When a magician points to activity in one area of the stage, the real trickery takes place somewhere else, in a location that we will only see if we ignore their directions. However for the sleight of hand to be effective, the area which the performer wants us to focus on needs to be credible, and perhaps a bit intriguing so we really do focus on it. As the nations newspapers and broadcasters are focusing on tax havens, my MEP Daniel Hannan has used twitter to promote a video that he claims offers a solution to the problem of UK tax evasion. It should be noted that tax evasion is illegal, while tax avoidance is not deemed as illegal, although both are a problem for HMRC.
“The difference between the revenues that in HM Revenue and Customs’ (HMRC) view should come in, and the total actually collected by HMRC, is known as the ‘tax gap’. Tax evasion and tax avoidance by businesses and individuals contribute to the tax gap, along with error, failure to take reasonable care, non-payment, legal interpretation, the hidden economy and criminal attacks on the tax system. The tax gap in the 2010 to 2011 financial year was estimated to be £32 billion – 6.7% of the total tax that HMRC estimates was due – and tax evasion and avoidance together accounted for £9 billion of this.”
What is not clear from this excerpt from a document published in 2013 (and the latest public document on the subject from HMRC) is if their estimates include the money lost to the UK from tax havens such as Panama and the British Virgin Islands etc. However one presumes that they do make some estimates in that direction.
According to Daniel Hannan, the way to stop law breaking is by making the law easier to obey and better understood. His motto is that we all need “lower, flatter, simpler taxes.” He claims that if the system was simpler ie with fewer tax breaks for certain behaviour or activities, such as film production (the example he gives) and the general cost of taxation was therefore lower, that the changed cost-benefit advantage of searching for fewer loop holes against a lower cost base would mean that tax evaders would simply pay up. Some of what Daniel suggests is correct, that an unnecessarily complex tax system and an unequal society where some people have so much income that their tax bill is high in absolute terms (even if it is low in percentage terms compared to the poorest) means that many of these people will happily take a gamble to pay advisers who offer them a saving in their taxes, while poorer people will have no alternative to paying the full tax take, including for the tax breaks that may actually advantage the wealthy with their advisers. So removing loop holes will reduce this activity. However tax avoiders are people who are by definition law breakers and so their moral compass is probably not going to change just because the amount they are cheating us from is diminished, and whilst their ongoing dishonesty may lead to them benefiting less, they need to be prosecuted, not simply be offered lower incentives for law breaking. In any event what Daniels sleight of hand is trying to divert us from, is that nations such as Panama, will always be searching for advantages when compared to developed wealthy nations such as the UK and the US. To reduce our level of taxation to the same level as Panama would come at a huge price for all but the wealthiest in our nation. Such a strategy would grossly increase the inequalities in our society, as those on low incomes would be unable to replace the provision of education, health, policing, bin collections etc that our tax system currently provides us with from their low incomes. Tax after all is intended to redistribute funds in the same way that insurance schemes benefit those who lose their loved ones. Clearly reducing taxes to this extent is not a credible way forward. The use of places such as Panama by tax avoiders is not going to change, no matter how simple our on-shore tax system is, unless their activities are opened up to scrutiny, in the same way as policemans torch reveals the lock picker.
We clearly do need a tax system that is as low, as flat and as simple as we can achieve without removing a low number of strategic tax breaks that are important to our social and economic well-being. However that is not all. We also need a tax system that ensures that tax avoiders are prosecuted with the full weight of the law and also significantly reduces tax evasion in our society. We also need a system that deals with the 72% of the tax gap caused by other factors. Finally and perhaps most important for Daniel Hannan and his chum David Cameron, we need to address issues of transparency on the matter of Trusts. As the Guardian has reported David Cameron refused in 2013 to allow the EU to make Trusts transparent, and surprisingly Daniel Hannan who as an MEP should have challenged this refusal, has made no reference to this problem in his handy YouTube piece on tax avoidance. This is a vital change that will ensure that tax avoiders have less places to hide. I would suggest that Daniel Hannans phrase should be modified to become “lower, flatter, simpler, transparent and effective taxation”