Wednesday, November 19, 2008

The Tax Gap

Despite the Labour benches trying to persuade the public that our economic problems are ‘a global phenomenon’, they can’t disguise the fact that it was Gordon’s economic policy failures that have left our finances in such a parlous state.

One of the actions they could have taken over the past decade was to fix the ‘Tax Gap’ – the amount of money that tax planning, avoidance and evasion takes away from the government.

When tax plans are introduced through Parliament they are done with an idea of their effects in mind.

Even under the present administration many of the taxes are progressive and redistributive.

Unfortunately, many of these tax changes don’t work in the way their authors intended due to loopholes in the system, exploited by both individuals and companies.

A pamphlet published earlier this year by the TUC and the Tax Justice Network claim that around £25bn per year is missing from UK government receipts due to tax planning and avoidance – with individuals with an annual income of over £100,000 costing the exchequer £8.4bn per year due to tax planning (or ‘clever accounting practices’ if you prefer).

Basically, the people who should be paying the most tax because they earn the most money find their way around the system.

But this isn’t a game – it is schools, hospitals and key services that suffer because the better paid can afford someone to look after their returns, while everyone else pays what they are supposed to.

To put the figures into context, the Tax Justice Network estimate that ensuring half of that £25bn went to its rightful place would provide enough money for fifty hospitals.

£25bn, by the way, isn’t far off the year’s expenditure for the whole of Wales.

The House of Commons Public Account Committee agrees with many of the points in the pamphlet.

Their recent report on managing corporation tax of large businesses points to the fact that only 50 of the top 700 large businesses in the UK pay two-thirds of corporation tax, with 181 businesses paying none whatsoever.

The Tax Justice Network estimate that a figure of around £70bn of tax evasion – that’s just not paying it, as opposed to planning a way of avoiding it – wouldn’t be out of the question.

That’s most than £100bn possibly missing to the government every single year.

The scary thing, and this is where you get the feeling that government’s left hand wasn’t aware of its right hand, is the cuts in Her Majesty's Revenue and Customs (HMRC) under Labour.

Just think about it – the organisation that goes out and collects money for the government has had to face consistent cuts to the point where it is unfit for purpose. It’s nonsensical.

HMRC need well-trained and well-supported staff so that they can detect tax evasion, so that they can wheedle out those who want to beat the system rather than accept the responsibility of paying tax.

Instead, the government have tried to enforce efficiency savings on them. According to one internal compliance review in an office, highlighted by the PCS union, cutting staff leads to £74m of savings and a loss of £204m in tax yield - nearly £3 lost for every £1 saved.

Wales has suffered heavily on this issue, and is set to lose more jobs in Convergence Fund areas across west Wales and the Valleys, because of the misguided centralising beliefs of the Labour government.

I hate to be the person that tells you that more taxmen would make the world a better place – but if companies and individuals all paid their tax as they should then it would be a smaller tax burden for the rest of us, and with that extra money we go do something decent and socially redistributive – like take the poorest in society out of the tax loop and end child poverty in the UK.

What a thought.

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