Playing Fantasy Fiscal Policy: Jeremy Corbyn’s Tax “Policy”

Reading Jeremy Corbyn’s “The Economy in 2020” you could be forgiven for thinking the UK has no real public finance problem.

Using figures drawn from a report from Richard Murphy, a tax campaigner, Corbyn alleges that we have about £120bn in uncollected taxes in the UK – which is the equivalent of roughly 20% of the UK tax collection. If these figures are correct, and all this tax could be collected, Britain wouldn’t really have a fiscal problem. The annual deficit is only about two-thirds of £120bn. So if these figures were credible it ‘solves’ the problem ‘at a stroke’ (to repeat a historic phrase).

Murphy’s actual figures are as follows:

£18.3bn in uncollected tax debts

£19.1bn in tax avoidance

£82.1bn in tax evasion (including the so-called ‘shadow economy’)

Total: £119.4bn

(Corbyn’s document rounds these figures to £20bn; £20bn; £80bn; and £120bn which is mildly eccentric but understandable I suppose).

There are two obvious questions to ask about these figures: first, are they credible? And second, how much of this unpaid tax can realistically be collected?

Fundamentally I think these figures are broadly credible and I will set out why below. But to imply from this, as Corbyn does*, that all this money could be collected is playing fantasy finances. And it is made even more fantastical by the paltry policy measures proposed to get this £120bn collected.

[*see note at the end re Richard Murphy’s estimate of what can actually be collected].

TAX DEBT

The figure of £18.3bn in uncollected tax debts seems to come from official HMRC figures and is therefore quite credible. It is only just over 3% of total tax collected annually, and as some of this will cover multiple years it actually seems a fairly low figure.

But what are ‘uncollected tax debts’? Mostly they will be amounts owed by businesses and individuals to HMRC that they have failed to pay. These are registered tax liabilities that have not been paid for one reason or another.

In 2010 there were about 60,000 individual bankruptcies in England and Wales, and a further 25,000 debt relief orders. In the same year 297,000 businesses ‘died’ in the UK. These are almost certainly where the vast bulk HMRC uncollected taxes arise.

Any country is going to suffer from this problem, and from what I can make out the UKs ‘problem’ is relatively small by international standards.

There don’t seem to be any specific proposals in the Corbyn/Murphy plan to tackle this problem, other than employing more HMRC staff. But the realistic chances of massively reducing this £18.3bn (3%) of uncollected taxes must be pretty small, no matter how many tax inspectors or VAT people HMRC employs.

TAX AVOIDANCE

The £19.1bn in tax avoidance is also fairly credible in that it, again, seems to derive from official statistics. As with tax debts, this is relatively ‘small beer’, equating to about 3.5% of the whole tax take.

Tax avoidance, it is important to remember, is the practice of employing legal means to minimize tax liabilities.

This is notoriously hard to tackle, because as all countries tax codes become more and more complex, tax accountants and lawyers find more and more ‘loopholes’ to exploit. Indeed many governments positively encourage tax avoidance by companies and individuals by offering tax incentives to engage in activities governments approve of.

On this Jeremy Corbyn proposes bringing in a “proper” anti-avoidance rule, although it’s not at all clear how that differs from what has already been introduced. He also, following Richard Murphy again, proposes some tightening up of reporting, reforms to how multinational corporations are taxed and more HMRC staff. Simplification of the tax code, which is often touted as another solution, doesn’t get mention.

Given that tax avoidance has been with us for time-immemorial (remember those bricked up windows to avoid the window tax?) it is very unclear how the rate of avoidance can be reduced to zero, as Corbyn’s rhetoric seems to imply.

TAX EVASION

This is the subject that has some emotive force behind it – the idea that there are wealthy individuals and big corporations massively evading tax altogether.

Corbyn/Murphy suggest that tax evasion – including the ‘shadow economy’ – probably amounts to some £80bn odd, annually.

I think this figure is probably about right, although it is by far the hardest to estimate. By definition the shadow, informal, or black economy is hidden and very hard to measure.

There are two broad approaches to estimating it. One is to go out and look – method used by Hernando de Soto in his famous studies in Peru and elsewhere. These studies convincingly demonstrate that the “invisible hand’s shadow”, as I call it, is very large indeed. The other method is to use various forms of econometric analysis to estimate its size – of which Professor Schneider is the leading exponent. His studies put the UK shadow economy at round about 10% of GDP or about £150bn today. That would mean the ‘tax liability’ on the shadow economy would be around £50bn (pro rata). To that figure Richard Murphy adds another £30bn in other forms of tax evasion to get to his £80bn+ figure.

Now I don’t argue with these figures, at least not in the broad picture they paint. They are probably about right and certainly more accurate than the ludicrously smaller numbers routinely pushed by HMRC and HM Treasury.

The problem is not the numbers, but whether it is feasible to do much about it and whether Corbyn/Murphy offer any credible policies to do so. The answer on both counts is no, or at least not much.

Schneider’s latest estimates for the sizes of shadow economies illustrate the nature of the problem (see page 23).

On 2007 the UK shadow economy is put at 10.6% of GDP. In the same year he estimates the figure for Greece was 25.1%, Italy 22.3%, Spain 19.3% and Portugal 19.2. No real surprises there. But Germany was 14.6% and famously tax compliant Sweden was estimated to be 15.6% (other Scandinavian countries were at similar levels).

History also suggests this is an ingrained problem: for the UK the figure in 1980/90 was 9.6%; but for Germany it 11.8% and Sweden 15.8%. In the 21 countries Schneider analyses not one of them significantly reduced the size of the shadow economy in the almost two decades his figures cover.

It is also important to realize at this point that the shadow economy is not just big financially; it is big in terms of people. Some ILO studies suggest that for every 1% of GDP in the shadow economy, roughly 1% of the workforce goes unregistered. That means in the UK it involves as many as 3 million people (or full-time equivalents). Most of these are not illegal immigrants, but indigenous Brits ‘moonlighting’ full-time or part-time. This is a massive problem.

So given the entrenched, huge and long-term nature of this problem, what radical solutions that are different from what has been tried before does Corbyn and his tax guru offer? Well, basically, nothing.

More HMRC staff (again). Tightening up of reporting requirements. That’s about it. No analysis of what others have tried (and largely failed) at doing. No tax amnesty to get people back into the system. Silence.

CONCLUSION

To be fair to Mr Corbyn, and his tax guru Mr Murphy, they are at least highlighting serious issues that all politicians ought to be addressing and all too often hide.

Their figures are probably about right, give or take, for the amount of tax that goes uncollected, avoided or evaded. But their analysis of why this happens is superficial, ahistorical and lacking in comparisons. Their solutions are largely banal and conservative, bordering on the bathetic amounting to mostly “more of the same”.

Even if one were extremely generous it is unlikely the measures would realize even 10% of the unpaid tax they identify – £12bn rather than £120bn. George Osborne is promising £5bn, so he and Mr Corbyn may not be that far apart afterall.

———-

*Additional note

Richard has Murphy has contacted me since this was published to point out he only claims that “about £20n” of the £120n is collectable.

Richard says this is mentioned in the full version of report, on page 70 and he has explained further on his blog. he also says on his blog it would have been better if Jeremy Corbyn had made this clear in his policy document.

Jeremy Corbyn is clearly implying to his readers and listeners in his ‘The Economy 2020’ there is £120n out there just waiting to be collected. This is fantasy, and he should say so, clearly and openly.