Cracking down on tax avoidance won’t fix the budget deficit

Clamping down on tax avoidance is popular with the voters. But far from fixing Britain's problems, it may make things even worse, says Matthew Lynn.

Ever since Roman times, tax collection has been an unpopular and intrusive business. There have to be checks to make sure people pay what they are meant to and don't cheat the system. Even so, in this country, HM Revenue & Customs (HMRC) is being encouraged to become nosier with every week that passes.

Posters with staring eyes are appearing everywhere. Companies are being harassed. Now we learn that the tax inspectors will be teaming up with credit reference agencies to detect fraud. Almost every day brings news of some fresh clampdown on tax avoidance.

Yet there is little evidence to suggest that Britain unlike, say, Greece or Italy is a country where tax dodging is endemic. The blunt truth is that cracking down on tax avoidance isn't going to fix the budget deficit and it is unlikely to be worth either the cost involved, or the increasing threat to civil liberties it poses.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

No tax system is ever going to be able to collect all the money that is owed. The incentives for avoiding tax are too great and too obvious you collect all the stuff the government provides, but you don't have to pay for it. Not even the most totalitarian government could expect to collect 100% of the tax it is owed.

In some countries, tax dodging is even a way of life. Greece is the most obvious example. Italy is another. Cash is the normal way of doing business. The black economy probably accounts for as much as 20% of output.

In this country, we have all paid a plumber in cash occasionally. But that is relatively trivial. Most of us have never heard of anyone paying their dentist in cash, or receiving their wages in used notes. On the whole, most people pay their taxes. If they didn't, we'd have noticed by now.

The impression from the government, however, is that tax dodging is rampant. The billboards are covered with blatantly Orwellian posters, with a big pair of watching eyes urging people to report avoidance. Big multinationals are being witch-hunted for perfectly normal tax planning. Starbucks, Amazon, Google and the rest are being vilified for simply moving money around in an effort to keep their tax bills under control.

MoneyWeek videos

Why does Starbucks pay so little tax?

Big, profitable companies can reduce their corporation tax bill to almost nothing.

Watch all of Tim's videos here

The tax authorities have been using leaked documents from offshore banks, and may have followed the example of the German government in paying for data that has been stolen. An affluence unit' has been established to investigate anyone who looks well-off as if that in itself is a crime.

This week we learned that HMRC would be working with the credit-referencing agencies to make sure there were no major discrepancies between people's declared income and their spending and so spot potential tax dodgers.

There is a certain amount of grand-standing here. Clamping down on tax avoidance makes a good headline at a time when spending is being cut. It allows the government to create the impression that it is making the rich pay their fair share, and may help deflect attention from painful cuts in welfare budgets. But it is also dangerous.

Once you give power to government departments, it is very hard to get it back again. None of the difficult questions are being asked and certainly not answered satisfactorily.

Do we really want tax inspectors routinely to have the power to check everyone's credit-card spending? Or do we think that data should be private unless there are reasonable grounds to believe a person is trying to evade taxes? Are there limits to how much surveillance is compatible with a free society? Are the amounts being raised worth the amounts being spent on detection? And is it sensible to hound some of the most successful companies in the world over their tax planning?

The real problem in Britain is not that people are dodging tax, it is that the government is spending too much. The budget deficit here is as big as Spain's, and that is a country that needs a bail-out. The government has consistently missed its targets and with stagnant growth the deficit will just get larger and larger. If the Bank of England were not printing money there would have been a full-blown financial crisis by now.

There are no taxes that can be raised to plug the gap. Most of them are already so high that putting them up only decreases revenue. Higher income taxes just stop people working and send the rich abroad. As for corporation tax, if anything it needs to come down if Britain is to remain competitive. What about a higher rate of VAT? That will simply destroy whatever little life remains in a sluggish economy. Steeper petrol taxes? People will just stop driving because they can't afford the fuel for their cars.

The truth is there are many taxes that need to be cut. The level of business rates on shops are so high, for example, that they now often exceed rents and are a major reason why so many high streets are boarded up.

If the deficit is ever to come under control there will have to be deep cuts in spending. So far, there is almost no debate about that only about whether it is right to slow the rate of increase in spending. It is a fiction that clamping down on tax avoidance can fix the deficit, or avoid the hard choices that will inevitably have to be made. And it's an initiative that poses an increasing threat to civil liberties. The headlines are easy but the price to be paid for them will be a high one.

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.