
There’s a lot of it about
No Deal plus Covid create the potential for total economic meltdown and simultaneous substantial inflation in the UK now which MMT cannot solve. We will be a failed state politically and economically in that case.
MMT cannot, I agree, beat that
But it would help a recovery from it