A nation of tax cheats changed by new rules
TAX evasion is rife in the UK. In the last few months a friend of mine has spent over £1,000 on various household jobs. On each occasion the labourer was paid in cash. Was VAT included? Did the workman pay income tax? I have other acquaintances who consider themselves left of centre politically, but do not seem to feel compelled to reveal their entire earnings to HMRC. There is a double standard on tax fraud in Britain today: a general sentiment that only the wealthy are under an obligation to pay their taxes in full, and that the morality of tax evasion is dependent on how much you withhold.
I suspect that the economy is doing better than official figures reveal, partly because increased tax burdens and regulatory requirements give incentives for legitimate business activity to go underground. It is always a shame when otherwise honest and devoted entrepreneurs are pushed into illegal activity. Plumbers, electricians and handymen should be the backbone of a commercial community, not targets for zealous HMRC informants. The role of the government is to facilitate entrepreneurship, not penalise it.
I know that I could pay less tax on my self-employed earnings than I do, but feel that those who advocate lower taxes have a moral duty to ensure they are compliant. The reason I want simpler and lower taxes is to encourage existing economic activity to become public, and to encourage more economic activity to take place.
Critics of flat taxes (where people pay the same tax rate on all of their taxable income) imply that these might have worked in Eastern Europe, where tax evasion was rife, but that the UK economy is somehow different. The results were certainly impressive in Eastern Europe. As the chart below shows, in Russia personal income tax revenue rose from $8.3bn in 2001 (when the flat tax was adopted) to $20.5bn in 2004.
It could happen here too. The UK has a massive scope to raise the taxpaying base. Much of the necessary activity is already happening, it’s just done behind closed doors. Tax evasion isn’t a rich man’s game, it has become a commonplace that many otherwise honest workers engage in. It’s time to slash the level of tax evasion, not by turning a blind eye but by giving current evaders as few excuses as possible to operate outside the system. Simplifying the tax code and reducing tax rates is the way to do so.
Anthony J. Evans is associate professor of Economics at London’s ESCP Europe Business School.
www.anthonyjevans.com