Lower and simpler taxes are part of combating tax evasion

January 30, 2012 10:26 AM

At the end of last week, I discussed tax evasion on the Radio 4 World Tonight programme with the host Ritula Shah and activist Richard Murphy.  Everyone should pay their fair share but, as I argued, condemning those who break the law is only part of the equation. We also need lower and simpler taxes which are easier to pay.

[soundcloud url="http://api.soundcloud.com/tracks/34985237" params="auto_play=false&show_artwork=false&color=669933" width="100%" height="166" iframe="true" /]



At the moment the tax system is so complicated and opaque that the squeezed middle see benefit fraud at the bottom end of the income distribution and the rich hiring expensive lawyers and accountants to avoid taxes at the other end.  Some think it is only fair that they cut a few corners.  That is one reason why we need a simpler tax and benefit system with fewer loopholes.  If everyone is reassured they aren't the only mugs paying their taxes, then that will undermine a lot of excuses for tax evasion.

But that is also why it is important we don't overstate the extent of the problem.  Exaggerating how many people avoid their taxes only adds to the sense that it is a normal, and to some extent, acceptable thing to do.  Unfortunately it does appear that Richard Murphy has seriously overstated the extent of the "tax gap" in his research, which he argues is £120 billion.

In Parliament last year, Treasury Minister David Gauke noted that "estimate does not take into account those reliefs and allowances that Parliament has determined should be available", including "double taxation relief".  Christie Malry has written about a number of critical problems with Richard Murphy's work, which suggest the HMRC estimate of around £40 billion is more reliable.

  • He fails to take account of double tax relief in his estimates.  There is a legitimate relief to prevent companies being taxed twice on profits they make abroad.

  • He counts taxes that are paid late but are likely to be paid at some point: "It is [...] a fallacy to include the entire £28 billion within the tax gap, as amounts received in respect of prior year taxes need to be knocked off it. An alternative approach is to recognise only that portion of tax debtors that are never expected to be received. This is what HMRC have done."

  • He makes a number of leaps of logic:


Murphy frequently makes use of flawed reasoning to justify his wild claims. For example,he suggests that the HMRC figure for tax paid late is "just £1.8 billion" while "the Ministerial claim is ... £3 billion". Hence he concludes that the correct figure must be £28 billion.


With respect to personal avoidance, he notes that the HMRC figure is £1.1 billion and that George Osborne has appeared to say that the avoidance figure for capital gains tax alone exceeds £1 billion. He therefore concludes that the Tax Research UK figure (of £13 billion) is "confirmed".


Yet, when data appear to disprove his estimates,he merely says that "more work is needed to support the Tax Research UK figure". In fact, the honest response would be to admit that the Tax Research UK estimates are wrong.


That kind of problem might be why, as Tim Worstall reported on his blog, when asked to choose between his estimate and the one produced by HMRC, respondents to a Tax Journal online survey went with the HMRC figure:

Readers were asked whose was the better estimate of the tax gap. While 166 favoured HMRC’s estimate of £42 billion and 83 favoured Murphy’s estimate of £120 billion, a further 151 readers said that both were ‘wrong’.


Tax evasion is illegal and rightly so.  We should also try to reduce tax avoidance which often distorts economic decisions and undermines confidence that everyone pays their fair share.  But we should do that by closing loopholes and reducing the incentive to dodge taxes with lower and simpler rates.  And it won't help at all if we overstate the scale of the problem.At the end of last week, I discussed tax evasion on the Radio 4 World Tonight programme with the host Ritula Shah and activist Richard Murphy.  Everyone should pay their fair share but, as I argued, condemning those who break the law is only part of the equation. We also need lower and simpler taxes which are easier to pay.

[soundcloud url="http://api.soundcloud.com/tracks/34985237" params="auto_play=false&show_artwork=false&color=669933" width="100%" height="166" iframe="true" /]



At the moment the tax system is so complicated and opaque that the squeezed middle see benefit fraud at the bottom end of the income distribution and the rich hiring expensive lawyers and accountants to avoid taxes at the other end.  Some think it is only fair that they cut a few corners.  That is one reason why we need a simpler tax and benefit system with fewer loopholes.  If everyone is reassured they aren't the only mugs paying their taxes, then that will undermine a lot of excuses for tax evasion.

But that is also why it is important we don't overstate the extent of the problem.  Exaggerating how many people avoid their taxes only adds to the sense that it is a normal, and to some extent, acceptable thing to do.  Unfortunately it does appear that Richard Murphy has seriously overstated the extent of the "tax gap" in his research, which he argues is £120 billion.

In Parliament last year, Treasury Minister David Gauke noted that "estimate does not take into account those reliefs and allowances that Parliament has determined should be available", including "double taxation relief".  Christie Malry has written about a number of critical problems with Richard Murphy's work, which suggest the HMRC estimate of around £40 billion is more reliable.

  • He fails to take account of double tax relief in his estimates.  There is a legitimate relief to prevent companies being taxed twice on profits they make abroad.

  • He counts taxes that are paid late but are likely to be paid at some point: "It is [...] a fallacy to include the entire £28 billion within the tax gap, as amounts received in respect of prior year taxes need to be knocked off it. An alternative approach is to recognise only that portion of tax debtors that are never expected to be received. This is what HMRC have done."

  • He makes a number of leaps of logic:


Murphy frequently makes use of flawed reasoning to justify his wild claims. For example,he suggests that the HMRC figure for tax paid late is "just £1.8 billion" while "the Ministerial claim is ... £3 billion". Hence he concludes that the correct figure must be £28 billion.


With respect to personal avoidance, he notes that the HMRC figure is £1.1 billion and that George Osborne has appeared to say that the avoidance figure for capital gains tax alone exceeds £1 billion. He therefore concludes that the Tax Research UK figure (of £13 billion) is "confirmed".


Yet, when data appear to disprove his estimates,he merely says that "more work is needed to support the Tax Research UK figure". In fact, the honest response would be to admit that the Tax Research UK estimates are wrong.


That kind of problem might be why, as Tim Worstall reported on his blog, when asked to choose between his estimate and the one produced by HMRC, respondents to a Tax Journal online survey went with the HMRC figure:

Readers were asked whose was the better estimate of the tax gap. While 166 favoured HMRC’s estimate of £42 billion and 83 favoured Murphy’s estimate of £120 billion, a further 151 readers said that both were ‘wrong’.


Tax evasion is illegal and rightly so.  We should also try to reduce tax avoidance which often distorts economic decisions and undermines confidence that everyone pays their fair share.  But we should do that by closing loopholes and reducing the incentive to dodge taxes with lower and simpler rates.  And it won't help at all if we overstate the scale of the problem.

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