Worrying about the size of the tax gap


In today's Times (no link, £) we're told that tax evasion costs the Treasury £100 billion in lost revenue. We're told the same thing in The Guardian as well: and these numbers come from the research of Richard Murphy, of Tax Research.

There's a couple of minor points we might make about this. Whether the numbers are reliable for example (evidence from Mr. Murphy's estimation of the losses from tax avoidance by companies doesn't inspire confidence). Whether we can actually do very much about it all and still remain a free society: there will be some level of grey, untaxed, economy whatever we do and there's a trade off between the size of it and how repressive we wish the government to be. Finally, whether closing said tax gap at present would be a good idea: which for most of those proposing we do it wouldn't be. For those who complain the most about the tax gap are also those shouting the loudest for Keynesian demand expansion. And collecting more taxes is just as much fiscal contraction, the opposite of what they're shouting for, as cutting spending is. At least it is according to the Keynesian theories they say inspires their economic pronouncements.

But let's leave aside those minor points and look to the major one. For I too am worried about the size of the tax gap, just as you should be. And just to be entirely fair, let's draw on more of Mr. Murphy's research as we express that concern. Here is his chart of the size of the grey (ie, legal but untaxed) economy:

As you can see, as the tax burden rose, as marginal tax rates rose, as the tax system became more complex, over the years of Gordon Brown, the size of that grey or shadow economy rose. And of course there is more than mere correlation here: incentives matter in economics after all and as the rewards of dodging taxes rise then so do the temptations to do so.

Which is why we here at the Adam Smith Institute have always argued for a low tax burden, low marginal tax rates and a simple taxation system. For we too are worried about the tax gap: it's just that we put forward solid plans to reduce it rather than just worrying about it, by having low, light and simple taxes.