Beating the Tax Gap

Yves here. The tax gap in the UK is defined in the UK as the Treasury thinks it ought to have collected versus the amount it actually receives. Although you could view it as a measure of efficiency of tax collection, as Richard Murphy makes clear, the tax gap is mainly if not entirely the result of tax abuse. And from this side of the pond, the focus on “tax gap” rather than “tax abuse” has the convenient effect of muddying the issue and taking the focus off cheaters.

But then again, with IRS enforcement weak and focused on small fry because the IRS has a hard time winning against the big boys, we don’t even talk about a tax gap, much the less tax abuse, save money laundering.

Yes, and Murphy is a big MMT fan, so he wants taxes and tax collection for the right reasons: to create incentives and disincentives, drain spending from the economy as needed, and redistribute income.

By Richard Murphy, a chartered accountant and a political economist. He has been described by the Guardian newspaper as an “anti-poverty campaigner and tax expert”. He is Professor of Practice in International Political Economy at City University, London and Director of Tax Research UK. He is a non-executive director of Cambridge Econometrics. He is a member of the Progressive Economy Forum. Originally published at Tax Research UK

I am on my way to Brussels this morning to speak at an EU Parliament event organised by the Socialist and Democrats Group of MEPs (of which Labour MEPs are members) on ‘Who stole our future?’. It seems that the tour has resumed despite recent events in my life. That is because I feel that it’s appropriate to do so. I will be talking about the tax gap in the context of the reshaping of society that we need. And if we are to have a future that includes the sense of public duty that my father undoubtedly embraced throughout his life then beating the tax gap is a key issue.

Several years ago I worked with the late Michael Meacher MP on this issue. Michael proposed legislation I had written to address the tax gap in the Commons as a private members bill. I well remember Jacob Rees-Mogg opposing it because he said, firstly, that Michael was a ‘socialist in tooth and claw’ and ‘this Bill would result in more tax being paid, and we do not want that’. I stress; I paraphrase.

Not for the first or last time Rees-Mogg angered me. He was right to describe Michael as a socialist. But the issue of beating the tax gap is at least in part about upholding the rule of law. Why the Right can in any way tolerate tax abuse when it threatens one of the foundations of Conservatism is very hard to understand, unless and until you comprehend that they are not Conservatives at all.

And that they are not pro-business either. There is nothing remotely pro-business about tolerating tax abuse when the consequence is that cheating businesses obtain an unfair competitive advantage over those businesses that act in the long term interest of all their stakeholders.

Rees-Mogg’s attitude was about only one interest, which was and is the selfishness that puts the interest of individuals who are willing to abuse above that of all others, including honest competitors, the law, the state and by extension all others in society. It does not require a socialist to point out the moral bankruptcy of such a position, although it seems that it helps, and makes the Left the best friends honest businesses have on the political spectrum, in my opinion.

Second Rees-Mogg was wrong to say that beating the tax gap meant more tax had to be paid. It might, of course. But I strongly suggest that since tax is primarily a tool of fiscal policy designed to beat inflation above all other goals then revenue maximisation is not the goal of any government. Rather the aim should always be to raise the required amount of tax as equitably as possible to achieve that fiscal goal in ways that achieve the secondary (but vital) goals of redistribution, repricing market failure, reorganising the economy and reinforcing the relationship between the citizen and the state. I doubt Rees-Mogg would recognise any of these.

My message today is that this is what we have to do. If we are to reclaim our future proper understanding of the role of tax is vital.

However, as my research is now showing in work I hope to publish soon, this is not the case, and there are massive impediments to doing so.

Astonishingly, official and other research data on tax is frequently inaccurate.

So too often is GDP data, which makes tax gap estimation hard.

And even the number of taxpayers is frequently subject to misreporting between data sources.

At its most basic level understanding tax is hard because official statistics seem to be perversely dedicated to ensuring that we cannot know the truth.

And when it comes to tax gaps, there is too little research and even too much denial that the issue is of consequence.

Tax cheats, both domestically and internationally, are stealing tax revenues. That is beyond dispute. But the absence of data to identify the true scale of the issue and to target resources to addressing the issue is the surest indication that they have far too many partners in politics and officialdom who are far too close to the Rees-Mogg view for comfort.

There is, I suggest, official complicity in the maintenance of the tax gap. Ed Balls was once said to have commented that he would not like to live in a country that sought to collect all the tax owing to it. I disagree: I want a state to seek to collect all the tax owing to it, but no more (of course). And that’s because to do so is the foundation of economic and social justice. We are too far from both.

Print Friendly, PDF & Email


  1. rd

    In the US, the bottom 50% doesn’t pay much income tax but they do pay significant payroll taxes. However, the biggest portion of the payroll tax also generates a future liability for Social Security. If they keep income underground, then they are not contributing to Social Security but also not maximizing their future Social Security payments, so that maybe somewhat of a wash fiscally. I don’t think the policy makers care much about this even though it can be a significant elderly finance issue.

    Much of the income tax comes from the top 20% and it is tough to game W2s for salaried workers. In general, the lobbyists have done a good job of making the case that the top 1% paying too much income tax is bad for the country and many policy makers appear to have bought that argument, so why would you try to make them pay more?

      1. rd

        The piece was about the gap of expected vs. actual taxes.

        Unless you are in an underground barter economy or are buying goods from cash only businesses that aren’t reporting income, it is hard to hide purchases to avoid sales tax. It is very difficult to hide property to avoid property tax.

        However, a number of businesses pay staff in cash and don’t report it to the IRS thereby avoiding their share of FICA. The employees don’t report the income so they avoid FICA and income tax.

  2. Synoia

    The Inland Revenue in the UK is probably not as politically managed as the IRS in the US.

    The US has very wealthy influential donors, who have much power probably because of the bi-annual elections, long expensive election seasons coupled with representative earmark privileges. The UK does not enjoy that mechanism, campaign seasons are short, and not as expensive as they are driven by the national party manifestos.

    Also in the UK, I’m unaware of the “earmarking” so prevalent in the US, so I believe local MPs have less line item influence over spending.

    I would not go so far as to say politics in the UK is honest, but there does appear to be less loopholes and less opportunity for individual MPs to be dishonest.

  3. Lambert Strether

    > Yes, and Murphy is a big MMT fan, so he wants taxes and tax collection for the right reasons: to create incentives and disincentives, drain spending from the economy as needed, and redistribute income.

    Solid one-liner that answers the question: “OK, genius, if taxes aren’t for raising revenue, what are they are for?”

  4. Penny

    This issue and Murphy’s contributions are very important, if nothing else as a means to expose the corruption of democratic instincts that characterizes modern society. Few individuals want to pay tax; they don’t want the rich to get away with paying nothing but they would avoid tax if they could. So resentment of the rich turns into resentment of their ability to pay something to tax advisors in order to pay nothing to the government. One way of turning this around would be to put gross income and income tax data on the public register. I could then look up Reese-Mogg, ascertain his gross income of £350,000 last year and his payment of £20,000 in taxes, comprised entirely of unavoidable income tax on his salary as an MP. If we could post a photo of each MP, their homes, their gross (reported) income and the tax they pay, this would clarify minds in the middle class households .

Comments are closed.