How to get rid of Britain’s shadow economy

Is paying for goods in cash morally wrong? Clearly not. Is paying for goods in cash in order to avoid paying VAT morally wrong? I suppose so.

After all, any tax you avoid paying has to be made up somewhere. So if you don’t pay it, someone else will – or you’ll end up paying it anyway via higher income tax or some such.

But all the fuss about paying in cash (since David Gauke’s comments on it last week) seem to miss the point – that the real villains of the piece are not so much the ones paying in cash, as the ones receiving in cash, and the ones who created the system that encouraged them to do so.

This isn’t just about VAT. It’s about the huge numbers of people who operate almost entirely outside the tax system. The painter you pay in cash? Most likely everyone else pays him in cash too. So not only is no VAT paid, but no income tax is paid. And no National Insurance is paid either. That’s not tax avoidance – it is tax evasion.

The tax gap in the UK (the difference between the amount we should get in tax revenues and the amount we actually do get) is estimated to be somewhere in the region of £35bn. That’s the kind of money that could more or less make our fiscal problems go away.

In Europe things are rather the same: the black economy is estimated to be around €2trn (that’s not far off a fifth of GDP) and the lost tax from it something like €1trn.

I wouldn’t go as far as to say that the €1trn could solve Europe’s problems (probably no amount of money can). But it would surely help out.

What’s the solution? Lower taxes overall and better enforcement of those lower taxes. For evidence that the latter will help, look here and you will see that most people aren’t really cheats at heart (or don’t admit to being anyway).

And for the former? Here’s my current favourite writer John Littlewood on the subject (and in this case in reference to the Attlee government).

“High taxation breeds an immoral psychology. It rewards connivance and spawns a tax avoidance industry that makes the honest citizen seem naïve. Worst of all, its disincentive effect reduces the appetite to work harder and drives the very ambitious into tax exile.” I’d say that pretty much sums up the problem – just as well now as it did then.

It might also be worth noting, as a letter in The Times last week pointed out, that the more straightforward and low a tax system is, the less avoidance there is. In the Isle of Man (no capital gains tax, inheritance tax or stamp duty; and income tax at 20%) there is no such thing as a tax avoidance scheme.