Tax clampdowns are a distraction from the real problem

The government is using the issue of tax dodging to distract the public from the real problem, says Matthew Lynn - Britain's rampant public spending.

The private bankers of Geneva should be swapping their Porsches for Skodas, as their clients disappear. The hedge-fund managers of Zug should be down to just one trophy wife a year. And the hotels of Lake Zurich should be shutting down as the guests dropping by to deposit a million or two in a numbered account cancel their bookings. The days when British tycoons could hide their millions away from the taxman in a secret Swiss bank account were supposed to be over. And the Treasury's coffers would be overflowing with the money repatriated to Britain.

Except it has not quite worked out like that. The high-profile campaign launched against Swiss tax evasion by the Treasury has turned out to be a lot less lucrative than planned. The Treasury expected to bring in £3.2bn from the assault on Swiss-based accounts, and had optimistically pencilled in that figure to its public spending plans for 2013. In fact, as figures showed last week, the campaign brought in under £1bn, less than a third of what was expected.

The Swiss campaign was just one among many anti-tax-avoidance campaigns, all aimed at different sections of society. British residents with Swiss assets were hit with a one-off levy of between 21% and 41% of their assets in May, while in future a withholding tax of up to 43% will be applied to Swiss accounts.

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Switzerland warned the Treasury it would not raise very much, as most British-based accounts were held by non-doms, who could get around the rules. But the Whitehall mandarins seemed to have been reading too many airport thrillers, and imagined there were untold billions stashed away that they could get their hands on so long as they could get the Swiss to co-operate. In the end, much less money was hidden in Geneva and Zurich than it imagined.

That is not the only example. The Treasury has launched campaigns against people selling stuff on eBay, against dentists, and against people selling second homes. In the last few weeks, it has been targeting buy-to-let landlords to make sure they pay all the tax on their rental income. Each time the campaign is accompanied by press coverage enthusing about how thousands will be caught in the net and millions raised for the government from those not paying their fair share.

Yet, on inspection, the sums raised turn out to be fairly trivial. Take the campaign against plumbers, for example. You would probably imagine they were among the more lucrative targets most of us must surely have paid a plumber in cash from time to time. But in fact it only raised £10m. The campaign against people selling stuff online? That one raised a princely £3m. The one against electricians? All of £1.25m. And a campaign against direct selling' mostly self-employed people selling greeting cards and the like at home events bought in just £250,000 in extra revenue. It is hard to believe that even covered the cost of putting the campaign on the website, never mind the planning that went into it.

Now it is possible that people are just out-witting the system. Perhaps all those plutocrats in Zug just asked their accountant to place their money in the name of a Belize-based trust. Perhaps the plumbers and electricians decided to hang onto the roll of crumpled twenties in their pockets. The internet sellers may have simply created new Gmail addresses and kept ignoring their tax liabilities. Possible, but not very likely. A more convincing explanation is that tax avoidance is just not that widespread in Britain.

A few countries, such as a Greece or Italy, may suffer from rampant tax evasion, and have tax collection systems that are both corrupt and incompetent. But that is not true of Britain. A study by the Institute of Economic Affairs earlier this year estimated the size of the black economy at just over 10% of GDP, around half that of Greece, Spain and Italy, and one of the lowest levels in the developed world. It has also been steadily falling since 1998.

If people are paying less tax than they should, it is more often because successive chancellors have created tax systems so mind-bogglingly complicated that they are full of loopholes, rather than because people are cheating the system.

But battling tax avoidance makes a useful fiction for the Treasury. It can pretend it is getting tough on the cheats, and pencil in all kind of fanciful figures for sums to be raised from crackdowns on different sectors of the economy. All it does, however, is raise false hopes that there is an easy way out of the country's fiscal mess, and that the deficit can be bought under control by targeting a few dodgers. It isn't true.

Britain still needs a sustained assault on an unaffordable level of public spending, and that will involve the state doing a lot less than it does now, and doing it more cheaply. No crackdown will change that and it is dishonest to pretend that it can.

Matthew Lynn

Matthew Lynn is a columnist for Bloomberg, and writes weekly commentary syndicated in papers such as the Daily Telegraph, Die Welt, the Sydney Morning Herald, the South China Morning Post and the Miami Herald. He is also an associate editor of Spectator Business, and a regular contributor to The Spectator. Before that, he worked for the business section of the Sunday Times for ten years. 

He has written books on finance and financial topics, including Bust: Greece, The Euro and The Sovereign Debt Crisis and The Long Depression: The Slump of 2008 to 2031. Matthew is also the author of the Death Force series of military thrillers and the founder of Lume Books, an independent publisher.