The rise of Britain’s un-taxed economy

I’ve written here several times before about the way in which the modern middle-classes have many streams of income, about the difficulties of measuring that, and partially as a result, about the size of the black economy; something the internet has caused to soar in size.

Who reports and pays tax on their airbnb income? Who really knows where the line is that makes selling on eBay a business rather than a hobby (particularly when even if it is a hobby, it creates un-taxed income)?

Measuring the size of people’s real incomes has always been hard – the internet has made it harder.

I’ve spoken to various government officials about this, but despite getting verbal agreement that, yes indeed, the black economy is much, much bigger than official numbers suggest, no new numbers have been forthcoming.

So, I was pleased to see this week that some proper economists have done their own research. Charles Goodhart and Jonathan Ashworth of Morgan Stanley have looked at the very fast increase in self-employment since the start of the financial crisis – this has accounted for four fifths of all job gains.

But these self-employed people haven’t started what you might think of as small businesses. Instead, they are individuals with no employees.

It has been, as Philip Aldrick puts it in The Times, “the age of the freelancer, not the entrepreneur.” At the same time, the amount of cash circulating in the UK has risen hugely – there is about £45bn more in actual cash around than there was in 2007.

From this, the economists back out the idea that the un-taxed economy (so, the illegal economy plus the grey or cash-in-hand economy) has jumped from 12% of the UK economy to about 16%. I’d still say that’s far too low, but it still represents a degree of statistical progress.

It also suggests that the UK’s output, far from being lower than it was in 2007, is actually about 4% higher.

• Over the last few years, many older and wiser heads in the UK have told me that the answer to the productivity puzzle in the UK (the figures show that it has fallen steeply and isn’t picking up) is that there isn’t one.

It is just that the rise in the black economy means less work is going reported, so it looks as if productivity has fallen. The Morgan Stanley numbers back this idea up pretty well.

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  • r

    I suppose the simple comparison is that the more we are taxed, the greater the grey/black economy.

    Back to bad politics, again.

    r.

  • Mombers

    I’ve certainly noticed this in my industry – financial services IT. The difference between PAYE and corporation tax is so vast that lots of people just go contracting. The jobs market is so buoyant that job security isn’t too much of a concern. The downside is that it is hard to make long term strategy because the best people won’t go permanent and it’s a hard sell to management to have a contractor in charge of significant parts of a project.
    Now shifting tax off earned income onto unearned income, mostly land value, would broaden the tax base enormously and get rid of all the ridiculous incentives for tax evasion, unemployment and evasion. Instead, we’re going to try to squeeze more and more out of fewer people, those who are working and are unwilling or unable to opt out of PAYE…

  • GFL

    Indeed Mombers you have hit the nail on the head. In the previous article Merryn wrote about this, I also highlighted the difference between PAYE and contracting, it seems people like Merryn get their income via a company too so it is rarely highlighted.

    Merryn, how many employees have both of your companies got, just out of interest? (non-family members :P)

  • Ralph

    I infer from the comment made by GFL that the spirit of Jimmy Carr runs deep indeed where income tax is concerned. The way in which self-employed people are assessed for income tax is long overdue a complete overhaul.

  • Cicero

    The higher the rate of tax the lower the receipts and vice versa. Well illustrated by the difference in tax receipts between the very highly taxed Wilson era and the Thatcher years.

    Under Brown we have had the introduction and huge growth of ‘Stealth Taxes’ whilst we have been getting less and less for the money that is taken. (See my comments on IHT). Pensions are poor, daily we see horror stories of the NHS, for most people these two items are what they expect from their taxes – their decline is unacceptable for many. Indeed if you consider how much an individual pays in NI, this could fund a fairly decent Private Pension and have enough left for Private Medical Insurance. (Yes, I know that the tax also goes to help the less well off – just an example).

    Add to this the waste we see and the expenditure that many cannot stomach (Foreign Aid) and then factor in the veniality of MPs themselves and their constant fiddling. The real wonder is that our black economy isn’t larger than that of Italy. My own guess is that it set to grow significantly unless or until the populace consider tax rates to be more reasonable and that they can see demonstrable benefits for the tax taken.

  • Merryn

    @GFL It is firmly against the rules to employ people as freelancers when they act as employees and we stick firmly to the rules! No personal services companies here.

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