Members of the Commons Public Accounts Committee have, according to Accountancy Age, recommended that HMRC beef up its investigations into the "cash in hand" economy by using anti terror legislation.Quote:
"The Department should consider whether to seek alternative powers to strengthen this work."
I cannot say that I agree with the committee:
1 The anti terror legislation was brought in to deal with terrorists, not moonlighting taxi drivers et al. RIPA is already massively misused by local authorities.
2 A better solution would be to simplify the tax system; cut direct taxes, introduce a single band of tax, increase personal allowances and increase VAT. That will draw in the undeclared tax from the "cash in hand" economy, and cut the cost of administering our already over complex tax system.
Tax does have to be taxing.
HMRC Is Shite (www.hmrcisshite.com), also available via the domain www.hmrconline.com, is brought to you by www.kenfrost.com "The Living Brand"
Absolutely agree. This government scarcely even pretends not to misuse powers anymore.
ReplyDeleteAnyone who still believes that ID cards, DNA databases, extended detention etc will only be used to tackle serious crime, terrorism and illegal immigration must be very very dim.
Oh-oh. It’s a long one!
ReplyDelete1) You may be pleasantly surprised, Ken, to learn that I agree with your first point! While it is important to detect and deter tax evasion for the sake of the vast majority of us who honestly pay our taxes, using anti-terror legislation to do so is both inappropriate and dangerous!
I even agree with xoggoth (particularly about ID cards)! Whatever next?
2) I disagree, however, with much of your second point. Before I start, I’d point out that (contrary, perhaps, to form) I don’t mean to be facetious here, and I genuinely intend to provoke debate on these points. If there’s something I’ve missed in my analysis, I’d be glad to hear it!
I don’t see how any of the changes you have set out would actually materially cut the cost of compliance with or administration of the system, nor do I see why they would draw in undeclared tax from the cash-in-hand and informal economies. Let’s take one suggestion at a time:
RAISE INDIRECT TAX (VAT) WHILST LOWERING DIRECT TAX
(OK, so I’ll start by taking two at a time!). This doesn’t simplify the system at all, as the only administrative difference it makes is a different number being used in the final sum on a tax calculation!
There is an argument that lower taxes discourage evasion, because you’ve less to gain by evading tax in a low-tax economy. This may be true to a point, but even then, because the penalties when you’re caught are linked to the amount evaded, while the advantages of evading are less so are the risks, so how much of an effect lowering taxes has on evasion is very debatable. Furthermore, if you’re raising one tax (VAT) while lowering the other (taxes on income/gains) then the changes will, all else being equal (i.e. if the changes are to be revenue-neutral), not alter the overall monetary incentives for evasion and avoidance.
INCREASE PERSONAL ALLOWANCES
Increasing personal allowances doesn’t make administration cheaper either, as all it does is change the number used in the 2nd-last (or thereabouts) step in the tax calculation. Again it makes no difference to how easy or otherwise it is to compute the tax bill.
Again, this has very little impact on the incentive to evade. When you evade, you skim profits from the highest rate bracket at which you pay tax. If your sole trade’s profits are £1m, £100k of which is undeclared cash-in-hand, the tax evaded is £40k. Even if the personal allowance went up to £20,000, you’d still be “saving” £40k in tax through this evasion! There would be small differences if you’re currently concealing an amount of income that would JUST take you into the next tax bracket up, but evaders in this bracket (and specifically the difference that would be made to their evasion by a raised personal allowance) probably aren’t going to be particularly material in the grand scheme of things (remember we’re talking about materiality for government finances, not from the point of view of the individual evader).
FLAT TAX.
I’m always amazed when people claim that so-called “flat tax” should be brought in to simplify the tax system and make it cheaper for HMRC to administer. Are these people serious? Do they think HMRC has offices full of employees bashing away at calculators working out how much is at 10%, how much is at 20%, etc? Believe it or not, even the Inland Revenue noticed several years ago that there are these useful machines, probably not unlike the one that you’re reading this on, which can do the job in a fraction of a second! The difficult bit, which is where the grey areas, arguments, evasion, avoidance and complexity in the system all lurk, are before the income figure to be taxed is arrived at (OK, reliefs like double-taxation relief are applied after this but they still aren’t affected by how many tax bands there are). Once the taxable income figure is reached and reliefs have been applied, the rest is simple multiplication no matter how many bands you have.
Again, I cannot see how a flat tax would deter evasion (assuming the change is to be revenue-neutral), but if there’s something I’ve missed please enlighten me.
So why, then, do we have incremental tax bands? The way I see it, there are two justifications. The first is well illustrated by reading about Abraham Maslow’s hierarchy of human needs (check it out on Wikipedia!). If you earn £6k in today’s Britain, almost every penny is needed for sheer survival. This is the most important income there is and taxing it is a bit harsh, I’m sure you’ll agree. As you go up through the basic rate band (around £6k-£40k), each additional grand of income becomes less about survival and more about leisure and enjoyment. Most would agree that it is fair to charge more tax on this less essential income than for the subsistence income. Once you’re earning over a certain amount, extra income becomes a question of whether you get an Audi or a Merc! Not exactly essential, so it isn’t unfair that you should be taxed more on that income.
That justification is perhaps more about why the poor pay a lower rate of tax, rather than why the rich pay more. The counter-argument about trickle-down economics is frequently trundled out against the rich being taxed more. What this ignores is that you are only as rich as you are because of what society (which relies on public spending) does for you.
Imagine you own a business in the UK employing 100 people. It doesn’t really matter for now what the business does, but due to the earnings it provides you with (it doesn’t really matter how much, either, but you are clearly considered rich) you enjoy a very high standard of living. Apart from your own hard work, you benefit from this lifestyle because (just the things that spring quickly to mind):
- Your workforce is educated and kept healthy by the state
- The armed forces and the police ensure a stable environment within which to operate
- The infrastructure of the country is kept in working order for the deliveries, commuting and services that the business depends on
- A stable and reliable legal and financial system allows you to collect debts and maintain control of your company and its assets
and:
- The society you live in allows you to spend your money in a way that gives you your fantastic lifestyle (there are leisure facilities; the condition of the roads don’t beat up your Porsche too much; etc, etc)
One of the main reasons the society can offer you all of the above, whereas a developing country couldn’t to the same extent, is public spending financed by tax. If you were to put the same amount of “your own hard work” into a business in such a developing country, you simply wouldn’t reap the same rewards in terms of your lifestyle because the public infrastructure wouldn’t allow it.
Given that public spending helps a rich business owner to enjoy a fabulous lifestyle due to the reasons set out above, is it not fair that such a person should pay tax at a higher rate than a much lower-paid employee, who enjoys a much poorer standard of living?
(OK, so some bits of that were a little facetious! Apologies.)
SIMPLIFYING THE TAX SYSTEM (in general)
I wasn’t sure whether this was a standalone thing in your blog post or you were referring to things like the flat tax. On the assumption that it was a standalone thing, I will assume you’re referring to what I mentioned earlier: the often complex task of working out what a person’s taxable income is (plus the reliefs that I touched upon).
It’s a nice idea, but would you like to suggest how to go about it (notwithstanding the flat tax rate, discussed above)? Maybe if you could give an example of one area of the tax code that should be simplified and how it should be done (while bearing in mind that many complexities of the tax rules – capital allowances, for example – exist to incentivise certain behaviour; OVER-simplification may remove incentives for behaviours that are good for both businesses and the economy). Part of the problem is, as soon as tax legislation is brought in, people start finding ways to abuse it, so additional legislation is brought in to plug the gaps. If you were to throw out all of the legislation and start again, possibly with the introduction of a small set of very simple rules, people would promptly find ways to get round these rules, and so the cycle begins again. What’s the answer? I don’t know! Purposive legislation might help, and the drafters are edging in that direction. What do you suggest?
(I realise that if you engage fully with this, Ken, we may end up having an argument about whether and how avoidance should be dealt with. For my opinions on that, please see my comment – yes, the long one – on your 25/9/09 blog posing!)
...and this was the Govt who said that these laws would not be used for anything but anti terror (you must remeber the "trust us to do the right thing" speeches that were trotted out when the anti terror leislation was trying to get onto the statute books.
ReplyDeleteBTW- "Anonymous" long posting but (believe it or not) an enjoyable read-many thanks!
I was right there with Anonymous until he included this in his analysis.
ReplyDelete- Your workforce is educated and kept healthy by the state
- The armed forces and the police ensure a stable environment within which to operate
- The infrastructure of the country is kept in working order for the deliveries, commuting and services that the business depends on
- A stable and reliable legal and financial system allows you to collect debts and maintain control of your company and its assets
and:
- The society you live in allows you to spend your money in a way that gives you your fantastic lifestyle (there are leisure facilities; the condition of the roads don’t beat up your Porsche too much; etc, etc)
Are these not the precise areas where the Government has 'ratted' on its resposibilities?
John,
ReplyDeleteI am glad to learn that you agree with me up to that point!
Are you saying that, because you feel that this government has neglected some or all public services, my argument about the justification for tiered tax bands is invalid? As far as I'm concerned, party politics has absolutely nothing to do with the argument I'm making (after all, there were tax rate bands under the Tories too!).
If you're implying that one of the other parties (or you for that matter) could have been doing a better job in any or all of these areas then that's your prerogative and you could probably put forward some pretty strong arguments to support your position, but my argument about tax bands rests on the fact that tax is required for an economy to operate. How well a government spends is a political question and we're free to unelect them (if enough people felt strongly enough, flat tax could even be an election-winner!). The government's failure or otherwise to effectively employ the tax money doesn't affect the principle I've described!
If, on the other hand, you're trying to say that public services have deteriorated to the point that doing business in the UK is now comparable to, at best, a third-world country ... then you probably haven't been to many third-world countries!
Regards.
Your 9th December 19:52 poster omits a small but vital distinction between direct and indirect tax, especially in the case of VAT.
ReplyDeleteEvading indirect tax is made more difficult for the great majority of the population, by its collection through the vendor of consumer goods/services. Direct tax is a maze of voluntary part-compliance compounding at many levels before a small proportion finally reaches HMRC. Thus it costs a relative fortune to collect less from fewer compliant contributors and veryone feels royally hacked off.
The old adage that "only poor people pay tax" is not entirely worthless in the context.