From the BBC:
The amount of tax that went uncollected rose in the last financial year to £42bn, HM Revenue & Customs (HMRC) has estimated. That was £2bn more than estimated for 2008-09 and meant HMRC failed to bring in nearly 9% of all potential taxes.
The biggest shortfall was in VAT, where £15.2bn, or 16%, of all the potential tax was uncollected. The next largest loss was nearly £6bn of income tax due to inaccurate self-assessment returns.
From the DCLG:
Local authorities in England collected £21.4 billion in council taxes by the end of March 2010 out of a total of £22.1 billion collectable. This gave a national average in-year collection rate for council tax in England of 97.1 per cent in 2009-10, an increase of 0.1 percentage points over 2008-09.
Local authorities in England collected £19.6 billion in non-domestic rates by the end of March 2010 out of a total of £20.0 billion collectable. This gave a national average in-year collection rate for non-domestic rates in England of 97.8 per cent in 2009-10, the same as in 2008-09.
For sure, there's a lot of fiddling that goes on with Council Tax Benefit and people wrongly claiming the single person's discount, but hey. Surely it's better for everybody to pay their dues that for honest taxpayers to be forced to pay the amounts owed by tax evaders as well?
And if that is the case, surely it's better to have taxes that are nigh impossible to evade, i.e. taxes on land and buildings, than it is to have taxes that are relatively easy to evade (even ignoring the deadweight costs of e.g. VAT, The Worst Tax Off All)?
Friday, 17 September 2010
Tax Gap Fun
Subscribe to:
Post Comments (Atom)
28 comments:
I'm in two minds over this one.
1) I don't want to be paying more tax because some other sods don't
2) That 42 billion isn't just sitting in jars labelled "stolen from the tax man", it's in the economy being used far more effectively than the government would use it.
In the case of 1), do any of us imagine that if they managed to get that 42 billion off the freeloaders that we would receive a tax refund?
Mark: tell me what I think.
OP:
1) Correct. And agreed that if this tax were collected there is little reason to assume that the current lot wouldn't just waste it.
2) Of course. I'm a Citizen's Income supporter, so it is clear to me that e.g. it is better if benefit claimants work cash in hand than stay at home all day; and if the alternative to tax evasion is people simply not starting up in business at all, it is a no-brainer.
But that is not the point; imagine ten people are supposed to pay £10 tax each to cover common expenditure. If one person evades, the tax bill on the other nine goes up to £11.11. Which increases the temptation to not pay, so eight people end up paying £12.50 each, and so on. But the two evaders still benefit from public services.
Conversely, if we only had Land Value Tax (nigh impossible to evade; but easy to avoid - you just trade down), everybody would be paying their fair share and there'd be no taxes on income or output (which are stupendoudly complicated and much easier to avoid, not to mention the deadweight costs).
That isn't what the government do though. Nine of the ten pay £10, and so the government are short £10, so they borrow it.
Ignoring (temporarily) the fact that borrowing is simply deferred taxation, isn't it better that that £10 was left in the economy? Given that I would prefer that a lot more of that taxation were left in the economy how can I complain when some actually is?
Can we assume that, given the usual 1.5 wastage factor of government, that the £10 they spend will only get £6.66 worth of value, but the £10 not collected in tax will get a full £10 benefit? We then hope that the growth stimulated by that £10 is enough to cover the interest on the borrowed money and the £3.33 lost in wastage.
Have I just advocated Keynsianism? I feel dirty.
If the tax is all collected it stays in the economy. The government may do stupid and wasteful things with it but they do tend to spend it all, employing large numbers of people in the process. So even the public waste is transformed mostly back into private expenditure.
Tax that isn't collected isn't necessarily put back into the economy in a useful way by the tax evader though. Some of it is, and that's a good thing but a proportion of it is not for the following reason. Tax and rent are basically two sides of the same coin and when one is lower then the other tends to be higher. Note that when I say rent I include interest since interest is basically the rent for money. The fact that tax evaders have more to spend means that they can afford higher rents. As a result rents (and consequently land prices) will be higher for everybody in an economy with tax evaders. And rents tend to be a drag on the economy in the same way that taxes are. This is because the income from them is often "invested" in assets like gold or land, rather than in capital. This does not generate employment in the same way that savings or capital investments do and also makes these assets more expensive for the rest of us honest tax payers.
So if the 10 quid was truly all left in the economy, I'd say, "Whoopee! We need more tax evasion." But it's not. Tax is evil but it's a necessary evil and since it's necessary, we should all be sharing the pain. Tax evaders are just shifting the pain to the rest of us. And, to add insult to injury, bumping up the prices of essential assets such as land for everybody.
OP, right let's assume that govt would have spent £100 anyway, and borrows £10. The marginal interest rate on that extra £10 is very high (say 10%) so even if the debt is never repaid, there is an extra £1 drag on the economy (i.e. future taxes are higher by £1 a year in perpetuity), and next year another £1 permanent loss and the year after, and so on.
D, excellent explanation.
"Tax is evil but it's a necessary evil and since it's necessary, we should all be sharing the pain. Tax evaders are just shifting the pain to the rest of us."
LVT might or might not be evil, but if not collected publicly will be collected privately anyway, so that is the one tax that is truly inevitable.
There are tax evaders, Mark and then there are people without £1000 for council tax.
JH, explain?
We do have C Tax Benefit, you know - the bulk of claimants are in Band A or Band B houses, so it might have made more sense to have zero C Tax in Band A and only £500 in Band B and have done with it, but hey.
D, thank you for the excellent explanation.
It makes sense, but it doesn't match up with what I thought was the received knowledge that governments are incompetent at spending. If what you say is true, then any amount of taxation wouldn't affect the economy, and that surely isn't true?
As a (contrived) example of government waste, they could employ 50 people to dig holes, and 50 more to fill them in again. Great! 100 employed people. Not so though, we've wasted 100 people's effort that could have been used creating value. It is my contention (and as I said, I've heard the figure of 1.5 waste quoted) that government spending is strongly of this wasteful form -- the more you leave in the private sector then, the better.
@Mark; even at that very expensive rate of borrowing (isn't government lending around 3% at present?) doesn't the 50% waste factor compensate for that when the money is left in the economy? Next year, the existing tax rate on the larger economy will be enough to pay back the 10% interest and a bit of the debt. Lather, rinse, repeat?
(I'm not trying to be argumentative, as always, I'm trying to find faults in my understanding)
Well im struggling to pay my VAT and NIC's, due to two companies going tits up,money I was relying on from them was gonna pay my vat & other bills. This happened early in the year and ive been struggling to get through due to the recession (that started in America) ever since.So am I classed as a tax evader or as someone who carries on trying to pay my way rather than just say 'enough' and suck the teat that so many people seem to be doing.
My back is now f****d , and I cant do what I normally would. Due to employers NIC I cant afford to take anymore staff on , so in essence what im saying is , small business has no-chance, no chance at all.
I do not feel like a tax evader although I do have lots of sleepless nights.
I agree entirely about your taxes on buildings etc as I live in a shithole and i'd probably get a rebate.lol
McT
OP, hopefully D will come back, but I'll respond on his behalf if I may.
"If what you say is true, then any amount of taxation wouldn't affect the economy, and that surely isn't true?"
Of course it isn't true - Laffer Curve, deadweight costs and all that. Plus Derek, like me prefers taxing land to taxing incomes - there is a strict upper amount in tax that can be raised and no deadweight costs or Laffer curve.
As to the comment directed at me, you have to compare like with like. You said that the govt would spend £100 anyway, whether it collects £90 tax or £100 tax, so the fact it wastes a third of the £100 is neither here nor there. We were discussing tax evasion in particular.
When people talk about govt borrowing interest rates, they look at average rates for all borrowing. Don't forget that it is the marginal interest rate that is important, which is approx. double the official interest rate, and that the most important factor on the rate a govt pays on borrowing is the debt-to-GDP ratio, ergo extra borrowing costs double the headline average rate.
Explanation of what 'marginal interest rate' is and how to calculate it here and charts here showing impact of debt-to-GDP on average interest rates.
McT, sorry to hear that, but that is exactly what I am always banging on about - it's the VAT and Employer's NIC (and all the red tape and shit) that's killing small businesses, they are the worst taxes by a country mile. And if the worst comes to the worst and you throw in the towel, that is what is called a 'deadweight cost'.
Corporation tax ain't so bad, because if you're making losses, at least you don't pay anything. But least bad is property tax, it's like rent.
Onus, totally understood and agreed re holes in the ground being a waste of the 100 individuals' effort. But even though the efforts of those 100 people have been wasted, they will spend their wages on essentials which employ other people in the private sector whose efforts will not be wasted. So it's not a total waste. The money stays in the UK economy. On the other hand, the tax evader may transfer the money offshore so as to avoid the eagle eyes of the Inland Revenue and it is totally lost to the UK economy or they may use it to bid up the price of UK assets thus causing economic damage above and beyond the simple tax evasion. So whether the money goes through the private or public sector there can be problems and which is worse depends very much on what the money is being spent on.
Mind you, to really see what I'm talking about, take a look at the third world. There are some countries there which have a low tax regime and/or high tax evasion and still do very badly economically because so much rent is extracted and sent off to foreign countries like Switzerland, the UK or the US. Haiti and Pakistan are prime examples. In these cases a high tax (preferably an LVT for all the good reasons that Mark has covered over the last few years) would at least help the local inhabitants' money to circulate within the country concerned, rather than having to be returned via "aid" or "charity" whenever something bad happens.
Mark, thanks for the backup. Completely agree.
As to the whole 'people digging holes and filling them in again', that is exactly what a third of public sector workers do*. The real cost of this is the value that they would have otherwise created.
So it would be better to pay them their salaries and not require them to turn up for work so that they can do something productive on the side. Or even better, sack 'em all and dish out the savings as a Citizen's Dividend.
* The real waste is not these two million people, it's the one fifth of GDP that the government gives to selected private sector companies for 'private sector procurement'. The cost-per-worker is about four times as high, because the worker gets a salary and the rent-seekers add on a 75% profit margin.
In regards to the comments about VAT and NICs payments, i've seen time and again over the course of my early years in employment when all I did was dogsbody jobs like bookkeeping & payroll. Employers are not just "unpaid tax collectors" but many times they lose money. It seems like the government simply assume that when a business collects VAT on its sales it tucks it on a shelf somewhere, in reality many many businesses cash-flow is very yo-yo like and often the VAT bill takes them into overdrafts causing not to be simple "unpaid tax collectors" but PAYING for it and losing money as a result. The time it takes to complete VAT returns is also lost to whomever performs the task. Most office type environments like my own bill based on time spent on jobs, accountants, solicitors etc... Time is money. OUR MONEY!! The case for simplification couldn't be more simple, fewer taxes which are easy to collect will produce significantly higher growth. It wouldn't take a genius to design not only a fiscally neutral system but one in which there are very very few losers as a result of the changes and a lot of winners in the lower income deciles.
SW: "It wouldn't take a genius to design not only a fiscally neutral system but one in which there are very very few losers as a result of the changes and a lot of winners in the lower income deciles."
Designing it is easy, it's making people understand why it would be better that's nigh impossible :-(
Hi Mark thanks for your comment/agreemeent but you did say
"Corporation tax ain't so bad, because if you're making losses, at least you don't pay anything."
Ive got 2 employees at the moment (just) Ive spent last years corporation tax keeping them employed (and im gonna get f****d for it, rather than pay them off I know most commentators would say your business is goosed but these people are my friends/family who rely on me. Ok im paying the HMRC a grand a month to pay it off but they havn't left me any room to keep on trading. I think my only choice is to strap a bomb to myself and fuck em all. lol
Ok its not that bad but you know what I mean.
McT, your comment went to spam, it helps if you set up a blogger account (only takes ten seconds) and your comments then appear straight away-ish.
As to your corporation tax, have you tried a provisional loss carry back claim from this bad year to the last year when you had a profit? That erases or reduces the liability for the earlier year.
Mark and Derek
Understood, and thank you for clarification.
I still don't think I'm convinced about tax evaders. It sounds like you're describing tax avoiders. And they are a product of a complex tax code.
Further, the argument that government spent money stays in the economy but private sector spent money doesn't isn't convincing because most private sector spending is on employment as well.
OP: "I still don't think I'm convinced about tax evaders. It sounds like you're describing tax avoiders. And they are a product of a complex tax code."
Agreed, but, remembering that my job is 'tax planning' I now perfectly well what the difference is and how much it costs (i.e. how much we charge for my excellent services)...
a) Simple is better than complicated (minimises not just 'avoidance' but compliance costs).
b) Difficult to evade taxes (land and property) are better than easy to evade taxes (on incomes and output), which is why I compared VAT with Council tax/Bus Rates.
"... the argument that government spent money stays in the economy but private sector spent money doesn't isn't convincing."
Maybe, maybe not. But 'hot' money is far more likely to disappear abroad and only return under the guise of 'offshore investment company' to buy UK land (which is relatively lightly taxed in the UK).
For example, there is a school of thought that says Spanish property prices went crazy because German tax evaders were spending their untaxed gains on property in Spain (and there is some truth in this).
And we are agreed that a third of govt spend is not spent wisely, that's a separate battle.
Onus, we were definitely talking about tax evasion. I have no problem with tax avoidance. As far as I am concerned tax avoidance just means ensuring that you pay your fair share (as defined by the current tax law) and no more. When it comes down to it we are all tax avoiders in that sense.
In contrast tax evasion means breaking the law in order to pay less than your fair share and thus giving yourself an advantage over your honest fellow citizens. Firstly by increasing their tax burden and secondly by out-bidding them for resources with your tax-free income. A very Bad Thing no matter how much or how unwisely the government spends.
That's why LVT is the way forward. It's easily avoidable: just rent instead of buying; and not buying means that land becomes cheaper for your fellow citizens. It's difficult to evade. Only real way is to bribe the tax assessor to give you a low valuation and even that can be difficult if computerised evaluation is used for assessment. Or even better the self-assessed-compulsory-purchase-price method.
D, good stuff, just a couple of suggestions:
" It's easily avoidable: just rent instead of buying" The rent you pay inevitably includes the rental value of the location, so even without LVT (i.e. under current rules) the tenant is paying FULL LVT - it's just that the bulk of the 'tax' is privately collected (albeit the landlord might be paying income tax on the rental income). You can only avoid it by trading down or sub-letting a room etc.
"Only real way is to bribe the tax assessor to give you a low valuation and even that can be difficult if computerised evaluation is used for assessment."
Yup. Computerised averaging over a postcode sector (or some other small area) on basis of recent selling prices is the way to go, so that every plot in that area pays £x per sq yard, full stop. They know how big people's plots are from maps, so you can't even cheat on that.
Fair enough, rent does include full LVT. So we all pay it in the same way that we all pay for commercial TV through our groceries, etc.
D, that's the clever bit.
1. Advertising costs money, and that is included in the price of groceries.
2. But the value of the advertising revenues is the main element of the value of radio spectrum, which is just another government-protected quasi monopoly, like land.
3. So if governments auction off radio spectrum on an annual basis, and dish out the proceeds as a Citizen's Dividend (a few £ per person per year).
4. So the extra few £ you pay for groceries comes back to you as a Citizen's Dividend and you are plus/minus nothing.
5. Of course, supermarkets advertise in newspapers as well, which cuts the cover price by half. So you pay a bit more for groceries, but get subsidised (or free) newspapers.
What's not to like?
What's not to like?
I don't read newspapers, that's what!
B, advertising subsidies the internet as well. Have you never wondered why the fine Blogger or gmail services are 'free'?
@MW/D
I'm sorry; I didn't mean to imply that you didn't know the difference between the two (I would be foolish indeed to have surmised that).
What I meant was that private sector act of taking ones income offshore (and hence not keeping it in the UK) sounds to me more like a characteristic of tax avoidance than evasion.
However, I accept that funds from tax evasion are likely to be offshore too.
I think we've ended up arguing over minutiae (as always happens when I join in -- sorry); broadly I think we agree on the best alternatives to the current systems. My original question was really to help me with my mental dilemma about the current system, whereby I am against the government taking money out of the economy, but don't like being screwed by people who are evading tax. Which should I be more annoyed about?
I don't think I'm any more enlightened I'm afraid, but I don't want to drag us back to the beginning of this circle.
OP: "I am against the government taking money out of the economy"
And so am I, no dispute there. When it taxes incomes, it takes money 'out of the economy'. But there is another way in which the government facilitates 'taking money out of the economy' and that is creating and protecting monopoly rights (primarily over land) for no charge to the beneficiary.
The only possible source of income into which landowners can tap is of course 'the economy'. So 'rents' and ultimately land 'ownership' are just privately collected taxes.
Therefore, it seems to me that the government should be charging land 'owners' for exclusive possession and it should stop taxing incomes.
That was why I compared collection rates for taxes on economic activity (VAT = very poor collection rate) and taxes on land and buildings (Council Tax = excelent collection rate).
OP, or if you want the edited version of that: ground rents are money that has already left the economy.
It makes no difference whether all the landlords woosh round in limousines or if the govt introduces LVT and all the politicians woosh round in limousines.
Post a Comment